Auditor underreporting of time and

moral reasoning: An experimental

lab study*
LAWRENCE A. PONEMON Babson College

Abstract. This paper introduces the theory of moral reasoning as a valid determinant
of the underreporting of audit time. In an experimental lab design for a sample of 88
auditors from a national public accounting firm, actual underreporting on an audit task
was observed. Findings show that underreporting is systematically related to the auditor's
level of moral reasoning as measured by the Defining Issues Test (DIT). Here those
with relatively low DIT scores were shown to underrepon most severely. Results also
show that although an unattainable time budget affects behavior, peer pressure has the
most significant impact on underreporting. The present study makes three imjxinant
contributions to the auditing and psychology literature. First, it establishes the significance
of peer pressure as an antecedent to underreporting. Second, it shows that an auditor's
moral reasoning explains actual underreporting behavior under conditions of work-related
pressure. Third, it reveals marked underreporting under simulated audit conditions.

Introduction
The underreporting of chargeable time, wherein auditors repon fewer hours than
actually utilized to complete a specific task, may be undertaken in response to
competitive (Marxen, 1990) and stressful (Kelley and Margheim, 1990) condi-
tions within the firm. Although such behavior is believed to be dysfunctional
(Rhode, 1978), there is evidence that underreporting actually mitigates acts that
reduce audit quality such as premature sign-off (McNair, 1991). Alternatively,
reponing actual time and exceeding the audit budget may signal poor perfor-
mance or even incompetence to firm management. Hence, auditors may believe
that underreporting is the only workable solution to an unattainable time budget.
Underreporting, however, often causes ethical tension for the auditor because
it may be viewed as a violation of firm policy and written standards. Further,
it may breach the norms of co-workers or go against the auditor's personally

* The author is grateful for the very helpful comments provided Donald Arnold, Joan
Grossman, C.J. McNair, and participants ofresearehcolloquia held at Penn State University,
SUNY Binghamton, SITNY Albany, and the University of Calgary. I am especially indebted
to Bill Scott and two anonymous reviewers for their constructive suggestions. Support for this
study was provided by the Canadian Certified General Accountants' Researeh Foundation. Any
mistakes or omissions are my responsibility.

Contemporary Accounting Research, Vol. 9, No. 1 (Fall 1992) pp. 171-189 ®CAAA
172 L.A. Ponemon

held beliefs or values. Some auditors will choose to repon honestly, even if
time budget overruns will negatively affect their reputation. In contrast, other
auditors will choose to underrepon because it is believed to be a work-related
ritual proving their loyalty to the firm (Dirsmith and Covaleski, 1985).
This paper explores the influence of moral reasoning upon auditors' under-
reponing behavior by employing an experimental lab study of 88 staff-level
auditors from a national public accounting firm. Using a well-known and highly
reliable psychometric instmment, the Defining Issues Test (DIT), findings show
that actual underreponing is negatively related to auditors' moral reasoning. Re-
sults also show that although an unattainable time budget affects behavior, peer
pressure has a more significant infiuence upon underreponing.
The remainder of this paper is organized as follows. The relevant background
literature on budget pressure, underreponing, and the psychology of moral
reasoning is provided. Then a conceptual framework and hypotheses are ad-
vanced. Next methods are explained and results reponed. Finally, implications
and limitations of the present study are discussed.

Background
The literature most relevant to the present research includes the study of time
budgets and their influence on individual behavior and the psychology of moral
reasoning.

Time budgets and behavior

Early research on budgeting has shown that individuals respond in a seem-
ingly undesirable manner when faced with time pressure (Argyris, 1953; Stedry,
1960; Hofstede, 1967). These works suggest that the management control stmc-
ture of a firm might inadvertently contribute to cenain dysfunctional behaviors
such as accepting and attempting to attain an unrealistic budget standard by
distorting productivity measures, slacking off on work, or underreponing time.
Although underreponing is prohibited by the formal policies of many firms
(Rhode, 1978) and the auditing profession (e.g.. Commission on Auditor's Re-
sponsibilities, 1978; National Commission on Fraudulent Financial Reponing,
1987), research has shown that it is often not penalized within the formal in-
centive structure unless it reaches extreme levels (Swieringa and Monctir, 1972;
McNair, 1987). Taking this one step further, Dirsmith and Covaleski (1985) sug-
gest that underreporting is pan of the firm's informal communication stmcture
and is viewed as a way to exhibit loyalty to firm management. Although these
studies provide different explanations of the underreporting phenomenon, they
all indicate that it may serve a unique purpose within the audit setting when
cost and quality tradeoffs are a fact of life.
Studies of auditor behavior under conditions of time budget pressure focus
on the motivation of the individual rather than the stmcture of the firm. Un-
derreponing (Lighmer, Adams, and Lighmer, 1982; Lightner, Leisenring, and
Winters, 1983) and premature sign-off (Fleming, 1979; Alderman and Dietrick,
 Underreporting of Time 173

1982) have been the focus of examination. More recent studies have examined
the interaction between underreporting and other dysfunctional behaviors that
directly reduce audit quality (Margheim and Pany, 1986; Kelley and Margheim,
1987; Kelley and Margheim, 1990).

Determinants of urtderreporting
Underreporting has been attributed to many causes. Researeh has shown that
unattainable time budgets, explicit peer pressure, the auditor's personally held
beliefs and ethical values, client fee arrangements, the auditor's perceptions of
performance appraisals, firm size, the auditor's position level within the firm,
and stress have all been found to influence underreporting behavior. Most of
these research findings are empirically derived, based on survey results from
large cross-sections of public accounting professionals.
Rhode (1978), Kelley and Seiler (1982), and Kelley and Margheim (1990)
all found that the frequency of auditor underreporting increased as time budgets
became more difficult to meet. Kelley and Seiler (1982) also found that auditors
at the staff and senior level, as compared to managers and partners, were more
willing to underreport. Further, Lightner et al. (1982) found that explicit peer
pressure, such as a supervisor's request to underreport, as well as the auditor's
own ethical beliefs and values, influenced underreporting.
Auditors who believed that time budget compliance would lead to a pos-
itive performance evaluation were shown to be more likely to underreport
(Lightner et al., 1983). Further, auditors from smaller accounting firms per-
ceived a higher frequency of underreporting than those from Big 8 (now Big 6)
firms (Margheim and Pany, 1986). The stmcture of the client billing arrangement
was also shown to influence underreporting (Kelley and Margheim, 1987). That
is, auditors working on a fixed-fee basis were more likely to underreport. Kelley
and Margheim (1990) also studied the influence of certain personality traits on
auditors' underreporting under stressful conditions caused by time budget pres-
sure. Findings revealed that engagements that were managed by seniors with
a Type A personality and that were highly stmctured had fewer incidents of
underreporting by audit staff. Further, they write, "The descriptive results of
this study suggest that an alarming number of underreporting and audit quality
reduction acts are occurring in practice" (p. 22).
Although these studies make important contributions to the auditing literature,
they are limited in two respects. First, results have been based on self-reported
(survey) responses. Thus, given the sensitive nature of questions asked, subjects
may have an incentive to distort their tme underreporting activities (Buchman
and Tracy, 1982). Second, the research does not provide a cognitive constmct for
explaining auditor behavior. The present study extends these works by utilizing
an experimental lab design, thus permitting the researcher to observe actual
underreporting behavior on an audit task exereise implemented during a firm
training program. The usefulness of laboratory designs has been demonsfrated
in previous accounting studies (Birtiberg and Nath, 1968; Swieringa and Weick,
174 L.A. Ponemon

Figure 1 Six stages of moral reasotiing

Pre-conventional level —• Focus is self.

Stage 1: Obedience: You do what you're told primarily to avoid punishment.

Stage 2: Instrumental egotism and simple exchange: Let's make a deal or only consider the
cost and/or benefits to oneself.

Conventional level —• Focus is relationships.

Stage 3: Interpersonal concordance: Be considerate, nice, and kind and you'll get along with
people. Focus is on cooperation with those in your environment.
Stage 4: Law and duty to the soci^ order: Everyone in society is obligated and is protected by
the law. Focus is on cooperation with society in general.

Post-conventional level —> Focus is personally held principles.

Stage 5: Societal consenstis: You are obligated by whatever arrangements are agreed to and by
due process and procedure. Focus is on faimess of the law or rule as determined
by equity and equality in the process of developing the rule.
Stage 6: Nonarbitrary social cooperation: Rational and impartial people would view coop-
eration as moral. Fcx;us is on faimess of the law or riUes derived from general
principles of just and right as determined by rational people.
Adapted from J. Rest, Development in Judging Moral Issues (Minneapolis, MN: University of
Minnesota Press, 1979).

1982). Furthermore, and perhaps most important, this study introduces the psy-
chology of moral reasoning as a cognitive determinant of auditor underreporting
behavior.

Psychology of moral reasoning

The psychology of moral reasoning provides a theory that explains the human
decision-making process prior to ethical behavior. It is concemed with the pro-
cess that individuals follow in making a decision. Based on earlier work in
this area (Piaget, 1932), Kohlberg (1969) developed a theory of moral develop-
ment. He advanced a stage-sequence model defining a series of reasoning levels
and developmental stages somewhat akin to the mngs of a ladder. That is, all
individuals progress upward through these levels beginning at what is termed
"pre-conventional morality," to the second level termed "conventional morality"
and sometimes to the final and highest level called "post-conventional morality"
(Kohlberg, 1984, pp. 624-639). Within each level of moral reasoning are two
cognitive stages. Figure 1 presents a summary of the six stage model.
Since the inception of the stage-sequence model, researchers have set out
to constmct reliable psychometric instruments to assess an individual's level
of moral reasoning (Colby and Kohlberg, 1987; Rest, 1979a).i Rest (1986)

1 Two well-known and widely used psychometric meastires of moral reasoning are the moral
judgment interview (MJI) (Colby and Kohlberg, 1987) and the Defining Issues Test (DIT)
 Underreporting of Time 175

summarizes the findings of more than 500 studies using one such instmment,
the Defining Issues Test (DIT). The present study utilizes the DIT (Rest, 1979b)
and a measure of post-conventional (stage 5 and 6) moral reasoning.

Studies in accounting and auditing

Based upon the work of Kohlberg (1969) and Rest (1979a), several studies
have examined public accounting professionals in terms of their level of moral
reasoning and ethical development (Tall, 1982; Armstrong, 1984 and 1987;
Ponemon, 1988 and 1990; Shaub, 1989; Ponemon and Gabhart, 1990; Ponemon
and Glazer, 1990). Most of these studies report that professional accountants do
not develop moral reasoning capacities commensurate with individuals having
similar socioeconomic and educational backgrounds.
For exmnple, using the DIT on a sample of accounting students and practi-
tioners, Armstrong (1987, p. 33) writes,

CPA respondents appear to have reached the moral maturation level of adults in general,
instead of maturing even to the level of college students, much less to the level of cc^lege
graduates. In other words, their college education may not have fostered continued moral
growth.

Ponemon (1988, 1990) also studied accountants at various position levels

in public firms. His studies revealed a marked negative association between
accountants' position level within the firm and their level of moral reasoning.
Ponemon (1990, p. 209) writes, "This work suggests that differences in ethical
behavior are likely to refiect differences in socialization; thus different positions
in a firm's hierarchy are likely to engender different ethical proclivities." To
test the infiuence of college education on accountant's ethical development,
Ponemon and Glazer (1990) examined accounting students and alumni from a
small liberal arts college and large state university. Using the DIT, they found
that only accounting setiiors and alumni of the liberal arts college progressed to
levels of moral reasoning comparable to DIT norms published by Rest (1986).
That is, the average DIT score of accounting seniors and alumni of the liberal
arts college was 47.8; the average DIT score of accounting seniors and alumni
of the state university was 37.6.
Ponemon and Gabhart (1990) experimentally investigated the infiuence of
moral reasoning on auditors' independence judgments, again using the DIT.
The results indicate that auditors at lower levels of moral reasoning were sen-
sitive to factors relating to penalty (personal harm) resulting from misconduct
when forming an independence judgment. Auditors at higher levels of moral
reasoning, however, were sensitive to affiliation (harm to others) when ft-aming
their judgment.

(Rest, 1979b). Both instruments are consistent with the stage-sequence model of moral devel-
opment as advanced by Kohlberg (1%9).
176 L.A. Ponemon

In summary, the psychology of moral reasoning has been shown to be of

consequence to the study of behavior in accounting practice because many pro-
fessional judgments are conditioned upon the beliefs and values of the individual.
Along these lines, others have found undeneponing decisions also to be moti-
vated by the auditor's ethical beliefs (Lightner et al., 1982; McNair, 1991). The
next section provides the conceptual framework and hypotheses to be tested.

Framework and hypotheses

Prior research has shown that work-related pressure in the audit setting influences
behavior (Gaemer and Ruhe, 1981; Choo, 1986; Kelley and Margheim, 1990;
Haskins, Baglioni, and Cooper, 1990; Lord, 1990). Such pressure has typically
been defined in terms of unattainable time budget standards (Fleming, 1979;
Chow, 1983). That is, the more difficult the time budget, the greater the pressure
and the more likely that undeneponing will occur. According to Lightner et
al. (1982), Dirsmith and Covaleski (1985), and McNair (1991), informal peer
pressure can also influence undeneponing. For example, the auditor may be told
to undeneport by a superior or may perceive other members of the same audit
firm underreponing or may view his or her own performance as insufficient
or may perceive other members of the audit team as being more skilled in
performing assigned tasks. The present study advances the idea that the auditor's
level of moral reasoning will lessen the effects of both time and peer pressure
on undeneponing because essential to this behavior are the ethical values that
the individual brings to the task.
The relationship between time budget and peer pressure, moral reasoning, and
undeneporting behavior is illustrated in Figure 2. The dependent variable in this
framework is underreported audit time. Of importance, in terms of the present
study, is the underlying moral reasoning level of the individual auditor assigned
to an engagement. The auditor's reasoning can be broadly defined in terms of
three developmental levels and six stages (see Figure 1). Also implicit in the
model is the existence of moral conflict resulting from the auditor's attempt to
resolve work-related pressures.^
According to Kohlberg (1984, pp. 624-628), an individual at the pre-
conventional level (stages 1 and 2) makes the decision to do "right" to avoid
punishment or to serve one's interest. The pre-conventional person is not cog-
nizant of differences among individuals. He or she views moral action in physical
terms and is not conscious of the psychological interests of others. The auditor
at the pre-conventional level would make the judgment to underrepon if it were
deemed more beneficial than reponing honestly. Similarly, if the auditor be-
lieved that the same outcome could be achieved by prematurely signing off, and
there was a low probability of getting caught, he or she might choose to do

2 Imphcit in this framework is that underreporting will be perceived as unethical. It is possible,

however, that auditors may view underreporting as altruistic given that it requires them to
forgo personal time and, in some cases even pay, to complete the audit within budget (Dir-
smith and Covaleski. 1985; McNair, 1991).
 Underreporting of Time 177

Figure 2 Research framework: The relationship between audit pressure, moral reasoning,
and underreporting

Factors causing work- Cognitive processes Dysfunctional

related pressures of the auditor behavior

Hyp.l

Unattainable
time budget
•- ,

Moral
Underreporting
reasoning
Hyp. 2.1
Peer pressure

Hyp. 2

SO rather than underrepon. Thus, under conditions of audit work pressure and
without sanctions being posed by the firm, the pre-convendonal auditor is likely
to underrepon time or engage in other dysfunctional behaviors.
The conventional (stages 3 and 4) individual is aware of shared feelings,
agreements, and expectations that take primacy over individual interests and
has a need to be a "good" person in the eyes of co-workers, management,
and the profession as a whole (Kohlberg, 1984, pp. 628-633). At stage 3, the
individual desires to maintain mles and authority that support stereotypical good
behavior. At stage 4, the individual feels obligated to keep the system of mles
and conventions going and seeks ways to avoid breakdown in the system. The
stage 3 auditor would be greatly influenced by the existence of peer pressure
(social conformity) or the unwritten mles of a peer group in framing a decision.
He or she would justify underreporting on the basis of what others do. In contrast,
the stage 4 auditor, depending upon his or her sense of obUgation to the firm,
may feel a need to report honestly despite pressure from peers to do otherwise.
The post-conventional (stages 5 and 6) individual follows self- chosen ethical
principles in which case particular laws or social agreements are usually valid
because they rest on such principles. However, when laws or mles violate these
principles, one acts in accordance with the principle rather than abiding by
the mle (Kohlberg, 1984, pp. 634-639). The individual recognizes that moral
and legal points of view sometimes confiict but has leamed to balance moral
principles with the mles and expectations of the profession and society. Hence,
the auditor makes a choice to underrepon only if it is consistent with his or her
self-chosen ethical principles. However, because the post-conventional auditor
would most likely perceive the dysfunctional consequences of underreporting.
178 L.A. Ponemon

he or she would see the mles as too important to break. Thus, auditors at the
post-conventional level understand firm policies, know the informal (unwritten)
mles of peers, and are influenced by their ethical principles (such as faimess,
honesty, and justice).^
In summary, the way in which an auditor perceives the problem and re-
solves the conflict will result in action consistent with his or her level of moral
reasoning. "* Auditors at a lower level of moral reasoning will be more sen-
sitive to work-related pressure and will be more likely to underreport. Those
at a higher levels will show greater resilience to work-related pressure under
identical conditions and will be less likely to underreport.
Following this framework, two primary and two subsidiary hypotheses are
advanced. The primary hypotheses examine the relationship between two forms
of audit pressure and underreported time as specified in Figure 1.
Hi Underreported audit time will be greater under conditions of unattainable
time budgets than under no time budgets.
H2 Underreported audit time will be greater under conditions of peer pressure
than under no peer pressure.
The subsidiary hypotheses test the influence of moral reasoning upon the under-
reporting of audit time under conditions of either an unattainable time budget
or peer pressure.^
Hi.i Under conditions of an unattainable time budget, auditors at lower moral
reasoning levels will underreport more time than those at higher moral
reasoning levels.
H2.1 Under conditions of peer pressure, auditors at lower moral reasoning levels
will underreport more time than those at higher moral reasoning levels.

Methods
An experimental study exploring three determinants of underreporting for a
sample of 88 staff-level auditors (subjects) from a national public accounting
firm was conducted. All subject were newly hired, were from three different

Some may argue that post-conventional reasoning may not be a desirable characteristic for
auditors because professional behavior demands compliance to an accepted set of rules or
guidelines. However, recent events in the savings and loan industry, the demise of the seventh
largest public accounting firm, and significant audit firm litigation suggest that the long-run
interests of the profession may be better served if auditors follow their own principles instead
of rules when the two conflict.
Moral reasoning and moral action are not synonymous concepts. However, Kohlberg (1984)
and Rest (1986) summarize the results of several studies all showing systematic relationships
between moral reasoning and moral behavior. Blasi (1980) provides a critical review of the
literature with respect to this issue.
It is important to note that the posited relationship between moral reasoning level and underre-
porting behavior may be environment specific. That is, when underreporting goes against the
norms of the firm and its employees, auditors at stage 3 or stage 4 may be just as unlikely to
underreport as stage 5 or stage 6 auditors.
 Underreporting of Time 179

offices, and were attending a one-week training program located in a northeastem

city. Data were collected for each auditor during a classroom training exercise
under the direct supervision of the researcher. The experiment utilized a between-
subjects lab design and required the examination of a bank reconciliation and
the completion of a cash work paper. Subjects were randomly assigned to one
of three classes (groups). All participants completed the audit task, biographical
information sheet, the Defining Issues Test, and a debriefing questionnaire in
less than two hours.
Audit task
The task was adopted from the firm's course training materials that required
the examination of a bank reconciliation including verification of outstanding
checks, deposits in transit, and various bank charges. It also required the exam-
ination of operating controls over cash. Each auditor completed a work paper
listing all check attributes that did not cotiform to specified control guidelines.
The practice set was populated with 20 accounting or control-related errors in-
cluding numerical transposition, missing entries, duplicate checks, and several
violations of prespecified accounting procedtire. This task was chosen because
it required little expertise, was typically performed by auditors at the staff level,
and could be administered in less than 75 minutes.
An independent sample of 23 auditors from the same firm ranging in ex-
perience from the staff to senior levels participated in a pilot study to assess
reliability of the experiment. The group was required to complete the entire
audit task and another shortened version (i.e., the same task with one-half the
transaction volume), without time limitations, under the supervision of the re-
searcher. Table 1 reports completion frequencies and task accuracies. As can be
seen, completion time was homogeneously dispersed at 60.3 minutes for the full
task and 29.1 minutes for the shortened version. Accuracy, as measured by the
number of errors attended to by each subject, was very high for all subjects on
both the full (93 percent) and shortened (95 percent) instmments.^
Experimental arui control groups
All subjects were randomly assigned to two experimental (i.e., time budget and
peer pressure) groups and one control group. Auditors individually completed
the task in a classroom environment without supervision (i.e., no proctor in
attendance) and were instmcted not to collaborate. All subjects were told that
upon completion of the task, they were to exit the classroom and to leave the
completed instmment face down on the desk. Twenty-six subjects in the control
group completed an identical task without explicit time constraints.
Thirty-five subjects were assigned to a time budget group. They were given
both verbal and written instmctions stating that, although there were no time
limits, the task should be completed in less than 35 minutes based on the expe-

Two graders independently tabulated task accuracy for each subject and instrument, with very
high (95.5 percent) interrater reliability.
180 L.A. Ponemon

TABLE 1
Frequency, means, and standard deviations on the full and shortened instruments for validation
sample

Time completion Task accuracy

Time range Standard Standard

(minutes) Count Mean deviation Mean deviation

Full task
51-54 4 53.00 1.4 93.00 4.8
55-59 6 57.33 2.9 93.00 4.4
60-64 9 61.67 1.5 94.22 4.1
65-75 4 66.26 4.7 93.00 3.9
Overall 23 60.30 5.6 93.40 4.0

Shortened task
21-24 5 22.60 1.5 94.00 2.4
25-29 4 25.75 1.0 97.50 2.1
30-34 12 32.00 1.9 95.52 3.6
35 2 35.00 0.0 94.50 0.7
Overall 23 29.13 4.7 95.44 3.1

rience of many other auditors at the staff level in the firm. After delivery, the
proctor (researcher) left the room. Subjects were required to complete the same
task.''
In the third group, a confederate-peer research design was incorporated to
explore the influence of peer pressure.* In this case, both peers and confeder-
ates were staff-level auditors. Twenty-seven subjects in the class (confederates)
were given the shortened task. The remaining 27 subjects (peers) received the
full instmment. Verbal and written instmctions to the class did not disclose
differences in tasks. Thus, subjects believed they were all assigned the same
work. By design, confederates were expected to complete the task more quickly.
Hence, as they left the classroom, they would send a subtle signal to those still
working—causing competitive and self-imposed pressure for members in the
peer group. No time limits were given. All auditors receiving the shortened in-
stmment completed the task within 36 minutes and quickly left the classroom
upon completion.'

Dependent variable
Auditors' underreported time, based on the full experimental task, is the depen-

On the advice of experienced auditors within the firm, the 35-minute time standard was com-
municated only at the outset of the experiment, llius, for purposes of task realism, auditors
were not warned as they £q>proached or exceeded the time standard.
Confederate-peer experimental designs are commonly used in cogtiitive-developmental research
(see Rest, 1986; Brabeck, 1984; Leming, 1978).
In summary, 115 subjects participated in the study. Because 27 subjects completed a different
(shortened) version of the instrument, 88 subjects were included in the analysis of results.
 Underreporting of Time 181

dent variable in the present study. Underreporting was measured as the difference
between self-reported completion time and actual (observed) completion time.
Subjects in all three groups were individually required to repon, under con-
ditions of no observable supervision, their times of completion to the nearest
minute. The researcher observed actual completion for all subjects via a one-way
window to the classroom not visible to subjects. After all subjects in each group
completed the experimental task, they were given a debriefing questionnaire, a
biographical survey, and the Defining Issues Test.

Defining Issues Test

All subjects completed the Defining Issues Test (Rest, 1979b). The DIT is a self-
administered questionnaire that elicits the subject's level of moral reasoning. It
includes six hypothetical conflicts and provides for a variety of related issues and
responses. Subjects select and rank order those issues having, in their opinion,
the most significant influence on the resolution of each presented conflict.
In scoring the DIT, points are assigned to each subject's responses using
a scale of 4 points for the most important to 1 point for the least important.
The points corresponding to the highest modes of moral reasoning are used to
construct a single measure known as the P (principled) score, computed for each
subject. The P score measures the percentage of stage 5 and 6 responses made
by an individual for the entire six cases. Results of the P scores are expressed as
a continuum from .00 to LOO. In addition, according to Rest (1979a), a higher
P score implies a lower percentage of stages 1 through 4. The DIT P score is
an objective measure for which very high statistical reliability and validity have
been assessed (Rest, 1979a and 1986).

Results
Table 2 provides the actual DIT means, medians, standard deviations, task ac-
curacies, and frequency of auditors corresponding to three experimental groups
and poststratified into low and high DIT P score groups.'^ The Pearson test (Fein-
berg, 1983) for independence revealed no significant differences with respect to
P scores across the three groups. As can be seen, task accuracy is consistently
high for all conditions of the table and does not seem to vary by experimental
condition or DIT P score level.
The means, medians, and standard deviations for underreported time in
minutes are provided in Table 3. As can be seen, underreporting is lowest
in the control group (2.46 minutes) and is highest under conditions of peer
pressure (11.59 minutes). Further, auditors with lower DIT P scores, on av-

10 Using the sample median P score of 38.5, auditors were split into low and high DIT P score
groups. For auditors in the low DIT P score group, stages 2 and 3 (on average) constituted
more than 65 percent of the overall pereentage stage score. For auditors in the high DIT
P score group, stages 4 and 5 (on average) constituted more than 71 pereent of the overall
percentage stage score.
182 L.A. Ponemon

TABLE 2
DIT P score means, medians, standard deviations, task accuracy, and frequency of subjects by
experimental and DIT groups

Budget Peer
DIT groups Control pressure pressure Overall

Low Mean 30.07 29.67 30.66 30.01

DIT Median 30.00 30.00 31.50 30.50
Standard deviation 6.01 7.55 7.69 7.32
Accuracy (%) 93.00 95.66 94.55 94.23
Frequency 12 17 15 44

High Mean 50.49 46.85 49.73 48.79

DIT Median 48.50 48.00 49.50 48.50
Standard deviation 9.78 8.81 9.52 9.34
Accuracy (%) 95.22 94.31 92.95 93.86
Frequency )4 18 12 44

Overall Mean 38.35 39.06 38.74 38.74

Median 38.00 38.50 38.50 38.50
Standard deviation 12.00 11.26 12.85 11.89
Accuracy (%) 94.39 94.67 93.28 94.01
Frequency 26 35 27 88

on frequency = 1.351, with 2 d.f. (not significant).

erage, underreponed more time than those with higher DIT P scores in all three
groups.'' The average difference in underreponed time for three groups be-
tween low and high DIT auditors is 4.55 minutes (e.g., 9.47 minutes in the low
DIT group as compared to 4.92 minutes in the high DIT group). This differ-
ence is most pronounced in the peer pressure group in which low DIT auditors
underreponed 16.57 minutes and high DIT auditors underreported 5.53 min-
utes. A one-tailed f-test was used to determine whether or not the means for
underreponed time by experimental group and DIT level are greater than zero.
Significance levels are reported in Table 3.
A two-factor fixed effects analysis of variance model was used to analyze
the relationship between underreponed time (dependent variable), DIT levels,
and experimental conditions. To control for unequal sample sizes, the method of
unweighted means (Neter, Wasserman, and Kutner, 1985, p. 753) was employed.
Table 4 reports the ANOVA results, which proved significant on DIT levels

11 Using the Spearman test (Hollander and Wolfe, 1973, pp. 191-192), DIT P scores were nega-
tively con-elated with underreported time (r = 0.271, p < .05). Plot diagrams of underreported
time by DIT P scores also revealed a negative relationship, with one exception. That is, audi-
tors in the time budget group with relatively high DIT scores (DIT P score > 43) tended to
engage in more underreporting than auditors with DIT scores in the middle ranges (but still
underreported less time than auditors with low DIT scores). This suggests that the relationship
between auditors' DIT P scores and the underreporting of time may be more complex than
posited in Hi.i.
 Underreporting of Time 183

TABLE 3
Means, medians, and standard deviations on underreported time by experimental and DIT
groups

Budget Peer
DIT groups Control pressure pressure OvcraU

Low Mean 2.54' lO.llt 16.57t 9.47t

DIT Median 2.45 9.40t n.ooj 8. lot
Standard deviation 2.40 9.91 8.03 9.41

High Mean 2.00 5.87t 5.53t 4.92t

DIT Median 1.95 6.05§ 5.60§ 4.20§
Standard deviation 5.05 4.67 8.62 5.39

Overall Mean 2.46* 7.46t 11.59t 7.25t

DIT Median 2.10 6.55§ 10.05i 7.40t
Standard deviation 2.96 6.52 8.85 7.35

Mean is significantly greater than zero at or beyond the 0.01 (*) or 0.001 (f) levels, using a
me-sided »-test.
Median is significantly greater than zero at or beyond the 0.05 (§) or 0.01 (|) levels, using the
Wilcoxon Signed Rank test.

TABLE 4
Two-way analysis of variance on underreported time by DIT and experimental groups

Sum of Mean
Souree of variation df squares sqtuues F-stat />-value

Experimental groups (1, 2, 3) 2 785.6 392.8 13.00 0.005

DIT P score levels (1, 2) 1 410.8 410.8 13.59 0.005
Interaction 2 497.5 248.7 8.23 0.010
Error 82 2478.0 30.2
Total 87 4171.9

The method of weighted means was used to adjust for unequal sample sizes between experi-
mental conditions. See J. Neter, W. Wasserman, and M. Kuter, Applied Linear Statistical Mod-
els (Homfiwood, IL: Irwin, 1985), p. 753.

(F[l,82] = 13.00,/? <.005), experimental groups (F[2,82] = 13.59,p <.005),

and tiieir interaction (F[2,82] = 8.23, p < .01).'^
T\ikey's pairwise comparison procedure (Neter et al., 1985, pp. 754-758)
was used to test the significance of differences in mean underreported time be-
tween experimental and confrol groups. Differences in underreported time for
auditors in the time budget group as compared to those in the control group
resulted in a 95 percent confidence interval of 3.99 to 11.15. Differences in
underreported time between the peer pressure and confrol groups resulted in a

12 The Komolog(MX>v-Smimov test of normality and homoscedasticity revealed no significant

violations in ANOVA residuals (Hollander and Wolfe, 1973, p. 219).
184 L.A. Ponemon

95 percent confidence interval of 10.17 to 17.89. Since the lower limits of both
intervals are above zero, Hj and H2 are supported.
Also using the Tukey procedure, differences in underreporting for auditors by
high and low DIT P score level resulted in three 95 percent confidence intervals
for the time budget, peer pressure, and control groups, respectively. They were
0.69 to 8.17 for time budget, 6.11 to 15.96 for peer pressure, and —4.38 to 5.46
for control. Hi.i and H2.1 are both supported because the confidence intervals for
the time budget and peer pressure groups do not contain zero. These findings also
indicate that the infiuence of the DIT P scores on underreported time are most
significant for auditors experiencing the peer pressure condition. In contrast,
DIT differences do not seem to affect auditor underreporting in the control
group since its 95 percent confidence interval contains zero. This may suggest
that underreporting is not the issue so much as pressure or possible repercus-
sions to oneself (i.e., comparison to others) that cause lower DIT auditors to
react.'3

Debriefing
A debriefing survey was completed by all auditors after the experimental task.
The survey attempted to capture subjects' perceptions of the task and, more
generally, actual underreporting within the firm. Findings corroborate task re-
alism and confirm the effect of experimental conditions. That is, 80 auditors (91
percent) believed that the task was realistic, and only three subjects believed
it was contrived. In addition, 46 auditors (52 percent) felt significant pressure
while performing the task. Of these subjects, 19 were in the peer pressure group,
21 in the time budget group, and only 6 in the control group. Using the Pearson
chi-square test (Feinberg, 1983), these differences were statistically significant (
p < .01). Hence, feelings of pressure were induced by the experimental condi-
tions, not the task alone.
Subjects were also asked about the ethics of underreporting. Of the audi-
tors, 25 (28 pereent) believed that underreporting was unethical regardless of
the situation, 46 (52 percent) believed that underreporting may not be unethical
in every situation, and 17 (19 percent) believed that underreporting was not
unethical. Although the audit firm has an official (written) policy against un-
derreporting, 41 auditors (47 percent) did not consider underreporting a serious
infraction. Further, 11 auditors (13 percent) did not even perceive underreporting
as a violation of firm policy.
In terms of the present study, peer pressure, time budgets, and the moral
reasoning of the individual auditor (as measured by the DIT), all play an im-
portant role in explaining underreporting behavior. The next section provides a
discussion of implications and limitations of these findings.

13 The Wilcoxon signed rank test (Hollander and Wolfe, 1973, p. 27) was also employed to
determine the impact of DIT P score levels and experimental groups on median underreported
time. Significance levels are reported in Table 3 and corroborate parametric tests of mean
differences.
 Underreporting of Time 185

Discussion

Implications
This study set out to explore the itifluence of moral reasoning on actual underre-
porting behavior. Previous research had focused solely on behavior motivations
without providing a psychological underpitming. This study introduced the psy-
chology of moral reasotiing, suggesting that it serves as a cognitive frame to
ethical judgments in the audit setting. Experimental findings corroborate theo-
retical predictions. That is, auditors with relatively low DIT results were shown
to underreport most severely. Findings also suggest that the relationship between
moral reasoning and underreporting may depend upon the conditions causing
dysfunctional auditor behavior.
This study makes three potentially important contributions to the practice
and theory of auditing. First, it demonstrates the significance of peer pressure as
an antecedent to underreporting. Second, it shows that the auditor's moral rea-
soning explains actual underreporting behavior on a simulated audit task under
conditions of work-related pressure. Third, it provides evidence that auditors
may engage in underreporting under certain conditions in actual practice.
In terms of the present study, budget pressure is caused by the auditor's need
to finish the assigned task in a reasonable time frame. Further, as revealed in
debriefing, feelings of competition among training class participants resulting
from the confederate-peer design motivated underreporting. Although unattain-
able budgets are consequences of extemal competition (Marxen, 1990), other
conditions within the firm may exacerbate intemal competition. Thus, firm man-
agement may be able to reduce underreporting by minimizing those conditions
causing intemal competition among auditors. For example, firm management
can promulgate and enforce stringent policy against underreporting. Further,
management can attempt to change peer group norms from underreporting to
honest reporting through open discussions of work-related pressures and con-
fiicts at staff meetings.
Although others have proposed the importance of the auditor's ethical beliefs
as a deterrent to underreporting (Lightner et al., 1982), the present study is the
first to empirically test and validate this proposition. Its findings are consistent
with earlier experimental studies (Gunzburger, Wegner, and Anooshian, 1977;
Leming, 1978; Brabeck, 1984), all showing important and systematic relation-
ships between individuals' levels of moral reasoning and their ethical behavior.
Taking this one step further, auditing firms may be able to reduce underreporting
by raising the moral reasoning levels of its auditors.
Consistent with prior researeh (Kelley and Margheim, 1990), this study also
shows that auditors, on average, underreported 7.25 minutes (more than 12 per-
cent) on a 60-minute task. One reason for this practice may be rooted in the
moral reasoning capacity of the individual auditor. It is worth noting that the
average DIT P score for all subjects is approximately 38.5. Although this re-
sult is comparable to Armstrong's (1987) and Ponemon's (1988) samples of
186 L.A. Ponemon

CPAs, it is markedly lower than the DIT norms for college-educated adults pub-
lished by Rest (1986). Hence, by virtue of self-selection within accounting firms
(Ponemon, 1990) and inadequate ethics training in accounting education (Arm-
strong, 1987), many auditors may be prone to underreport or engage in other
dysfunctional behaviors in actual practice. According to Rest (1988), adults
can develop higher moral reasoning levels through deliberate educational inter-
ventions. Thus, the findings of this study may suggest that moral development
should be an important goal of accounting education. ^'^

Limitations
Several limitations in the present study can be identified. First, a sample of
newly hired (inexperienced) staff auditors from one firm limits the ability to
generalize these results to the population of more experienced auditors in other
auditing firms. Still, the inclusion of subjects from the same firm may actually
be an advantage in terms of internal validity, because firm characteristics could
also influence underreporting (Margheim and Pany, 1986). Second, the present
study utilized an experimental lab design and a simulated audit task rather than
observing actual behavior in audit practice. Hence, the extent to which these
conditions are isomorphic of real-world pressures could not be assessed.'^ Third,
the DIT P score was used as a sunogate for each subject's level of moral
reasoning. The DIT is based upon a model that suggests that an individual's
reasoning is subject to measurement. However, because DIT scenarios are not
auditing related, it is possible that the auditor's measured moral reasoning will
not explain ethical orientations in the auditing environment.'^ Finally, this study
implicitly assumed that underreporting is an immoral response to work-related
pressure, yet it is also possible that many auditors do not view underreporting
as unethical.
Despite limitations, the results of this study indicate the importance of moral
reasoning as a determinant of underreporting in the audit setting. That is, find-
ings are consistent with the posited relationship between moral reasoning and
the auditor's tendency to engage in underreponing behavior conditions of time
budget and peer pressure.

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