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Neutral and presumptive doubt perspectives of professional skepticism and auditor job outcomes
Jeffrey R. Cohen, Derek W. Dalton, Nancy L. Harp
Pages 1-20
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An error management perspective on audit quality: Toward a multi-level model
Christoph Seckler, Ulfert Gronewold, Markus Reihlen
Pages 21-42

The economic consequences associated with integrated report quality: Capital market and real effects
Mary E. Barth, Steven F. Cahan, Li Chen, Elmar R. Venter
Pages 43-64

The dynamics of (dis)integrated risk management: A comparative field study
Marika Arena, Michela Arnaboldi, Tommaso Palermo
Pages 65-81

Money, honour and duty: Global professional service firms in comparative perspective
Crawford Spence, Jingqi Zhu, Takahiro Endo, Saori Matsubara
Pages 82-97
ISSN: 0361-3682
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Accounting, Organizations and Society 62 (2017) 1e20
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Neutral and presumptive doubt perspectives of professional

skepticism and auditor job outcomes
Jeffrey R. Cohen a, *, Derek W. Dalton b, Nancy L. Harp b
a
Boston College, Carroll School of Management, Chestnut Hill, MA 02147, USA
b
Clemson University, College of Business and Behavioral Science, Clemson, SC 29634, USA
a r t i c l e i n f o a b s t r a c t
Article history: This study examines the impact of auditor traits that measure the two predominant perspectives of
Received 25 November 2015 professional skepticism (i.e., the neutral perspective and the presumptive doubt perspective) on critical
Received in revised form job outcomes within the audit profession (i.e., organizational citizenship behaviors and turnover in-
11 August 2017
tentions). Using a sample of 176 auditors, we find that the neutral perspective of professional skepticism
Accepted 15 August 2017
Available online 18 September 2017
has a positive effect on the career trajectory of audit professionals (e.g., lower turnover intentions)
through higher levels of perceived partner support for professional skepticism whereas the presumptive
doubt perspective of professional skepticism has a negative effect on the career trajectory of audit
Keywords:
Professional skepticism
professionals (e.g., higher turnover intentions) through lower levels of perceived partner support for
Perceived partner support professional skepticism. These results present a troubling dilemma for the auditing profession. That is,
Organizational citizenship behavior while presumptive doubt skeptics potentially improve audit quality (Hurtt, Brown-Liburd, Earley, &
Turnover intentions Krishnamoorthy, 2013; Quadackers, Groot, & Wright, 2014), we find that presumptive doubt skeptics
report lower levels of organizational citizenship behaviors and are less likely to remain within the
auditing profession. Implications for research and practice are discussed.
© 2017 Elsevier Ltd. All rights reserved.
1. Introduction standards concerning fraud (e.g., Nelson, 2009; Quadackers et al.,

2014).
The significance of professional skepticism (hereafter, “PS”) is The primary objective of this study is to examine the following
emphasized throughout the auditing standards (e.g., AICPA, 1988; research question: What is the impact of auditor traits that measure
1992, 1997a, 1997b, 2002, 2006; PCAOB, 2004; 2008a); however, the two prevailing perspectives of PS on critical job outcomes
auditing firms continue to be criticized for exercising insufficient within the audit profession, such as organizational citizenship be-
levels of PS (e.g., Franzel, 2013; PCAOB, 2007; 2012, 2013). Given the haviors and turnover intentions? Organizational citizenship be-
importance of PS in the auditing profession, research has begun to haviors are voluntary behaviors that go beyond formal job
investigate auditors' personality traits with respect to PS (e.g., requirements which benefit the overall functioning of the organi-
Hurtt, Brown-Liburd, Earley, & Krishnamoorthy, 2013; Quadackers, zation, such as assisting coworkers, defending the organization,
Groot, & Wright, 2014; Rose, 2007). Prior literature documents two and offering ideas to improve organizational processes (Dalton,
general perspectives of PS: neutrality and presumptive doubt Cohen, Harp, & McMillan, 2014; Lavelle, Rupp, & Brockner, 2007).
(Nelson, 2009). Neutrality represents an auditor's mindset that The audit profession relies heavily upon pro-social, team-based
critically evaluates evidence but assumes no bias in management's work (e.g., Agoglia, Hatfield, & Brazel, 2009; Carpenter, 2007);
assertions ex ante, whereas the presumptive doubt mindset as- consequently, auditing professionals are expected to engage in
sumes some level of dishonesty or bias in management's assertions. positive organizational citizenship behaviors that assist the overall
The neutral perspective appears to be the primary perspective audit function (e.g., Agoglia et al., 2009; Carpenter, 2007; Dalton
underlying most of the auditing standards whereas the presump- et al., 2014). Therefore, understanding how auditor traits that
tive doubt perspective appears to be more visible within auditing measure PS affect organizational citizenship behaviors is particu-
larly salient within the audit profession. Examining auditor turn-
over intentions is also important since the retention and promotion
* Corresponding author. of skeptical auditors is critical for fraud detection, audit quality, and
E-mail address: cohen@bc.edu (J.R. Cohen).
http://dx.doi.org/10.1016/j.aos.2017.08.003
0361-3682/© 2017 Elsevier Ltd. All rights reserved.
2 J.R. Cohen et al. / Accounting, Organizations and Society 62 (2017) 1e20
the overall sustainability of the audit profession (e.g., CAQ, 2010; citizenship behaviors (OCBs) and lower turnover intentions. Thus,
Hurtt et al., 2013; PCAOB, 2008b; 2011; Westermann, Cohen, & by extension, we argue that auditors who are more predisposed
Trompeter, 2017). Further, this study responds to Hurtt et al.’s toward the neutral perspective of PS will report higher OCB and
(2013) call for future research examining the impact of trait skep- lower turnover intentions, whereas auditors who are more pre-
ticism on auditor career outcomes that potentially affect audit disposed toward the presumptive doubt perspective of PS will
quality. report lower OCB and higher turnover intentions.
As a second objective of the paper, we examine the role that In addition to partner support for PS, the PCAOB (2012) outlines
perceived partner support for PS plays within the relationship be- several additional means by which firms can support PS, such as
tween auditor PS and job outcomes. Auditing standards (e.g., SAS promotion policies that support PS, performance evaluation sys-
No. 99), PCAOB guidance (e.g., PCAOB, 2012), and academic evi- tems that support PS, and scheduling/budgeting support for PS. In
dence (Carpenter & Reimers, 2013) indicate that the “tone at the supplemental analysis, we examine whether these additional fac-
top” set by an audit partner's emphasis on PS is a critical factor that tors can provide additional insights regarding the relationships in
can promote or inhibit skeptical judgments and actions. For our theoretical model.
example, high partner emphasis on PS (as opposed to high Using a survey of 176 auditing professionals employed in public
emphasis on efficiency) makes fraud investigations more effective accounting firms, we find results consistent with expectations. Our
when fraud risk is high (Carpenter & Reimers, 2013). Strong partner study makes three primary contributions. First, our study presents
support for PS also is needed to remove barriers to skeptical actions, the first empirical evidence concerning the relationship between
including the barrier encountered when audit staff anticipate the two prevailing perspectives of PS and organizational citizenship
(correctly) that they will be penalized when additional audit pro- behaviors and turnover intentions within the auditing profession.
cedures necessary to achieve appropriate levels of PS do not While Quadackers et al. (2014) find that the presumptive doubt
identify additional misstatements (Brazel, Jackson, Schaefer, & perspective is more predictive of skeptical judgments and actions,
Stewart, 2016). Perceived partner support for PS (or lack thereof) especially in higher risk settings, our findings indicate that the
is a fruitful area for audit firms (and regulators) to understand and individuals who are most closely associated with skeptical judg-
enhance in order to improve audit quality. Therefore, we examine ments and decisions (i.e., presumptive doubt skeptics) are less
auditors' perceptions about partner support for PS in order to likely to engage in OCBs and are less likely to remain employed
provide insights about the current state of the profession's “tone at within their respective audit firms. In contrast, we find that audi-
the top” regarding PS. Further, our study compares perceived tors who are higher in neutral PS are associated with higher levels
partner support for the two dominant perspectives of PS and of OCB and lower levels of turnover intentions. In short, our find-
documents new benefits (consequences) of higher (lower) ings present a potentially troubling dilemma for the auditing pro-
perceived partner support. fession. Specifically, presumptive doubt skeptics, who are more
We predict that perceptions of partner support for PS will vary likely to provide skeptical decisions in higher risk settings
based on the extent to which an auditor's inherent “trait” PS rep- (Quadackers et al., 2014), are less likely to engage in organizational
resents either the neutral perspective of PS or the presumptive citizenship behaviors and are more likely to leave the audit
doubt perspective of PS (Nelson, 2009). We argue that presumptive profession.
doubt skeptics'1 inherent distrust of management and assumption Second, our findings provide evidence regarding the underlying
of bias will lead them to encounter more situations in which their mechanisms by which the two prevailing perspectives of PS influ-
inherent PS causes them to collect additional evidence. If this evi- ence organizational citizenship behaviors and turnover intentions.
dence does not result in additional misstatements, research in- Specifically, our findings indicate that neutral skeptics report
dicates that the additional work will be viewed as an inefficient use higher levels of organizational citizenship behaviors and lower
of time that is penalized by the firm during the evaluation process turnover intentions because they perceive more partner support
(Brazel et al., 2016). Given the competing pressures faced by audit for PS. Likewise, presumptive doubt skeptics report lower levels of
partners (e.g., litigation and reputation risk vs. engagement prof- organizational citizenship behaviors and higher turnover in-
itability and client satisfaction) we predict that partners, on tentions because they perceive less partner support for PS and less
average, are less likely to support the presumptive doubt scheduling and budgeting support for PS. These results indicate
perspective that may result in more client conflicts and additional that perceived partner support for PS is a key mediating variable
testing that does not necessarily result in detecting additional that helps explain the relationships between PS and auditor job
misstatements. In contrast, we argue that neutral skeptics' inherent outcomes.
personality traits are likely to enable them to achieve a level of PS Finally, our supplemental analysis regarding the PCAOB factors
that closely matches the PS supported by partners attempting to that support (or inhibit) firm-wide PS provide several implications
balance competing incentives. In short, we expect that presumptive for audit quality and firm audit risk. First, we find that auditors at
doubt skeptics will perceive lower partner support for PS, while both large (i.e., Big 4) and small (i.e., regional and local) firms
neutral skeptics will perceive higher partner support for PS. perceive that demanding schedules and tight audit budgets are the
We next predict that perceptions of partner support for PS have primary organizational factors impeding the exercise of sufficient
implications for auditor job outcomes. Using organizational sup- levels of PS within the audit profession. Furthermore, we document
port theory (Eisenberger, Cummings, Armeli, & Lynch, 1997; several findings regarding large audit firms that are particularly
Rhodes & Eisenberger, 2002) and social exchange theory (Rhodes troubling. Specifically, we find that auditors at larger firms (i.e., Big
& Eisenberger, 2002; Riggle, Edmondson, & Hansen, 2009) as 4 and national non-Big 4 firms), as compared to auditors at smaller
theoretical support, we predict that perceived partner support for firms (i.e., local and regional firms), report lower levels of perceived
PS will be positively associated with perceived organizational partner support for PS and lower levels of scheduling/budgeting
support, which, in turn, will lead to higher organizational support for PS. Further, auditors at larger firms are more likely to
report that their firms’ performance evaluation systems do not
provide incentives that promote skeptical judgments and decisions.
1
Throughout the paper, we describe auditors who report relatively high levels of
These findings are discussed further in the conclusion.
neutral PS as neutral skeptics and auditors who report relatively high levels of The remainder of our paper is organized as follows: The
presumptive doubt PS as presumptive doubt skeptics. following section discusses prior research and develops
J.R. Cohen et al. / Accounting, Organizations and Society 62 (2017) 1e20 3
hypotheses. The third section discusses the research method while Both neutral PS and presumptive doubt PS measure auditors’
the fourth section presents the results. The final section discusses individual “traits” that impact skeptical judgments and actions
our results and offers recommendations for future research along (Hurtt et al., 2013; Nelson, 2009). Hurtt et al. (2013, p. 50) define
with practice-based implications. traits of skeptical auditors as “individual characteristics that enable
auditors to determine when evidence does not add up, or the traits
2. Literature review and hypothesis development that allow auditors to exercise skeptical judgment”. To measure
neutral PS, Quadackers et al. (2014) rely upon the Hurtt (2010)
2.1. Models of auditor professional skepticism professional skepticism scale. As mentioned by Quadackers et al.
(2014, p. 642), the Hurtt professional skepticism scale “focuses
Prior research identifies several factors that affect both skeptical more on having and pursuing doubt than on a particular direction
judgments and actions.2 Building on Nelson’s (2009) model of of doubt, which is consistent with the neutrality perspective of
professional skepticism, Hurtt et al. (2013) categorize the ante- professional skepticism”. The Hurtt professional skepticism scale is
cedents to skeptical judgments and actions into four main cate- a multidimensional scale comprised of the following six factors: (1)
gories: (1) auditor characteristics, (2) evidential characteristics, (3) a questioning mind, (2) suspension of judgment (e.g., the auditor
client characteristics, and (4) external environment characteristics. should keep an open mind until sufficient evidence is gathered), (3)
While all four factors are relevant to understanding skeptical search for knowledge (e.g., the auditor should maintain an inquis-
judgments and actions, our paper focuses on individual auditor itive mindset in the search for evidence), (4) interpersonal under-
characteristics that are associated with skeptical judgments and standing (e.g., the auditor should aspire to understand human
actions. In particular, our study focuses on the personality traits of attitudes, intentions, and behaviors), (5) autonomy (e.g., the auditor
individual auditors that characterize the two predominant per- needs to decide for him- or herself the veracity of client assertions),
spectives of PS (i.e., neutral PS and presumptive doubt PS). There- and (6) self-esteem (e.g., the auditor must have enough self-esteem
fore, our study examines “trait” PS (a relatively permanent to counteract persuasive attempts from the client and to challenge
personality characteristic), rather than “state” PS (a temporary certain assumptions or conclusions).
condition which is elicited by the circumstances and contextual Quadackers et al. (2014) use an interpersonal trust scale to
features of a given situation) (Hurtt, 2010; Westermann et al., measure the presumptive doubt perspective of PS (Rotter, 1967,
2017)3 because trait skepticism is likely to influence critical job 1980). Individuals vary in their disposition to trust others, and
attitudes and job outcomes within the auditing profession. these differences influence behavior in a variety of contexts (Rotter,
1980; Schul, 1993; Schul, Burnstein, & Bardi, 1996; Wrightsman,
2.2. Neutral PS versus presumptive doubt PS 1991). Quadackers et al. (2014) equate lower levels of trust with
higher levels of the presumptive doubt perspective of PS. For
Prior research identifies neutrality and presumptive doubt as example, as indicated by Quadackers et al. (2014, p. 642), “the in-
the predominant perspectives of auditor professional skepticism verse of interpersonal trust is directly related to the presumptive
(Hurtt et al., 2013; Nelson, 2009; Quadackers et al., 2014). Nelson doubt perspective of professional skepticism”. The inverse of
(2009) characterizes professional standards and academic interpersonal trust is an appropriate measure of presumptive doubt
research as taking either a neutral or a presumptive doubt PS given that it measures the theoretical notions of suspicion, as-
perspective of PS. For example, Nelson characterizes international sumptions of dishonesty, and a lack of trust (Nelson, 2009), all of
auditing standards (e.g., IAASB 2004), the PCAOB in AS No. 2 which reflect the presumptive doubt perspective of PS. Consistent
(PCAOB, 2004; paragraph 36), and statements such as SAS No. 109 with Quadackers et al. (2014), we use the Hurtt PS scale to measure
(AICPA, 2006) as reflecting a neutral view of PS in which the auditor neutral PS and the inverse of the Rotter interpersonal trust scale to
works to verify management's assertions but does not assume any measure presumptive doubt PS.
bias ex ante. In essence, the neutral view of PS reflects the “trust but Rose (2007) finds that auditors who are less trusting of others
verify” principle of auditing (Quadackers et al., 2014). (i.e., auditors who are more prone to the presumptive doubt
As opposed to the neutral perspective of PS, the presumptive perspective of PS) pay more attention to aggressive financial
doubt perspective assumes that some level of dishonesty or bias is reporting, and, in turn, are more likely to believe that intentional
inherent in management's assertions. Standards focusing on fraud misstatements have occurred. Likewise, Rose, Rose, and Dibben
convey more of a presumptive doubt perspective of PS (e.g., SAS No. (2010) find that less trusting audit committee members (i.e.,
57 (AICPA, 1988); SAS No. 99 (AICPA, 2002)). The presumptive audit committee members who are more prone to the presumptive
doubt perspective emphasizes asymmetric doubt whereby an doubt perspective of PS) are more likely to perceive that manage-
auditor is more likely to doubt evidence that an assertion is true ment is not credible when management has incentives to manage
than to doubt evidence that an assertion is false (Hurtt et al., 2013; earnings. Quadackers et al. (2014) examine both perspectives of PS
Nelson, 2009). Previous academic research tends to adopt this view and find that while both neutral PS and presumptive doubt PS are
when characterizing auditor skepticism (e.g., Hogarth & Einhorn, positively related to skeptical judgments and decisions, presump-
1992; McMillan & White, 1993). For example, Hogarth and tive doubt PS is more predictive of skeptical judgments and de-
Einhorn (1992, p. 40) characterize a skeptic as someone who is cisions, especially in higher risk settings. Overall, prior research
“highly sensitive to negative evidence but ignores positive indicates that auditors with higher levels of neutral PS or pre-
evidence”. sumptive doubt PS display higher levels of skeptical judgments and
decisions.
A natural question that one may ask is whether measures of
2
Recent models of auditor PS distinguish between skeptical judgments and neutral PS and presumptive doubt PS are simply two sides of the
skeptical actions (Hurtt et al., 2013; Nelson, 2009). A skeptical judgment occurs same coin. However, Quadackers et al. (2014, p. 649) highlight that
when an auditor recognizes a potential issue that may require additional work; the Pearson correlation coefficient between the Rotter interper-
however, a skeptical action occurs when an auditor actually alters his/her behavior
sonal trust scale and the Hurtt PS scale is not significant (r ¼ 0.08,
in response to a skeptical judgment (Hurtt et al., 2013).
3
Nelson (2009) indicates that auditor traits such as problem-solving ability,
p ¼ 0.42), “indicating they measure different perspectives.” Simi-
ethical predisposition, and other traits such as self-confidence can also influence larly, we find that the Pearson correlation coefficient between the
skeptical judgments and actions. We leave these issues for future research. Rotter interpersonal trust scale and the Hurtt PS scale is
insignificant (r ¼ 0.07, p ¼ 0.33). Further, as discussed later in the management, a presumptive doubt skeptic is more likely to doubt
paper, exploratory factor analysis indicates that there are no sig- evidence that an assertion is true than to doubt evidence that an
nificant cross-loadings between the Rotter interpersonal trust scale assertion is false (Hurtt et al., 2013; Nelson, 2009). Therefore,
and the Hurtt PS scale, indicating satisfactory discriminant validity within a given audit engagement, we expect auditors higher in
for the two scales. presumptive doubt trait skepticism to encounter more situations in
which their trait PS causes them to distrust the most readily
2.3. Perceived partner support for PS available audit evidence and requires them to gather additional (or
more reliable) evidence to be satisfied with management's asser-
The “tone at the top” created by an audit partner's emphasis on tions. If the additional audit procedures performed by presumptive
professional skepticism is critical to promoting skeptical judgments doubt skeptics do not result in additional detected misstatements,
and actions (e.g., Carpenter & Reimers, 2013; AICPA, 2002; PCAOB, research suggests that client management will report negative in-
2012). A partner's “emphasis” on PS refers to the relative weight formation to the audit partner and the auditor will be penalized by
placed on the need to maintain PS to achieve audit effectiveness the audit firm's evaluation process (Brazel et al., 2016). Additionally,
versus the relative weight placed on the need to perform proced- in pursuing more persuasive evidence, presumptive doubt skeptics
ures to maintain audit efficiency (Carpenter & Reimers; 2013). We are more likely to engage in client conflicts because of reduced
predict that individual auditors with varying levels of the two communication skills associated with less trusting personalities
dominant perspectives of PS are likely to have different perceptions (e.g., Bernerth & Walker, 2009; Dirks & Ferrin, 2001). In sum,
about whether audit partners at their firm support their PS. presumptive doubt skeptics are likely to face negative conse-
While no prior study explicitly examines whether audit partners quences for performing additional work that is deemed “ineffi-
tend to more strongly support the presumptive doubt perspective cient” when it does not result in additional misstatement detection.
versus the neutral perspective of PS, we expect that, on average, Given that partners are often responsible for (or heavily involved
audit partners support more of a neutral perspective (i.e., “trust but with) firm performance evaluations, auditors who experience the
verify”) as opposed to the presumptive doubt perspective (i.e., aforementioned penalties will likely perceive lower levels of part-
assumption of biased/dishonest management) due to competing ner support for PS. Thus, we predict the following:
pressures on partners and the rise of commercialism in the auditing
H1. Auditors with higher levels of presumptive doubt PS will
profession (e.g., Covaleski, Dirsmith, Heian, & Samuel, 1998;
report lower levels of perceived partner support for PS.
Gendron, 2002; Hanlon, 1996; Kornberger, Carter, & Ross-Smith,
2010). On the one hand, partners have incentives to encourage PS In contrast to H1, we expect neutral skeptics to perceive higher
in order to provide high audit quality. For example, partners should levels of partner support for PS. Neutral skeptics are defined by
promote PS in order to avoid reputation loss, litigation, and PCAOB characteristics such as a “questioning mindset,” a critical “suspen-
enforcement actions. However, partners also are concerned with sion of judgment,” and a “search for knowledge” that helps them
maintaining positive relationships with clients. Further, audit critically evaluate audit evidence (Hurtt, 2010), but, unlike pre-
partners face strong competition for clients, deadline pressure, and sumptive doubt skeptics, they do not assume management bias, ex
downward pressure on audit fees that engender the promotion of ante. Therefore, within a given audit engagement, they are likely to
higher levels of audit efficiency. Individual partners attempting to encounter fewer scenarios where their skepticism requires them to
balance these trade-offs may emphasize effectiveness over effi- gather additional evidence (relative to presumptive doubt skep-
ciency (or vice versa) (Carpenter & Reimers, 2013). For example, tics). This means that they are relatively less likely to encounter the
partner communication to the audit team might encourage mini- negative career consequences that occur when additional testing
mum levels of professional skepticism necessary to maintain audit fails to identify additional misstatements (as documented by Brazel
effectiveness, and at the same time, promote/reward high levels of et al., 2016).
efficiency that contribute to profitability. Further, we expect that the neutral skeptic's inherent trait PS is
The exact balance of audit efficiency and effectiveness audit likely to be consistent with the skepticism supported by partners
partners generally strive for is unknown; however, an increasing given the trade-offs that partners face. To avoid litigation, reputa-
focus on commercial pursuits in the auditing profession (e.g., rev- tion loss, and regulatory enforcement actions, partners demand
enue generation, profitability) suggests that audit efficiency goals that auditors critically evaluate evidence in order to perform
(e.g., profitability and client satisfaction) may be gaining a greater effective audits. Several components of neutral skepticism suggest
share of partner emphasis and support at the expense of technical that an auditor scoring higher in neutral PS will be more likely to
expertise and audit quality (e.g., Covaleski et al., 1998; Hanlon, critically evaluate evidence (as compared to an auditor scoring
1996; Kornberger et al., 2010). Indeed, PCAOB inspection findings lower on the neutral PS scale). For example, the “suspension of
often appear to stem from problems with “tone at the top” (PCAOB, judgment” component is necessary for auditors to suspend judg-
2012), and the accountability systems in place at audit firms have ment until enough persuasive evidence has been gathered as
been criticized for promoting minimum amounts of PS to avoid required by SAS No. 1 (AICPA, 1997b). The “search for knowledge” is
penalties while failing to reward heightened PS when appropriate necessary for auditors to maintain an inquisitive mindset in the
(Westermann et al., 2017). Because of the competing pressures that search for evidence. Furthermore, the “questioning mindset”
partners must balance in a competitive auditing environment, we component is necessary for auditors to maintain “an ongoing
expect partner messaging (e.g., direct communications and/or questioning of whether the information and evidence obtained
signals) about PS to be, on average, less supportive of the pre- suggests that a material misstatement due to fraud has occurred”
sumptive doubt perspective which assumes biased evidence and (AICPA, 2002; paragraph 13). These inherent personality charac-
dishonest management. Therefore, we expect that auditors with teristics of those scoring higher in neutral PS (as opposed to those
higher levels of presumptive doubt PS will internalize these mes- scoring lower in neutral PS) should promote a more critical eval-
sages and perceive lower levels of partner support for their PS. uation of audit evidence which is necessary to achieve the requisite
Additionally, we expect that presumptive doubt skeptics are audit effectiveness demanded by partners.
more likely to face penalties, which, in turn, will also cause them to At the same time, neutral PS components such as high “inter-
perceive less partner support for their PS. Because the focus of the personal understanding” and high “self-esteem” suggest that au-
presumptive doubt perspective is an inherent distrust of ditors higher in neutral PS will also be able to apply their skepticism
in a way that minimizes conflicts with partners' other competing 2002). That is, when employees perceive a supervisor's status as
priorities (e.g., engagement efficiency, deadline pressure, and client relatively high, the effect of perceived supervisor support on
satisfaction). For example, auditors higher in “interpersonal un- perceived organizational support is stronger than when employees
derstanding” are likely to leverage their interest in human under- perceive a supervisor's status as relatively low.
standing and social awareness by paying close attention to client We posit that perceived partner support for PS represents a
needs and managing effective client relationships. Additionally, specific form of perceived supervisor support. Specifically, whereas
prior research indicates that “self-esteem” is a significant deter- perceived supervisor support represents the extent to which em-
minant in sales performance (e.g., Bagozzi, 1980). The same self- ployees believe that their supervisors provide support in a general
confidence that facilitates higher sales is likely to help a skeptical overarching sense, perceived partner support for PS represents
auditor deliver a stronger “sales pitch” to gain client buy-in on the supervisory support that encourages professional skepticism. Given
need to gather additional evidence. Therefore, even when a neutral that auditor skepticism is a critical factor in the development of
skeptic and a presumptive doubt skeptic both desire additional auditor professionalism, we posit that perceived partner support
evidence to be persuaded about management's assertions, the for PS is a key dimension of general supervisory support within the
neutral skeptic's ability to successfully interact with the client may audit profession. Furthermore, consistent with findings in organi-
mitigate negative client reactions to additional requests. In other zational behavior (e.g., Eisenberger et al., 2002), we expect that
words, the neutral skeptic's inherent PS encourages a balance be- perceived partner support for PS, as opposed to merely perceived
tween effectiveness, efficiency, and client satisfaction that poten- supervisor support for PS, will be particularly salient for audit
tially matches the balance emphasized by partners. Therefore, we professionals given that partners represent a higher level of status
predict that neutral skeptics will perceive higher levels of partner within the organizational hierarchy of public accounting firms.
support for PS. Therefore, we predict the following:
H2. Auditors with higher levels of neutral PS will report higher H3. Perceived partner support for PS will be positively related to
levels of perceived partner support for PS. perceived organizational support.
2.4. Perceived organizational support 2.5. Organizational citizenship behavior and turnover intentions
Organizational support theory (Eisenberger et al., 1997; Rhodes Prior research relies upon social exchange theory to predict the
& Eisenberger, 2002) asserts that employees develop global beliefs
effects of perceived organizational support on job-related attitudes
about the degree to which the organization values their work- and outcomes (e.g., job satisfaction, organizational commitment,
related contributions and cares about their welfare (perceived
organizational citizenship behavior, turnover intentions, etc.). So-
organizational support). A basic premise of organizational support cial exchange theory is a cross-disciplinary paradigm developed
theory is that employees often perceive that the organization has a
within social psychology, sociology, and anthropology (e.g., Blau,
positive or negative disposition toward them in terms of firm-wide 1964; Gouldner, 1960; Sahlins, 1972). Lavelle et al. (2007, p. 845)
support and concern for their welfare (Dawley, Houghton, &
define social exchanges as “subjective, relationship-oriented in-
Bucklew, 2010). For example, perceived organizational support teractions between employers and employees characterized by an
assesses the extent to which employees perceive their firms care
exchange of socio-economic benefits, mutual trust and commit-
about their general wellbeing (Herda & Lavelle, 2011, 2012; Lynch, ment, a long-term focus, and unspecified, open-ended commit-
Eisenberger, & Armeli, 1999). Similarly, employees form general
ments”. Social exchange theory asserts that when individuals
perceptions regarding the extent to which supervisors value their
perceive that they have benefited from a social exchange, they
work-related contributions and care about their welfare (i.e., attempt to balance the exchange by engaging in reciprocal actions
perceived supervisor support; Eisenberger, Stinglhamber,
(i.e., the norm of reciprocity).
Vandenberghe, Sucharski, & Rhoades, 2002). As agents of the or- Using social exchange theory for theoretical support, several
ganization, supervisors direct and evaluate employee work;
meta-analytic studies find that perceived organizational support is
consequently, employees tend to view supervisory actions as positively associated with task performance, organizational citi-
organizational actions (i.e., extensions of the organization), rather
zenship behavior, organizational commitment, and job satisfaction,
than individual actions (Eisenberger, Huntington, Hutchison, & and negatively associated with turnover intentions (Rhodes &
Sowa, 1986; Eisenberger et al., 2002). Therefore, employees view
Eisenberger, 2002; Riggle et al., 2009). Consistent with these
positive interactions with supervisors as indicative of organiza- findings, accounting research finds that perceived organizational
tional support whereas negative interactions with supervisors are
support is positively associated with organizational commitment,
viewed as a lack of organizational support. which, in turn, leads to higher levels of Big 4 alumni benefiting their
Relying upon this stream of logic for theoretical support, prior
former firms (i.e., higher levels of post-employment citizenship)
research finds that perceived supervisor support has a positive ef- (Herda & Lavelle, 2011). Similarly, perceived organizational support
fect on perceived organizational support (Dawley et al., 2010;
can lead to lower employee burnout and turnover intentions within
Eisenberger et al., 2002).4 Prior research also finds that the rela- the audit profession (Herda & Lavelle, 2012). Further, prior ac-
tionship between perceived supervisor support and perceived
counting research finds that OCB is negatively associated with
organizational support is positively associated with the perceived turnover intentions (Chen, Hui, & Sego, 1998; Dalton et al., 2014).
status of the supervisor within the organization (Eisenberger et al.,
Therefore, given these prior research findings, we expect that
perceived organizational support will be positively associated with
4
organizational support, which, in turn, will lead to higher turnover
Eisenberger et al. (2002) examine whether perceived supervisor support im-
intentions. More importantly, given earlier predictions, we predict
pacts perceived organizational support, or vice versa. They find that perceived
supervisor support is positively related to the temporal change in perceived orga- the following indirect effects by extension:
nizational support, providing support for the idea that perceived supervisor sup-
port impacts perceived organizational support. To provide further support for this
H4a. Presumptive doubt PS will have a negative indirect effect on
finding, Eisenberger et al. (2002, p. 565) note that most prior studies argue that perceived organizational support and OCB, and a positive indirect
perceived supervisor support influences perceived organizational support. effect on turnover intentions.
Fig. 1. Hypothesized model of auditors' professional skepticism.
H4b. Neutral PS will have a positive indirect effect on perceived Table 1

organizational support and OCB, and a negative indirect effect on Respondent demographic characteristics.
turnover intentions. Gender Firm Type

Male 59.7% Big 4 47.7%
H4c. Perceived partner support for PS will have a positive indirect Female 40.3% Other National 14.2%
effect on OCB and a negative indirect effect on turnover intentions. Regional 8.5%
Age Local 29.6%
Fig. 1 depicts our theoretical model. As shown in Fig. 1, we Range (mean) 24-60 (32.8)
expect that neutral PS will be positively associated with perceived Office Size
partner support for PS whereas presumptive doubt PS will be Position 2 to 9 3.4%
Associate/Staff Acct. 5.7% 10 to 50 18.2%
negatively associated with perceived partner support for PS.
Senior Acct. 31.3% 51 to 100 13.1%
Further, perceived partner support for PS will be positively asso- Manager/Supervisor 37.5% Over 100 65.3%
ciated with perceived organizational support, which, in turn, will Senior Manager 25.5%
be positively associated with OCB and negatively associated with n ¼ 176.
turnover intentions.
3. Research method were completed by audit partners and 6 were completed by audit
directors, so we removed these 8 surveys (given that partners and
3.1. Participants directors do not tend to leave their firms), resulting in a final
sample of 176 public accounting audit professionals.5
We obtained a mailing list of CPAs from the Texas Board of Table 1 presents the descriptive statistics for our sample of 176
Accountancy. Using this mailing list, we sent out 6,500 letters to a auditing professionals. In total, 59.7% (40.3%) of the respondents
random sample of public accounting CPAs in order to solicit were male (female). The average age of the respondents was 32.8
participation. The mailing list did not provide information years with a range from 24 to 60. In total, 47.7% of the auditing
regarding area of employment (i.e., audit, tax, or other), so the professionals were employed by Big 4 firms, 14.2% were employed
letters were sent out to 6,500 CPAs employed in all areas of public by other national firms, 8.5% were employed by regional firms, and
accounting. Given that our study focuses on turnover intentions 29.6% were employed by local firms. Most of the audit professionals
and given that partners do not tend to leave their firms, we (i.e., 65.3%) were employed at large audit firms (i.e., office
restricted our mailings to CPAs who were listed as non-partners. size > 100).
Further, we restricted our sample to CPAs under the age of 60 in Using procedures recommended by Armstrong and Overton
order to limit the possibility of retired CPAs completing the survey. (1977), we tested for non-response bias. We compared the re-
Potential respondents received a letter describing the purpose of sponses of early respondents (the first 25% ¼ 44 respondents) to
the study as well as directions to the web-based survey. We also the responses of late respondents (the final 25% ¼ 44 respondents).
mailed these 6,500 potential respondents two-week and four-week While we did not detect any significant differences between early
reminder postcards, which also included directions to the web- and late respondents for the variables used in this study (i.e.,
based survey instrument. p > 0.10 for all comparisons), we note that the relatively small
In total, 126 letters were returned because of incorrect or old sample size of early and late respondents (n ¼ 44 respondents for
addresses, resulting in a final mailing of 6,374 letters. We received each group) results in a lack of observed post-hoc power for these
465 completed surveys, representing a 7.3% response rate. Of the comparisons (i.e., observed power which is below the recom-
completed surveys, we received a total of 184 surveys completed by mended 0.80 level by Cohen (1988)).6 Therefore, with a larger
auditing professionals. However, 2 of the 184 completed surveys
6
We note that there is an ongoing debate regarding the usefulness of post hoc
5
The dataset provided by the Texas Board of Accountancy indicates whether an power analysis (Hoenig & Heisey, 2001; Yuan & Maxwell, 2005). For example,
employee is a partner or an employee. We did not send mailings out to anyone Hoenig and Heisey (2001, p. 20) indicate that “observed power is determined
listed as a partner within this dataset. Therefore, the two audit partners who completely by the p value and therefore adds nothing to the interpretation of the
completed the survey likely became partners after the dataset was last updated by results”. In other words, insignificant effects will also very likely be associated with
the Texas Board of Accountancy. insufficient levels of observed power.
sample size, it is possible that there could be significant differences in contrast, partners who do not emphasize and support PS are
between early and late respondents for some of the variables. more concerned with audit efficiency and client retention than
audit quality (e.g., Rich, Solomon, & Trotman, 1997). Therefore, our
measure of perceived partner support for PS includes three questions
3.2. Measures examined
that assess the extent to which auditors perceive that partners
support them even if their skepticism causes a conflict with the
To the extent possible, the measures in this study come from
client or results in less efficient audits. A sample item is the
validated scales developed and used in prior studies (see Appendix
following: “Partners support me if my professional skepticism
A).7 Higher scores are representative of higher levels for each of the
causes a conflict with the client” (1 ¼ strongly disagree and
variables used in this study. Regarding the individual measures’
5 ¼ strongly agree). Cronbach's alpha for the scale equaled 0.88.
reliability and validity, we note that all scale items are significantly
Perceived organizational support was measured by a three-item
related to their constructs (p < 0.01). However, as shown in
scale used in prior accounting studies by Herda and Lavelle (2011,
Appendix A, eight of the scale items have factor loadings that are
2012), who adapted the scale from a perceived organizational
less than 0.50 (i.e., SJ3 ¼ 0.32; PD3 ¼ 0.36; PD6 ¼ 0.42; PD13 ¼ 0.41;
support scale developed by Lynch et al. (1999).9 A sample item is
PD20 ¼ 0.41; PD21 ¼ 0.46; PD22 ¼ 0.47; and OCB1 ¼ 0.47), which is
the following: “My firm really cares about my wellbeing”
below the minimum recommended guideline that factor loadings
(1 ¼ strongly disagree and 5 ¼ strongly agree). Cronbach's alpha for
should exceed 0.50 (Hair, Black, Babin, & Anderson, 2010). There-
perceived organizational support was 0.90. We measured organi-
fore, we removed these eight scale items from our analyses. Further,
zational citizenship behavior by using the organizational citizen-
following survey recommendations (e.g., Podsakoff, MacKenzie,
ship behavior directed at the organization scale (i.e., the OCBO
Lee, & Podsakoff, 2003), we used the following procedures in our
scale), which was developed by Lee and Allen (2002). Cronbach's
survey: (1) we assured participants that their responses would be
alpha for the scale equaled 0.87, indicating acceptable reliability.
kept strictly confidential; (2) participants were informed that there
Finally, we measured turnover intentions by using the three-item
were no right or wrong answers; and (3) to the extent possible, we
turnover intentions scale adopted by Viator and Pasewark (2005).
used existing scales that have been validated in prior studies.
Cronbach's alpha (0.94) indicated acceptable reliability.
Neutral PS was measured by the 30-item Hurtt professional
All data were obtained from a single source at a single point in
skepticism scale (Hurtt, 2010) as the Hurtt (2010) scale captures the
time (i.e., each participant completed all of the predictor and cri-
theoretical basis of neutral PS. For example, accounting standards
terion scales at once). Therefore, we used Harman's single factor
characterize neutral PS as a multi-dimensional construct (e.g.,
test to assess whether the common method bias (Podsakoff et al.,
AICPA, 1997a), and the Hurtt scale is designed to capture six di-
2003) was problematic for our study. As indicated by Harman's
mensions of neutral skepticism supported by psychology, philos-
single factor test, common method bias can be problematic if a
ophy, consumer behavior, and auditing research (Hurtt, 2010). In
single factor emerges from an exploratory factor analysis (EFA) or if
addition, the scale is significantly associated with the skeptical
a single factor accounts for the majority of the covariance among
decision-making processes of auditing professionals (e.g.,
the variables. Our EFA uses the maximum-likelihood method and
Quadackers et al., 2014). Cronbach's alpha for the scale was 0.87,
an oblique (varimax) rotation. In untabulated results, the EFA in-
indicating acceptable reliability.
dicates that there are no significant cross-loadings [i.e., all cross
There is no scale designed to specifically measure the pre-
loadings are less than 0.40 (Hair, Anderson, Tatham, & Black, 1998)],
sumptive doubt perspective of PS. However, Quadackers et al.
indicating satisfactory discriminant validity. Furthermore, the first
(2014) argue that the inverse of interpersonal trust scales are
factor explains 13.2% of the total variance. Collectively, these results
directly related to the presumptive doubt perspective of PS, and
suggest that the common method bias did not significantly influ-
Quadackers et al. use the inverse of the Rotter interpersonal trust
ence participants' responses.10
scale to measure the presumptive doubt perspective of PS. In
contrast, Rose (2007) and Rose et al. (2010) use the Wrightsman
(1991) trust scale to measure professional skepticism. Therefore, 4. Results
we collected data on both measures. Inferences remain unchanged
regardless of which scale is used; therefore, we conclude that both Table 2 presents the descriptive statistics for the variables used
scales serve as adequate proxies for the presumptive doubt in this study. Table 3 reports the correlation matrix and reliability
perspective of PS. In the main analysis in this paper, we use the statistics for the variables used in this study. As expected, neutral PS
inverse of the Rotter interpersonal trust scale given its more recent is positively related to perceived partner support for PS and organi-
use within accounting research (i.e., Quadackers et al., 2014).8 zational citizenship behavior, and presumptive doubt PS is negatively
Cronbach's alpha for presumptive doubt PS as measured by the associated with perceived partner support for PS. Further, perceived
inverse of the Rotter interpersonal trust scale equaled 0.82. partner support for PS is positively associated with perceived orga-
We developed a measure called perceived partner support for PS nizational support and organizational citizenship behavior and
given that we are unaware of any such measure in the existing negatively associated with turnover intentions. We note that neutral
literature. Carpenter and Reimers (2013) indicate that partners who PS and presumptive doubt PS are not significantly correlated
emphasize and support PS are primarily concerned with audit (p > 0.10). Given that the correlation between neutral PS and pre-
effectiveness above audit efficiency or keeping the client satisfied; sumptive doubt PS is insignificant and given that there are no sig-
nificant cross loadings between neutral PS and presumptive doubt
7
Specifically, with the exception of one of our scales (i.e., perceived partner
9
support for PS), each of the scales used in this study was developed and used in prior We note that Herda and Lavelle (2012) refer to this scale as perceived firm
studies. We developed the perceived partner support for PS scale because prior support whereas Herda and Lavelle (2011) refer to this scale as perceived organi-
research has not developed a measure of perceived partner support for PS. zational support. Given that the three-item scale is derived from a measure of
8
We do not use the Rotter interpersonal trust scale and the Wrightsman trust perceived organizational support (Lynch et al., 1999), we refer to this scale as
scale in the same model because an exploratory factor analysis indicated multiple perceived organizational support, rather than perceived firm support.
10
cross loadings (>0.30) between the two scales, indicating a lack of discriminant Kline (1998) indicates that skewness greater than 3.0 and kurtosis greater than
validity. Given that the two scales measure interpersonal trust, this finding (i.e., a 10.0 indicate potential problems with non-normal data. The data in this study are
lack of discriminant validity between the two scales) was expected. within acceptable levels of univariate normality.
Table 2
Descriptive statistics.
Variable n Mean Std. Dev.
Neutral PSa 176 4.69 0.46

Presumptive Doubt PSb 176 3.21 0.41
Perceived Partner Support for PSb 176 4.21 0.86
Perceived Organizational Supportb 176 3.76 1.06
Organizational Citizenship Behaviorb 176 3.92 0.61
Turnover Intentionsb 176 3.17 1.34
Notes:
a
Scores are on a six-point scale (1e6) with higher scores indicative of higher neutral PS.
b
Scores are on a five-point scale (1e5) with higher scores indicative of higher presumptive doubt PS, perceived partner support for PS, perceived organizational support,
organizational citizenship behavior, and turnover intentions.
Table 3
Pearson correlation coefficients and reliability statistics of variables.
Neutral Presumptive Perceived Partner Support Perceived Organizational Organizational Citizenship Turnover
PS Doubt PS for PS Support Behavior Intentions
Neutral PS 0.87
Presumptive Doubt PS 0.07 0.82
Perceived Partner Support for 0.14* 0.25*** 0.88
PS
Perceived Organizational 0.01 0.07 0.44*** 0.90
Support
Organizational Citizenship 0.27*** 0.02 0.34*** 0.46*** 0.87
Behavior
Turnover Intentions 0.02 0.04 0.26*** 0.61*** 0.47*** 0.94
Notes:
Bold statistics on the diagonal represent Cronbach alpha coefficients. All other statistics represent correlations between variables.
*, **, *** Significant at p < 0.10, p < 0.05, and p < 0.01, respectively.
PS, our results suggest that both measures represent different support for H1. Hypothesis 2 predicts that auditors with higher
perspectives of professional skepticism. levels of neutral PS will report higher levels of perceived partner
support for PS than auditors with lower levels of neutral PS. As ex-
pected, neutral PS has a positive relationship with perceived partner
4.1. PLS model
support for PS (b ¼ 0.16, p < 0.05), providing support for H2.
Hypothesis 3 posits that perceived partner support for PS will be
To test our predictions, we use PLS as it is appropriate for small
positively associated with perceived organizational support. As
sample sizes (or when there are a large number of parameters
indicated in Fig. 2, perceived partner support for PS is positively
being estimated for a relatively small sample size).11 Given that
associated with perceived organizational support (b ¼ 0.46, p < 0.01).
neutral PS includes six subfactors, we measured neutral PS as a
This result indicates that auditors who perceive that partners
second-order factor comprised of the six subfactors shown in
provide high levels of support for their professional skepticism are
Appendix A. Further, factor analysis indicates that the presumptive
more likely to perceive that their overall organization supports
doubt PS scale loaded primarily on three factors (see Appendix A for
them as well.
the three factors). Therefore, we measured presumptive doubt PS as
Hypothesis 4 (a, b and c) tests indirect effects. Table 4 shows all
a second-order factor comprised of these three subfactors. All of the
of the direct, indirect, and total effects for our PLS model.
other measures were measured as first-order factors. To assess the
Hypothesis 4a predicts that presumptive doubt PS will have a
discriminant validity of each of the scales, we completed factor
negative indirect effect on perceived organizational support and OCB
analysis using the maximum-likelihood method and an oblique
as well as a positive indirect effect on turnover intentions. As shown
(varimax) rotation. Each of the scale items loaded on the appro-
in Table 4, Panel B, presumptive doubt PS has a negative indirect
priate factor, and there were no significant cross-loadings (cross
effect on both perceived organizational support (p < 0.05) and OCB
loadings were all less than 0.40) for any of the constructs, indicating
(p < 0.10); further, presumptive doubt PS has a positive indirect ef-
acceptable discriminant validity. Fig. 2 displays the PLS results with
fect on turnover intentions (p < 0.05). Hypothesis 4b predicts that
all significant paths shown in the model.
neutral PS will have a positive indirect effect on perceived organi-
Hypothesis 1 predicts that auditors with higher levels of pre-
zational support and OCB as well as a negative indirect effect on
sumptive doubt PS will report lower levels of perceived partner
turnover intentions. As indicated in Table 4, Panel B, neutral PS has a
support for PS than auditors with lower levels of presumptive doubt
positive indirect effect on both perceived organizational support
PS. As shown in Fig. 2, presumptive doubt PS is negatively associated
(p < 0.05) and OCB (p < 0.05) and a negative indirect effect on
with perceived partner support for PS (b ¼ 0.24, p < 0.01), providing
turnover intentions (p < 0.01). Taken together, these results indicate
that the two perspectives of PS have decidedly different effects on
11 critical job outcomes within the audit profession.
PLS uses a bootstrap method to test the significance of path coefficients
(Davison & Hinkley, 1997; Efron & Tibshirani, 1993). Larger numbers of bootstraps Hypothesis 4c predicts that perceived partner support for PS will
provide more stable coefficients and significance values than smaller numbers of have a positive indirect effect on OCB and a negative indirect effect
bootstraps (Ringle, Wende, & Becker, 2015). Therefore, to provide stable co- on turnover intentions. As predicted, Table 4, Panel B indicates that
efficients, we used a large number of bootstraps (i.e., 2,500 bootstraps) for each of
perceived partner support for PS has a positive indirect effect on OCB
our models.
Fig. 2. Model results.
Table 4
Direct, indirect, and total effects of presumptive doubt PS, neutral PS, and perceived partner support for PS.
Panel A: Direct Effects
Predictor Variable Dependent Variable Prediction Coefficient Conclusion
Presumptive Doubt PS Perceived Partner Support for PS H1, - 0.24 Significant at p < 0.01
Neutral PS Perceived Partner Support for PS H2, þ 0.16 Significant at p < 0.05
Neutral PS Organizational Citizenship Behavior 0.27 Significant at p < 0.01
Perceived Partner Support for PS Perceived Organizational Support H3, þ 0.46 Significant at p < 0.01
Panel B: Indirect Effects
Presumptive Doubt PS Perceived Organizational Support H4a, - 0.11 Significant at p < 0.05
Organizational Citizenship Behavior H4a, - 0.05 Significant at p < 0.10
Turnover Intentions H4a, þ 0.07 Significant at p < 0.05
Neutral PS Perceived Organizational Support H4b, þ 0.07 Significant at p < 0.05
Organizational Citizenship Behavior H4b, þ 0.03 Significant at p < 0.05
Turnover Intentions H4b, - 0.11 Significant at p < 0.01
Perceived Partner Support for PS Organizational Citizenship Behavior H4c, þ 0.21 Significant at p < 0.01
Turnover Intentions H4c, - 0.27 Significant at p < 0.01
Panel C: Total Effects
Predictor Variable Dependent Variable Coefficient Conclusion
Presumptive Doubt PS Perceived Partner Support for PS 0.24 Significant at p < 0.01
Perceived Organizational Support 0.11 Significant at p < 0.05
Organizational Citizenship Behavior 0.05 Significant at p < 0.10
Turnover Intentions 0.07 Significant at p < 0.05
Neutral PS Perceived Partner Support for PS 0.16 Significant at p < 0.05
Perceived Partner Support for PS Perceived Organizational Support 0.46 Significant at p < 0.01
(p < 0.01) and a negative indirect effect on turnover intentions used in this study (i.e., perceived partner support for PS, perceived
(p < 0.01). Finally, Fig. 2 also indicates that neutral PS has a positive, organizational support, OCB, and turnover intentions). This analysis
direct relationship with OCB (p < 0.01), and as expected, perceived also controls for firm size, employee rank, and gender. As shown in
organizational support has a negative, direct effect on turnover in- Table 5, two subfactors, self-confidence and search for knowledge, are
tentions (p < 0.01). responsible for most of the effects of neutral PS. Specifically, self-
While the results shown in Table 4 indicate that neutral PS has a confidence has a positive effect on perceived organizational support
direct or indirect effect on each of the dependent variables, it is and OCB and a negative effect on turnover intentions; further, search
unclear which of the individual subfactors of neutral PS are driving for knowledge has a positive effect on perceived partner support for
these results. Therefore, in Table 5, we complete several regression PS and OCB. These results suggest that the self-confidence and search
analyses in which we test the effect of each of the six subfactors of for knowledge subfactors are largely responsible for the relation-
neutral PS (shown in Appendix A) on the four endogenous variables ships between neutral PS and positive job outcomes.
Table 5
Regression results of the subfactors of neutral PS.
Subfactors of Neutral PS Perceived Partner Support for PS Perceived Organizational Support OCB Turnover Intentions
Self-Determining 0.08 0.21** 0.08 0.10

Self-Confidence 0.04 0.14* 0.22*** 0.18**
Suspension of Judgment 0.04 0.01 0.04 0.12
Search for Knowledge 0.18* 0.09 0.36*** 0.14
Interpersonal Understanding 0.10 0.05 0.02 0.09
Questioning Mind 0.04 0.02 0.10 0.09
Control Variables:
Firm Size 0.13* 0.19** 0.18** 0.22***
Rank 0.25*** 0.18** 0.17** 0.23***
Gender 0.04 0.03 0.08 0.07
Adj. R2 0.06 0.09 0.22 0.14
Variables:
Perceived Partner Support for PS ¼ The average of the perceived partner support for PS scale;
Perceived Organizational Support ¼ The average of the perceived organizational support scale;
OCB ¼ The average of the organizational citizenship behavior scale;
Turnover Intentions ¼ The average of the turnover intentions scale;
Self-Determining ¼ The average of the self-determining subscale of the neutral PS scale;
Self-Confidence ¼ The average of the self-confidence subscale of the neutral PS scale;
Suspension of Judgment ¼ The average of the suspension of judgment subscale of the neutral PS scale;
Search for Knowledge ¼ The average of the search for knowledge subscale of the neutral PS scale;
Interpersonal Understanding ¼ The average of the interpersonal understanding subscale of the neutral PS scale;
Questioning Mind ¼ The average of the questioning mind subscale of the neutral PS scale;
Firm Size ¼ 1 for local firms, 2 for regional firms, 3 for national firms, and 4 for Big 4 firms;
Rank ¼ 1 for associate, 2 for senior associate, 3 for supervisor/manager, and 4 for senior manager; and
Gender ¼ 0 for males and 1 for females.
*, **, *** Significant at p < 0.10, p < 0.05, and p < 0.01, respectively (two-tailed).
Standardized regression coefficients are shown.
4.2. Robustness analysis (Wrightsman, 1991) to measure the presumptive doubt perspective
of PS, rather than the inverse of the Rotter interpersonal trust scale.
We ran several additional PLS models in which we controlled for Factor analysis revealed that the Wrightsman trust scale loaded on
a number of additional variables in order to assess the robustness of two factors: one factor includes all of the negatively phrased items,
our findings. Firm size and rank are the only control variables that and the other factor includes all of the positively phrased items.
are significantly associated with any of the dependent variables in Therefore, in our PLS model, we modeled the Wrightsman trust
our model. Therefore, Fig. 3 presents a robustness model which scale as a second order factor with these two subfactors. The results
controls for firm size (where 1 ¼ local firms, 2 ¼ regional firms, of this analysis are included in Appendix C and indicate that our
3 ¼ national non-Big 4 firms, and 4 ¼ Big 4 firms) and employee inferences remain unchanged. Specifically, comparisons of Table 4,
rank (where 1 ¼ associates, 2 ¼ senior associates, 3 ¼ supervisors/ Panel C and Appendix C, Panel C indicate that the total effects
managers, and 4 ¼ senior managers). As shown in Fig. 3, the PLS remain similar regardless of whether the Rotter interpersonal trust
model remains robust with similar results. Interestingly, we find scale or the Wrightsman trust scale is used to measure the pre-
that auditors at larger firms (e.g., Big 4 and national non-Big 4 sumptive doubt perspective of PS.
firms) report lower levels of perceived partner support for PS; like-
wise, higher ranking auditors (e.g., managers and senior managers)
report higher levels of perceived partner support for PS than lower 4.3. Additional analyses: organizational factors that support (or
ranking auditors (we explore each of the findings in greater detail inhibit) professional skepticism
later in the paper). Furthermore, we note that auditors employed at
larger firms report lower perceived organizational support (p < 0.05) The PCAOB highlights the importance of partner support for PS
and higher turnover intentions (p < 0.10). These results are consis- within the audit profession in order to ensure that a questioning
tent with prior research indicating that turnover is significantly mindset is maintained throughout the duration of audit engage-
higher at larger public accounting firms (AICPA, 2011). Appendix B ments. While our main analysis focuses on perceived partner
reports tabular results for this PLS analysis.12 support for professional skepticism, the PCAOB also documents
To provide further evidence of robustness, we ran a PLS model in several additional means by which audit firms can support pro-
which we used the inverse of the Wrightsman trust scale fessional skepticism (PCAOB, 2012). Therefore, in the remaining
analyses, we examine whether any of these factors can also help
explain some of the relationships among auditor PS and job out-
comes. We also examine differences in these factors across
12
We also ran several multi-group PLS analyses to examine whether any of the employee rank and firm size and assess which factors are deemed
path coefficients in the model shown in Fig. 3 differ across different firm sizes. First,
most responsible for impeding sufficient levels of professional
we ran a multi-group PLS analysis that compares the path coefficients of large firms
(i.e., Big 4 and national non-Big 4 firms) to the path coefficients of small firms (i.e., skepticism within the audit profession.
regional and local firms). For this multi-group PLS analysis, we were unable to The PCAOB indicates that firms can help support the application
detect any significant differences across large and small firms. Second, we ran a of PS by “implementing and maintaining appraisal, promotion, and
multi-group PLS analysis that compares the path coefficients of Big 4 firms to the compensation processes that enhance rather than discourage the
path coefficients of local firms. For this multi-group PLS analysis, we detected one
significant difference between Big 4 firms and local firms. Specifically, the path
application of professional skepticism” (PCAOB, 2012, p. 2). In other
between OCB and turnover intentions was significantly stronger for local firms words, audit firms can support professional skepticism by ensuring
(p < 0.01) than Big 4 firms (p > 0.10). that firm performance evaluation systems and promotion policies
Fig. 3. Robustness results.
provide incentives for professional skepticism. The PCAOB also in- in Table 6, over a third of auditors (38.6%) report that scheduling
dicates that scheduling demands and tight audit budgets can place demands are so tight that auditors are prevented from exercising
undue pressure on auditors to complete audit work too quickly, adequate levels of professional skepticism. Likewise, 31.8% of audi-
which, in turn, can lead to lower levels of audit quality (PCAOB, tors report that their firms do not schedule enough auditors to allow
2012). More specifically, scheduling demands can cause auditors for adequate time to exercise sufficient levels of professional skep-
to “seek audit evidence that is easier to obtain rather than evidence ticism. In addition, 39.2% of auditors report that the audit budgets at
that is more relevant and reliable, to obtain less evidence than is their firms do not allow for enough time to adequately support
necessary, or to give undue weight to confirming evidence without auditor professional skepticism. Similarly, 30.2% of auditors report
adequately considering contrary evidence” (PCAOB, 2012, p. 7). that tight audit budgets cause auditors to seek evidence that is easier
Thus, audit firms can support professional skepticism by ensuring to obtain rather than evidence that is more relevant or reliable, and
that a sufficient number of auditors are scheduled to allow for the 33.0% of auditors report that tight audit budgets cause auditors to
requisite professional skepticism throughout the audit engage- give undue weight to confirming evidence rather than considering
ment. Likewise, audit budgets should allow for enough time for contrary evidence. In short, the results in Table 6 indicate that
auditors to maintain an appropriate level of professional scheduling demands and tight audit budgets appear to be the pri-
skepticism. mary factors within audit firms impeding professional skepticism.
Using the PCAOB's recommendations for firm support for PS, we
developed a series of questions to assess the extent to which firms 4.3.1. Comparisons of employee rank and firm size
support professional skepticism in the following four areas: (1) We also compare each of these PCAOB factors across employee
performance evaluation systems, (2) promotion policies, (3) rank (i.e., higher rank versus lower rank) and audit firm size (i.e.,
scheduling audit work, and (4) audit budgets. Table 6 provides small firms versus large firms). Table 7 shows that higher ranking
descriptive statistics for each of these areas of organizational sup- auditors (i.e., managers and senior managers) perceive higher
port for professional skepticism. We also included the three levels of partner support for PS than lower ranking auditors (i.e.,
perceived partner support for PS scale items in Table 6. While each of associates and senior associates) across each of the three perceived
the perceived partner support for PS questions are framed such that partner support for PS scale items. Furthermore, lower ranking au-
higher scores are indicative of higher levels of support for profes- ditors are more likely than higher ranking auditors to report that
sional skepticism, we note that each of the other scale items for their firms do not schedule enough auditors to allow for adequate
performance evaluation systems, promotion policies, scheduling time to exercise sufficient levels of professional skepticism; lower
audit work, and audit budgets are framed such that higher scores ranking auditors are more likely than higher ranking auditors to
are indicative of lower levels of support for professional skepticism. report that their firms’ audit budgets do not provide enough time to
Table 6 indicates the percentage of auditors who either slightly adequately support auditor professional skepticism; and lower
agreed or strongly agreed with each of the scale items. As indicated ranking auditors are more likely to report that there is too much
Table 6
Organizational factors that support auditor PS.
% Slightly Agree or Strongly Agree

(n ¼ 176)
Perceived Partner Support for PS

1. If I decide to do more testing because of my professional skepticism, partners support me. 88.0%
2. When I am critical of a client explanation, my partners support me and encourage me to obtain more evidence. 92.7%
3. Partners support me if my professional skepticism causes a conflict with the client. 78.5%
Performance Evaluation Systems and PS
1. The performance evaluation processes at my firm do not reward professional skepticism. 38.6%
2. My firm's performance evaluation system has been unfair to me in that it has not adequately rewarded me for my professional 15.9%
skepticism efforts.
3. The performance evaluation system at my firm places more emphasis on retaining/acquiring audit clients than maintaining an 24.5%
appropriate level of professional skepticism.
4. The performance evaluation at my firm places more emphasis on selling non-audit services than maintaining an appropriate level 14.2%
of professional skepticism.
Promotion Policies and PS
1. Promotion policies at my firm favor revenue generation over technical skills and the application of professional skepticism. 22.1%
2. Promotion policies at my firm favor avoiding conflict with the client over the application of professional skepticism. 14.8%
3. Promotion policies at my firm penalize me when my professional skepticism causes a client conflict. 11.4%
Scheduling Audit Work and PS
1. My firm's scheduling demands are so tight (i.e., not enough people scheduled on a job or not scheduled long enough) that they 38.6%
prevent adequate levels of professional skepticism.
2. My firm does not schedule enough auditors to allow for adequate time to exercise sufficient levels of professional skepticism. 31.8%
Audit Budgets and PS
1. My firm's budgets do not provide enough time to adequately support auditor professional skepticism. 39.2%
2. My firm's audit budgets are so tight that they prevent adequate levels of professional skepticism. 35.8%
3. At my firm, there is too much pressure to complete audits quickly, rather than maintaining an appropriate level of professional 25.6%
skepticism.
4. At my firm, tight audit budgets cause auditors to seek evidence that is easier to obtain rather than evidence that is more relevant 30.2%
and reliable.
5. At my firm, tight audit budgets cause auditors to give undue weight to confirming evidence rather than considering contrary 33.0%
evidence.
pressure to complete audits quickly rather than maintaining an completed an additional factor analysis with all of the scale items
appropriate level of professional skepticism. Taken together, these from our original PLS models (see Figs. 2 and 3) and the addition of
results indicate that lower-ranking auditors perceive lower levels of these seven scale items. Factor analysis indicates that these seven
partner support for PS and lower levels of scheduling and budg- scale items loaded on one factor with no significant cross-loadings
eting support for PS. with any of the other scale items (cross loadings < 0.40), indicating
As shown in Table 7, auditors at larger firms (i.e., Big 4 and na- acceptable discriminant validity. Further, the seven scale items
tional non-Big 4 firms) perceive lower levels of partner support for have factor loadings exceeding 0.70, which exceed the minimum
PS than auditors at smaller firms (i.e., local and regional firms). recommended level of 0.50 (Hair et al., 2010). Cronbach's alpha for
Further, auditors at larger firms are more likely to report that per- these seven scale items equaled 0.94, indicating acceptable reli-
formance evaluation systems at their firms do not adequately ability. Therefore, we used these seven scale items to measure a
reward professional skepticism and that performance evaluation new construct entitled scheduling and budgeting support for PS. We
systems place more emphasis on selling non-audit services than reverse scored these scale items so that higher levels for this scale
maintaining an appropriate level of professional skepticism. Finally, are indicative of auditors who report that their firms' scheduling
auditors employed at larger firms are more likely to report that and budgeting practices support the application of adequate levels
scheduling demands and audit budgets do not support sufficient of professional skepticism. Fig. 4 displays our original PLS model
levels of professional skepticism. Collectively, these results indicate with the inclusion of the new variable, scheduling and budgeting
that auditors employed at larger firms are more likely to perceive support for PS.
less partner support for PS, performance evaluation systems that do As shown in Fig. 4, our main results reported earlier remain
not create sufficient incentives for skeptical decisions, and intense unchanged. Therefore, we focus the discussion of these results
scheduling demands and tight audit budgets that do not allow for primarily on the variable scheduling and budgeting support for PS.
adequate levels of professional skepticism. While neutral PS is not significantly associated with scheduling and
budgeting support for PS (p > 0.10), presumptive doubt PS is nega-
tively associated with scheduling and budgeting support for PS
4.3.2. Supplemental PLS analysis (b ¼ 0.19, p < 0.05), indicating that auditors with higher levels of
We also completed additional PLS analysis to assess whether presumptive doubt PS are more likely to perceive that scheduling
any of the organizational factors shown in Table 6 could also help demands and tight audit budgets at their firms do not allow for
explain some of our earlier findings (e.g., the negative effects of adequate time to exercise sufficient levels of professional skepti-
presumptive doubt PS and the positive effects of neutral PS on job cism. Additionally, scheduling and budgeting support for PS is posi-
outcomes). We find that the scale items related to performance tively associated with perceived organizational support (b ¼ 0.29,
evaluation systems and promotion policies shown in Table 6 are not p < 0.01) and negatively associated with turnover intentions
correlated with any of the variables used in our models; however, (b ¼ 0.17, p < 0.05). Collectively, results in Fig. 4 indicate that both
the seven scale items related to scheduling audit work and audit perceived partner support for PS and scheduling/budgeting support for
budgets (i.e., the scale items under the categories “scheduling audit PS help explain the relationships between auditor PS and job
work and PS” and “audit budgets and PS” shown in Table 6) are outcomes.
significantly related to several of the model variables. Therefore, we
Table 7
Organizational factors that support auditor PS: Comparisons of auditor rank and audit firm size.
Low Ranking High Ranking Big 4 and National Regional and Local Firm
Auditorsa Auditorsa Firm Auditors Auditors(n ¼ 67)
(n ¼ 65) (n ¼ 111) P-Value (n ¼ 109) P-Value
Perceived Partner
Support for PS
1. If I decide to do more testing because of my professional skepticism, partners support me. 3.97 4.41*** 4.16 4.39*
2. When I am critical of a client explanation, my partners support me and encourage me 4.22 4.54** 4.38 4.49
to obtain more evidence.
3. Partners support me if my professional skepticism causes a conflict with the client. 3.65 4.15*** 3.86 4.13*
J.R. Cohen et al. / Accounting, Organizations and Society 62 (2017) 1e20

Performance Evaluation Systems and PS
1. The performance evaluation processes at my firm do not reward professional skepticism. 2.98 2.96 2.96 2.99
2. My firm's performance evaluation system has been unfair to me in that it has not adequately 2.35 2.19 2.39 2.01**
rewarded me for my professional skepticism efforts.
3. The performance evaluation system at my firm places more emphasis on retaining/acquiring 2.52 2.35 2.43 2.33
audit clients than maintaining an appropriate level of professional skepticism.
4. The performance evaluation at my firm places more emphasis on selling non-audit services than 2.09 2.04 2.17 1.87*
maintaining an appropriate level of professional skepticism.
Promotion Policies and PS
1. Promotion policies at my firm favor revenue generation over technical skills and the 2.42 2.27 2.38 2.24
application of professional skepticism.
2. Promotion policies at my firm favor avoiding conflict with the client over the application 2.23 2.02 2.19 1.94
3. Promotion policies at my firm penalize me when my professional skepticism causes a client conflict. 2.03 2.00 2.07 1.91
Scheduling Audit Work and PS
1. My firm's scheduling demands are so tight (i.e., not enough people scheduled on a job or not scheduled long enough) 2.95 2.82 3.04 2.60**
that they prevent adequate levels of professional skepticism.
2. My firm does not schedule enough auditors to allow for adequate time to exercise 2.89 2.55* 2.82 2.45*
sufficient levels of professional skepticism.
Audit Budgets and PS
1. My firm's budgets do not provide enough time to adequately support auditor professional skepticism. 3.11 2.70* 3.07 2.49***
2. My firm's audit budgets are so tight that they prevent adequate levels 2.94 2.56* 2.93 2.33***
3. At my firm, there is too much pressure to complete audits quickly, rather than 2.83 2.25*** 2.65 2.16**
maintaining an appropriate level of professional skepticism.
4. At my firm, tight audit budgets cause auditors to seek evidence that is easier to obtain rather than evidence that is 2.98 2.41*** 2.76 2.39*
more relevant and reliable.
5. At my firm, tight audit budgets cause auditors to give undue weight to confirming evidence rather than 3.05 2.54** 2.93 2.40**
considering contrary evidence.
*, **, *** Significant at p < 0.10, p < 0.05, and p < 0.01, respectively (two-tailed).
a
Low ranking auditors include associates and senior associates; high ranking auditors include supervisors, managers, and senior managers.
13
Fig. 4. Additional analysis.
4.4. Actual versus perceived partner support for PS perceive less support in general, then presumptive doubt skeptics
should report lower levels of perceived organizational support,
We note that a key mediating variable in our study (i.e., which measures an individual's general level of organizational
perceived partner support for PS) measures a perception that, like support. However, as shown in the correlation table reported in
all perceptions, may or may not reflect the actual state of nature. Table 3, the correlation between presumptive doubt PS and perceived
Therefore, there are two possible reasons why presumptive doubt organizational support is not significant (p ¼ 0.35) whereas the
skeptics perceive lower levels of partner support for PS: (1) Pre- correlation between presumptive doubt PS and perceived partner
sumptive doubt skeptics actually receive lower levels of partner support for PS is highly significant (p < 0.01). Taken together, these
support for their PS, or (2) presumptive doubt skeptics merely results suggest that an actual lack of partner support for PS is likely
perceive less partner support for PS because they are generally driving our results, rather than a general perception of a lack of
more doubtful and less content in their work environment and, organizational support.13
thus, perceive less support in general. This indicates it is possible
that presumptive doubt skeptics perceive less partner support for
PS than neutral skeptics when, in reality, they do not actually 5. Conclusion and implications
receive less partner support. Thus, if presumptive doubt skeptics
report less partner support for PS primarily because they tend to In this study, we provide initial empirical evidence regarding the
effects of auditor trait skepticism on critical job outcomes within
the auditing profession. We find differential effects for the two
predominant perspectives of PS. Specifically, we find that the
13
As additional support for the argument that presumptive doubt skeptics actu- neutral perspective of PS has a positive indirect impact on
ally experience less partner support for PS rather than merely perceiving less perceived organizational support and OCB and a negative indirect
partner support, we completed untabulated analyses in which we compare the
perceived organizational support and the perceived partner support for PS of neutral
effect on turnover intentions through higher perceptions of partner
skeptics and presumptive doubt skeptics. Neutral skeptics include 45 auditors who support for PS; in contrast, the presumptive doubt perspective of PS
scored above the median on the neutral PS scale (i.e., the Hurtt scale) and below the has a negative indirect impact on perceived organizational support
median on the presumptive doubt PS scale (i.e., the Rotter interpersonal trust scale), and OCB and a positive indirect effect on turnover intentions
and presumptive doubt skeptics include 41 auditors who scored above the median
through lower levels of perceived partner support for PS and lower
on the presumptive doubt PS scale (i.e., the Rotter interpersonal trust scale) and
below the median on the neutral PS scale (i.e., the Hurtt scale). Perceived organi- levels of scheduling/budgeting support for PS. Our findings provide
zational support for neutral skeptics is not significantly different from perceived a number of important research implications.
organizational support for presumptive doubt skeptics (mean of 3.85 versus 3.75, First, Quadackers et al. (2014) find that the presumptive doubt
respectively, p ¼ 0.63). At the same time, partner support for PS is significantly perspective is more predictive of skeptical judgments and actions,
higher for neutral skeptics than presumptive doubt skeptics (mean of 4.48 versus
3.82, respectively, p < 0.01). These results hold regardless of whether the composite
especially in higher risk settings; however, our findings suggest
scales or individual component measures are used for both perceived organizational that the individuals who are most closely associated with skeptical
support and partner support for PS. judgments and decisions (i.e., presumptive doubt skeptics) are less
likely to engage in OCBs and are less likely to remain employed scheduled long enough) that they are prevented from exercising
within their respective audit firms. In short, our findings indicate adequate levels of PS. Second, lower ranking auditors perceive
that auditors who are more likely to engage in skeptical judge- lower levels of partner support for PS and lower levels of sched-
ments and decisions (i.e., presumptive doubt skeptics) are also less uling/budgeting support for PS than higher ranking auditors. These
likely to engage in OCBs and are more likely to leave the audit findings are consistent with prior accounting research that finds
profession. Moreover, while our results related to the presumptive that higher-ranking employees tend to view their organizations
doubt perspective of PS reveal some challenges for the audit pro- more favorably than lower-ranking employees (e.g., Bobek,
fession, our results regarding the neutral perspective of PS offer a Hageman, & Radtke, 2010; Chow, Harrison, McKinnon, & Wu,
more positive outlook. Specifically, we find that auditors who are 2002). Therefore, firm leaders (e.g., partners and directors) may
higher in neutral PS are more likely to engage in OCBs and are less need to make more concerted efforts to support the PS of lower-
likely to leave the audit profession. Taken together with earlier ranking auditors.
findings by Quadackers et al. (2014), our results suggest that audit Additionally, we find that auditors at larger firms (i.e., Big 4 and
firms would likely benefit from assigning neutral skeptics to most national non-Big 4 firms), as compared to auditors at smaller firms
audit engagements (in general) whereas presumptive doubt skeptic (i.e., local and regional firms), report lower levels of perceived
could be assigned to specific clients (e.g., high-risk clients) or to partner support for PS; they are more likely to report that their
performing certain roles (e.g., fraud risk assessments). firms’ performance evaluation systems do not provide sufficient
Second, our findings document several underlying mechanisms incentives for skeptical judgments and decisions; and they are
by which the two prevailing perspectives of PS impact auditor job more likely to report that intense scheduling demands and tight
outcomes. Specifically, our findings indicate that neutral skeptics audit budgets do not allow for adequate levels of professional
report higher levels of organizational citizenship behaviors and skepticism. These results are particularly troubling for Big 4 audit
lower turnover intentions because they perceive more partner firms because the Big 4 have a reputation of providing higher
support for PS. In contrast, presumptive doubt skeptics report quality audit services than smaller firms (e.g., Eshleman & Guo,
lower levels of organizational citizenship behaviors and higher 2014; Teoh & Wong, 1993) and have invested more resources in
turnover intentions because they perceive less partner support for reputational capital than smaller firms (e.g., Francis & Krishnan,
PS and less scheduling and budgeting support for PS. These results 1999). Further, Big 4 firms experience higher levels of litigation
help explain the relationships between auditor PS and both orga- risk than non-Big 4 firms (e.g., Khurana & Raman, 2004) given their
nizational citizenship behaviors and turnover intentions. “deeper pockets”. Thus, Big 4 firms likely have more of an incentive,
Third, our findings regarding the indirect effects of presumptive relative to smaller firms, to ensure that adequate levels of PS are
doubt PS have implications for audit quality and firm audit risk. maintained in order to promote high audit quality. Therefore, our
Carpenter and Reimers (2013, p. 45) find that partner support for PS results suggest that Big 4 firms should make more of a concerted
“is critical for both effective and efficient identification of fraud risk effort to support PS through partner support for PS, scheduling/
factors and choice of relevant audit procedures”, suggesting that budgeting support for PS, and performance evaluation systems that
partner support is critical for audit quality when fraud risk is high. reward professional skepticism. In particular, prior research finds
Further, existing research indicates that OCBs are critical for the that auditors are penalized during performance evaluations when
effective functioning of the organization (e.g., Lee & Allen, 2002; they collect additional client evidence necessary to maintain
Motowidlo & Van Scotter, 1994; Podsakoff, MacKenzie, Paine, & appropriate levels of PS, but fail to detect any misstatements (Brazel
Bachrach, 2000), which, as previously discussed, likely results in et al., 2016); therefore, our results highlight the importance of
higher levels of audit quality. Additionally, prior research indicates performance evaluation systems that adequately reward (rather
that turnover intentions are associated with dysfunctional audit than penalize) PS, especially within Big 4 audit firms. Further, these
behaviors such as premature sign-offs and gathering insufficient results suggest that a fruitful avenue for future research would be to
evidence (Donnelly, Quirin, & O'Bryan, 2003). Taken together, these explore the underlying reasons why Big 4 auditors perceive less
results suggest that higher perceived partner support for PS, higher support for PS.
OCBs, and lower turnover intentions are likely to lead to higher We also encourage future research to further examine neutral
levels of audit quality. However, we find that presumptive doubt PS. Prior research indicates that the Hurtt PS scale measures trait
skeptics report lower levels of perceived partner support for PS and skepticism and is fixed at the time an auditor enters the profession
OCB and higher turnover intentions. Therefore, while prior research (Hurtt, 2010; Nelson, 2009). We note, however, that Hurtt (2010)
indicates that presumptive doubt PS has a positive, direct effect on tested for test-retest reliability over a relatively short time frame
audit quality (e.g., Quadackers et al., 2014), our results suggest that (i.e., 8 weeks for undergraduate business students and a mean of 22
presumptive doubt PS may have a negative, indirect effect on audit days for audit professionals). Further, several of the subscales of
quality through lower levels of perceived partner support for PS, neutral PS appear as though they could change over time. For
lower levels of OCB, and higher turnover intentions. Thus, we example, the subfactors of self-confidence, suspension of judge-
encourage future research to examine both the direct and indirect ment, self-determining, search for knowledge, and questioning
effects of presumptive doubt PS on audit quality to assess whether mind could potentially all increase as auditors are exposed to firm
presumptive doubt PS remains positively associated with audit training, firm mentoring, different role responsibilities (associate
quality in total. versus senior associate), and different client interactions. Therefore,
Finally, our supplemental analysis of the PCAOB factors (PCAOB, we encourage future research to examine whether neutral PS is
2012) that support or inhibit PS reveal a number of additional stable over longer durations, such as the period of time between
implications for audit quality and firm audit risk. First, our results associate to senior associate. If neutral PS changes over time, audit
indicate that auditors perceive that demanding scheduling and firms could focus efforts on increasing some of the individual
tight audit budgets are the primary organizational factors impeding subfactors of neutral PS. For example, given that our results suggest
the exercise of sufficient levels of PS within the audit profession. For that the self-confidence subfactor and the search for knowledge
example, 39.2% of audit respondents report that audit budgets do subfactor are primarily responsible for the positive effects of
not provide enough time to adequately support PS, and 38.6% of neutral PS on job outcomes, future research could further explore
audit respondents report that scheduling demands at their firms these individual subfactors.
are so tight (i.e., not enough people scheduled on a job or not This study includes limitations that represent opportunities for
Table 8
Summary of findings and contributions.
1. First, we find that auditors who are most closely associated with skeptical judgments and decisions (i.e., presumptive doubt skeptics) are less likely to engage in
organizational citizen behavior (OCB) and are less likely to remain employed within their respective audit firms. In contrast, we find that auditors who are higher in
neutral professional skepticism (PS) are associated with higher levels of OCB and lower levels of turnover intentions. In short, our findings present a potentially
troubling dilemma for the auditing profession. Specifically, presumptive doubt skeptics, who are more likely to provide skeptical decisions in higher risk settings
(Quadackers et al., 2014), are less likely to engage in organizational citizenship behaviors and are more likely to leave the audit profession. Taken together with earlier
findings by Quadackers et al. (2014), our results suggest that audit firms would likely benefit from assigning neutral skeptics to most audit engagements (in general)
whereas presumptive doubt skeptic could be assigned to specific clients (e.g., high-risk clients) or to performing certain roles (e.g., fraud risk assessments).
2. Second, our findings document several underlying mechanisms by which the two prevailing perspectives of PS influence auditor job outcomes. Specifically, our findings
indicate that neutral skeptics report higher levels of organizational citizenship behaviors and lower turnover intentions because they perceive more partner support for
PS. In contrast, presumptive doubt skeptics report lower levels of organizational citizenship behaviors and higher turnover intentions because they perceive less partner
support for PS and less scheduling and budgeting support for PS. These results help explain the relationships between auditor PS and job outcomes.
3. Third, while prior research indicates that presumptive doubt PS has a positive, direct effect on audit quality (e.g., Quadackers et al., 2014), our results suggest that
presumptive doubt PS may have a negative, indirect effect on audit quality through lower levels of perceived partner support for PS, lower levels of OCB, and higher
turnover intentions. Thus, we encourage future research to examine both the direct and indirect effects of presumptive doubt PS on audit quality to assess whether
presumptive doubt PS remains positively associated with audit quality in total.
4. Finally, our supplemental analysis of the PCAOB factors (PCAOB, 2012) that support or inhibit PS reveal the following additional implications for audit quality and firm
audit risk:
4a. First, our results indicate that auditors perceive that demanding scheduling and tight audit budgets are the primary organizational factors impeding the exercise of
sufficient levels of PS within the audit profession, suggesting that audit firms may benefit from providing more immediate attention to these factors.
4b. Second, we find that lower ranking auditors perceive lower levels of partner support for PS and lower levels of scheduling/budgeting support for PS than higher
ranking auditors. Therefore, firm leaders (e.g., partners and directors) may need to make more concerted efforts to support the PS of lower-ranking auditors.
4c. Third, we find that auditors at larger firms (i.e., Big 4 and national non-Big 4 firms), as compared to auditors at smaller firms (i.e., local and regional firms), perceive
lower levels of partner support for PS; they are more likely to report that their firms' performance evaluation systems do not provide sufficient incentives for skeptical
judgments and decisions; and they are more likely to report that intense scheduling demands and tight audit budgets do not allow for adequate levels of professional
skepticism. Therefore, our results suggest that Big 4 firms should make more of a concerted effort to support PS through partner support for PS, scheduling/budgeting
support for PS, and performance evaluation systems that reward professional skepticism.
future research. To more directly examine the relationship between substantially improved the manuscript. We also thank Chris
presumptive doubt PS and actual partner support for PS, we Agoglia, Jon Harp, Kathy Hurtt, Helen Brown-Liburd, Jeffrey
encourage future research to measure the relationship between McMillan, Chris Nolder, Luc Quadackers, Mike Shields, and Sally
presumptive doubt skepticism and actual indicators of partner Widener for providing helpful comments and suggestions for this
support (e.g., actual promotions). Furthermore, as in all survey- paper. The manuscript also benefited from workshop participants
based research, we acknowledge that we are unable to prove cau- at Clemson University along with participants at the 2014 ABO
sality, only correlations. Therefore, future research may employ an Conference and the 2015 Auditing Midyear Conference. We
experimental design to isolate out the causal effects of several of appreciate and acknowledge financial support provided by Clem-
the variables used in this study. Finally, we provide a summary of son University and Boston College.
our findings and contributions in Table 8.
Acknowledgments
Appendix A. Scale items and factor loadings
The authors thank Hun Tong Tan (editor) and two anonymous
reviewers for many thoughtful comments and suggestions that
Scale Items (“R” ¼ reversed item) Item Reference Factor

Loading
Neutral PS (1 ¼ strongly disagree and 6 ¼ strongly agree)

Search for Knowledge Factor
1. I think that learning is exciting. SK1 0.92
2. I relish learning. SK2 0.77
3. Discovering new information is fun. SK3 0.83
4. I like searching for knowledge. SK4 0.89
5. The prospect of learning excites me. SK5 0.89
6. I enjoy trying to determine if what I read or hear is true. SK6 0.58
Suspension of Judgment Factor
1. I take my time when making decisions. SJ1 0.74
2. I do not like to decide until I've looked at all of the readily available information. SJ2 0.76
3. I dislike having to make decisions quickly. SJ3 0.32
4. I like to ensure that I've considered most available information before making a decision. SJ4 0.91
5. I wait to decide on issues until I can get more information. SJ5 0.70
Self-Determining Factor
1. I tend to immediately accept what other people tell me. (R) SD1 0.83
2. I usually accept things I see, read, or hear at face value. (R) SD2 0.78
3. I often accept other people's explanations without further thought. (R) SD3 0.76
4. It is easy for other people to convince me. (R) SD4 0.74
5. Most often I agree with what the others in my group think. (R) SD5 0.57
6. I usually notice inconsistencies in explanations. SD6 0.54
Interpersonal Understanding Factor
(continued )
Scale Items (“R” ¼ reversed item) Item Reference Factor

Loading
1. I like to understand the reason for other people's behavior. IU1 0.89
2. I am interested in what causes people to behave the way that they do. IU2 0.90
3. The actions people take and the reasons for those actions are fascinating. IU3 0.90
4. I seldom consider why people behave in a certain way. (R) IU4 0.77
5. Other people's behavior does not interest me. (R) IU5 0.57
Self-Confidence Factor
1. I have confidence in myself. SC1 0.91
2. I do not feel sure of myself. (R) SC2 0.86
3. I am self-assured. SC3 0.86
4. I am confident of my abilities. SC4 0.87
5. I feel good about myself. SC5 0.83
Questioning Mind Factor
1. My friends tell me that I usually question things I see or hear. QM1 0.79
2. I frequently question things I see or hear. QM2 0.86
3. I often reject statements unless I have proof that they are true. QM3 0.64
Presumptive Doubt PS (1 ¼ strongly disagree and 5 ¼ strongly agree)
First Factor
1. Hypocrisy is on the increase in our society. PD1 0.53
2. This country has a dark future unless we can attract better people into politics. PD2 0.69
3. Using the honor system of not having a teacher present during exams would probably result in increased cheating. PD3 0.36
4. The United Nations will never be an effective force in keeping world peace. PD4 0.59
5. Most people would be horrified if they knew how much news that the public hears and sees is distorted. PD5 0.68
6. It is safe to believe that in spite of what people say most people are primarily interested in their own welfare. PD6 0.42
7. Even though we have reports in newspapers, radio, and TV, it is hard to get objective accounts of public events. PD7 0.73
8. The future seems very promising. (R) PD8 0.65
9. If we really knew what was going on in international politics, the public would have reason to be more frightened than they now PD9 0.67
seem to be.
10. Most elected officials are really sincere in their campaign promises. (R) PD10 0.50
Second Factor
11. In dealing with strangers one is better off to be cautious until they have provided evidence that they are trustworthy. PD11 0.53
12. Fear and social disgrace or punishment rather than conscience prevents most people from breaking the law. PD12 0.63
13. Many national sports contests are fixed in one way or another. PD13 0.41
14. Most people can be counted on to do what they say they will do. (R) PD14 0.59
15. In these competitive times one has to be alert or someone is likely to take advantage of you. PD15 0.54
16. Most salesmen are honest in describing their products. (R) PD16 0.63
17. Most students in school would not cheat even if they were sure of getting away with it. (R) PD17 0.53
18. Most repairmen will not overcharge even if they think you are ignorant of their specialty.(R) PD18 0.62
19. A large share of accident claims filed against insurance companies are phony. PD19 0.51
20. Most people answer public opinion polls honestly. (R) PD20 0.41
Third Factor
21. Parents usually can be relied upon to keep their promises. (R) PD21 0.46
22. The judiciary is a place where we can all get unbiased treatment. (R) PD22 0.47
23. Most experts can be relied upon to tell the truth about the limits of their knowledge. (R) PD23 0.72
24. Most parents can be relied upon to carry out their threats or punishments. (R) PD24 0.57
25. Most idealists are sincere and usually practice what they preach. (R) PD25 0.63
Perceived Partner Support for PS (1 ¼ strongly disagree and 5 ¼ strongly agree)
1. If I decide to do more testing because of my professional skepticism, partners support me. PartnerSupport1 0.91
2. When I am critical of a client explanation, my partners support me and encourage me to obtain more evidence. PartnerSupport2 0.95
3. Partners support me if my professional skepticism causes a conflict with the client. PartnerSupport3 0.88
Perceived Organizational Support (1 ¼ strongly disagree and 5 ¼ strongly agree)
1. My firm strongly considers my goals and values. POS1 0.91
2. My firm really cares about my wellbeing. POS2 0.95
3. My firm shows very little concern for me. (R) POS3 0.88
Organizational Citizenship Behavior (1 ¼ never and 5 ¼ always)
How often have you engaged in the following behaviors at work?
1. Attend functions that are not required but that help the organizational image. OCB1 0.47
2. Keep up with developments in the organization. OCB2 0.67
3. Defend the organization when other employees criticize it. OCB3 0.75
4. Show pride when representing the organization in public. OCB4 0.79
5. Offer ideas to improve the functioning of the organization. OCB5 0.68
6. Express loyalty toward the organization. OCB6 0.84
7. Take action to protect the organization from potential problems. OCB7 0.72
8. Demonstrate concern about the image of the organization. OCB8 0.76
Turnover Intentions (1 ¼ strongly disagree and 5 ¼ strongly agree)
1. I often think about leaving my firm. TI1 0.95
2. I will probably look for a job outside of this firm within the next 3 years. TI2 0.94
3. I am tempted to investigate other job openings. TI3 0.95
Appendix B. Robustness results
Appendix C. Replication of main analysis using the

Wrightsman Trust Scale to measure presumptive doubt PS
(continued )

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An error management perspective on audit quality: Toward a multi-

level model
Christoph Seckler a, *, Ulfert Gronewold b, Markus Reihlen a
a
Leuphana University of Lüneburg, Institute of Management & Organization, Universita €tsallee 1, 21335 Lüneburg, Germany
b
University of Potsdam, Chair of Accounting and Auditing in the Private and Public Sector, August-Bebel-Str. 89, 14482 Potsdam, Germany
Article history: We take an error management perspective on audit quality. Drawing on 18 months of participant ob-
Received 31 October 2013 servations and 38 interviews conducted in a Big 4 accounting firm, we develop a multi-level model of
Received in revised form error management. With this model, we propose how organizational structures, team procedures and
18 August 2017
practices, and individual cognitions and emotions interact to manage errors. The multi-level model of
error management allows us to conceptually integrate previous behavioral and social research on audit
quality, contributes to the rising accounting firm error management literature, and explains how and
why two general approaches from the broader error management literature to errors that are usually
Keywords:
Audit quality
considered as opposing each other, i.e., error prevention and error resilience, may interact and actually
Error management entail each other in accounting firms.
Multi-level model © 2017 Elsevier Ltd. All rights reserved.
1. Introduction (Francis, 2011; Hopwood, 1996). Thus, the specific mechanisms

within the audit firm that may explain variances remain vague.
How can we explain the differences in provided audit quality? To understand the mechanisms within the ‘black box,’ a second
This question has attracted considerable attention in the account- approach to empirical audit quality research is embedded in the
ing literature since DeAngelo's seminal theoretical papers on this behavioral and social research stream. This stream uses social and
topic (DeAngelo, 1981a, 1981b). A substantial body of empirical cognitive psychology lenses to understand auditors' behaviors,
research has emerged and converged, primarily around two ap- cognitions, and emotions (Birnberg & Shields, 1989), along with
proaches. A first and very popular approach to studying audit sociological lenses for making sense of the influence of social
quality is embedded in the archival research stream. It assumes that structures, institutions, and roles on auditors' behavior (e.g., Cooper
the audit's context plays a decisive role in determining audit & Robson, 2006; Miller, 1994). Scholars following this stream have
quality. Archival researchers have studied the influence of legal studied, e.g., the influence of quality control structures on auditors'
regulations (e.g., Francis & Wang, 2008), professional self- behavior (e.g., Malone & Roberts, 1996), the role of workpaper re-
regulation (e.g., Grant, Bricker, & Shiptsova, 1996), accounting views (e.g., Ramsay, 1994), auditors' judgment and decision making
firm size (e.g., Francis & Yu, 2009), non-audit services (Firth, 1997), (JDM) (e.g., Bonner, 2008; for a review), the error management
low-balling (e.g., DeAngelo, 1981a), auditor tenure (e.g., Carey & climate (e.g., Gold, Gronewold, & Salterio, 2014), and how social
Simnett, 2006), client corporate governance (e.g., Lennox & structures and agentic behavior reciprocally interact (e.g., Barrett,
Pittman, 2010), and the auditor's industry specialization (e.g., Cooper, & Jamal, 2005; Dirsmith, Heian, & Covaleski, 1997). One
Dunn & Mayhew, 2004). Together, these archival studies have major contribution of the behavioral and social research stream is
considerably advanced our understanding of how an audit's context that it indicates the relevance of interactions of different levels of
influences audit quality. However, one main limitation of this analysis within the organization to explain differences in audit
approach is that it treats accounting firms mostly as a ‘black box’ quality (e.g., Barrett et al., 2005; Malone & Roberts, 1996). However,
we argue that a crucial issue in this stream is not a lack of singular
studies that investigate how particular organizational structures
and procedures influence and interact with individual auditors'
* Corresponding author. behaviors. Rather, a key issue is that there is little conceptual
E-mail addresses: seckler@leuphana.de (C. Seckler), ulfert.gronewold@uni-
integration of how this interaction across multiple levels of analysis
potsdam.de (U. Gronewold), reihlen@leuphana.de (M. Reihlen).
22 C. Seckler et al. / Accounting, Organizations and Society 62 (2017) 21e42
evolves over time and can be systematically explained. and how it is performed in accounting firms. Accordingly, audit
Our study explores the relatively neglected multi-level inter- team activities reside in nested arrangements and are affected by
action in the production of audit quality by importing insights the bottom-up forces of the auditor's cognitions and emotions
from the broader error management literature (Goodman et al., related to errors (i.e., error orientation) and by the top-down
2011; Perrow, 1984; Weick, Sutcliffe, & Obstfeld, 1999). Error forces of social structures and systems. This multi-level
management is used as an umbrella term for organizations' joint research approach differs from typical behavioral and social
efforts to prevent and handle occurring errors (Goodman et al., studies in accounting, which usually either apply a behavioral or
2011). Error management has been highlighted as a key to un- a structural lens alone or look selectively at unidirectional effects
derstanding the production of quality in the wider fields of at a single point in time (e.g., how specific organizational factors
psychology, management, and sociology (Frese & Keith, 2015; influence individual judgments). A multi-level manner of theo-
Hofmann & Frese, 2011b; Perrow, 1984; Weick et al., 1999). rizing enhances our understanding by moving the literature to-
Recently, it has also been introduced in the accounting field (Gold ward a more integrative and dynamic explanation of how audit
et al., 2014; Gronewold & Donle, 2011; Gronewold, Gold, & quality is produced in practice.
Salterio, 2013). The base literature on error management1 is Second, whereas previous behavioral and social research related
divided into twodlargely unreconcileddmain camps: error to audit quality provided many insights into the functioning of
prevention and error resilience (Goodman et al., 2011; Weick quality control structures, of standard procedures such as work-
et al., 1999). Whereas advocates of the error prevention camp paper reviews (e.g., Ramsay, 1994), of auditors' JDM (e.g., overview
emphasize the role of formal structures and procedures in pre- in Bonner, 2008), or more recently of an error management climate
venting errors and their accumulation, advocates of the error (e.g., Gold et al., 2014), this study contributes to the behavioral and
resilience camp stress the role of individual resilience and social audit quality literature by addressing how these elements
informal (shared) practices to quickly address errors (Goodman interact in preventing and handling errors in accounting firms.
et al., 2011). However, despite this divide between the two Outlining these interactions within the multi-level model suggests
camps, we contend that both may offer valuable insights for that aspects that have previously been treated in isolation are much
understanding various aspects of error management on different more interrelated than the literature indicates. For instance, we
levels of analysis. describe and explain how preventive procedures such as work-
Theoretically informed by the base literature on error manage- paper reviews have a socializing effect on junior auditors' error
ment, we empirically investigate the multi-level interaction in orientation, which is crucial for the emergence of error resilient
audit error management based on an in-depth case study of a Big 4 practices within audit teams. We therefore suggest that workpaper
accounting firm. Based on 18 months of participant observations reviews have not only a direct effect on audit quality by correcting
(over three busy seasons in three consecutive years), 38 interviews, errors but also an indirect effect by socializing auditors with errors.
and the firm's internal archival materials, we examine the interplay Based on these findings, we suggest that considering the indirect
between organizational structures, team activities (i.e., procedures socialization effects of standard procedures (see also Westermann,
and practices), and individual characteristics regarding error Bedard, & Earley, 2015) is more important than currently under-
management. We focus on the management of audit (not ac- stood in the literature related to audit quality.
counting) errors mainly at the audit team level. However, we move Third, the multi-level model may also inform the broader base
one level down (i.e., individual level) and up (i.e., organizational literature on error management (Goodman et al., 2011). Although
level) to examine both how individual characteristics influence some studies have strived to understand the co-occurrence of error
team activities and how organizational structures enable and prevention and error resilience approaches within organizations
constrain these activities (e.g., Hackman, 2003). The case study (Vogus & Sutcliffe, 2007a, 2007b), those studies remain vague
findings are condensed in a multi-level model of error management regarding ‘the mechanisms through which these two approaches
in accounting firms. The model suggests that error manage- combine’ (Goodman et al., 2011: 165). In this regard, the multi-level
mentdunder ideal conditionsdis a result of a self-reinforcing model of error management describes and explains one central
system in which organizational structures (e.g., quality and risk mechanism by showing how preventive procedures (e.g., work-
management system), team prevention procedures (e.g., workpaper reviews) in accounting firms play a socializing role in indi-
paper reviews), team resilient practices (i.e., shared practices to vidual auditors' dispositions regarding errors (i.e., error
quickly handle occurring errors), and individual characteristics orientation), which is crucial for resilient practices to emerge
(error anticipation and error coping) interact and jointly constitute within audit teams. Therefore, we outline how and why these
and reconstitute each other. However, the multi-level model also prevention and resilient approaches to error management interact
outlines ruptures that explain why and how error management with and even entail each other within accounting firms.
may fail, which suggests that error management in accounting
firms is a fragile endeavor. 2. Theoretical background
The multi-level model of error management contributes to the
literature in several ways. First, it explains the emergence and The production of audit quality has been subject to extensive
execution of error management in accounting firms. This is novel research, despite ongoing discussion about its definition (e.g.,
because the audit error management literature has focused on Francis, 2011; McNair, 1991; Power, 1997, 2003). One key problem
relatively specific issues, namely, the error management climate lies in the inherent ‘obscurity’ of the audit product and the
and error reporting (Gold et al., 2014; Gronewold & Donle, 2011; assurance actually provided (Power, 1997). Because this assur-
Gronewold et al., 2013). Building on and extending this research, ance is neither observable nor exactly measurable, audits and the
we capture error management as a broader construct and suggest assurance provided are ‘credence goods’ that ultimately must be
a multi-level approach to understanding both how it emerges trusted by stakeholders (Causholli & Knechel, 2012; Power, 1997).
However, while this obscurity inhibits exact measurement, it has
not precluded scholars from defining audit quality conceptually.
1
By the term ‘base literature on error management,’ we refer to the literature on
The majority of studies follow DeAngelo's (1981b) definitiondas
error management outside of accounting and auditing that predominantly resides we do in this studydin which audit quality is the joint proba-
in the organizational behavior and psychology areas. bility that a given auditor (a) finds breaches in the financial
C. Seckler et al. / Accounting, Organizations and Society 62 (2017) 21e42 23
statements and (b) reports these breaches. The former aspect is quality. In contrast, auditor competence is less the focus of
associated with auditors' competence and the latter with audi- archival audit quality research, despite its indicated relevance in,
tors' independence. To empirically understand differences in the e.g., studies on industry specialization (e.g., Dunn & Mayhew,
provision of audit quality, two broad empirical research streams 2004; Solomon et al., 1999). However, even the literature on in-
can be differentiated: (1) archival approaches and (2) behavioral dustry specialization remains vague about the mediating mech-
and social approaches. anisms of how industry specialization translates into
competence, i.e., what underlies its association with audit quality
2.1. Archival research on audit quality in practice (DeFond & Zhang, 2014).
Archival research uses existing data, usually from repositories, 2.2. Behavioral and social research on audit quality
i.e., data that are not originally produced for the research question
at hand, and applies econometric methods of analysis to it (DeFond The behavioral and social research approach has the advantage
& Zhang, 2014). Findings of this research indicate that the legal and of being able to look inside accounting firms' ‘black box.’ Behavioral
the regulatory environment affect the outcoming audit quality. For research related to audit quality usually applies cognitive and social
example, Francis and Wang (2008) provide evidence that audit psychology to the auditing context. This research aims to ground
quality is higher in countries with stronger investor protection audit theory on detailed assumptions about cognitions, emotions,
regimes. Likewise, Maijoor and Vanstraelen (2006) find that audi- and social interactions in the institutional audit environment,
ted financial statements were less affected by earnings manage- applying a variety of methods such as experiments, surveys, in-
ment in countries with stronger audit enforcement regimes. Similar terviews, and field studies for developing and testing these as-
findings have been obtained in studies on regime switches sumptions empirically.
(DeFond, Wong, & Li, 1999; Venkataraman, Weber, & Willenborg, Behavioral research has shown how organizational structures
2008).2 and systems influence auditors' daily work (e.g., Malone & Roberts,
Findings also indicate that contextual conditions regarding 1996; Pierce & Sweeney, 2006). For example, studies on quality
the audit client, the auditor, and the auditor-client relationship control structures indicate that auditors' perceptions of the
matter for resulting audit quality. Regarding the audit client, strength of these structures and procedures influences them to
studies indicate an association between the presence of an audit engage in reduced audit quality behaviors (RAQs) such as prema-
committee and audit quality primarily because of the theorized turely signing off audit steps or accepting insufficient client ex-
protective and coordinating function that the audit committee planations (e.g., Malone & Roberts, 1996). The same research
might serve (e.g., Carcello & Neal, 2003; DeFond & Jiambalvo, reveals the detrimental effects of tight time budgets, deadlines, and
1991; Vafeas, 2005). With respect to the auditor, archival performance evaluations by showing how organizational struc-
research findings suggest that accounting firm size is positively tures and systems may lead auditors into RAQs (e.g., Pierce &
related to audit quality because of big firms' economic incentives, Sweeney, 2006).
differences in production technology, and greater social capital More directly related to the quality control of audit operations
(Francis & Yu, 2009; Lai, 2009). Finally, with respect to the within the audit teams, studies on the role of workpaper reviews
auditor-client relationship, studies on auditor tenure suggest that particularly inform our study. These studies provide rich insights
audit quality may be higher when tenure is longer, which might into the relative effectiveness of the workpaper review procedure
be attributable to the increasing competence of the incumbent depending on contextual factors such as error type (e.g., Ramsay,
auditor. However, increasing tenure may also be negatively 1994), reviewer experience (e.g., Ramsay, 1994), review format
related to the auditor's independence (e.g., Chen, Lin, & Lin, (Brazel, Agoglia, & Hatfield, 2004), the comprehensiveness of the
2008; Myers, Myers, & Omer, 2003). Non-audit services are review approach (Bamber & Ramsay, 1997, 2000), and workpaper
often suggested to be associated with lower audit quality, but this ‘stylization’ (e.g., Rich, Solomon, & Trotman, 1997). Whereas this
relationship seems to depend on factors such as auditor tenure or literature suggests that the review procedure can prevent a
industry specialization (e.g., DeFond, Raghunandan, & considerable portion of errors from remaining in the final work-
Subramanyam, 2002; Kinney, Palmrose, & Scholz, 2004). Finally, papers, this same research also indicates the limitations of this
auditor specialization in the client's industry is mostly found to formal procedure, as error detection rates appear unlikely to exceed
be associated with higher audit quality (Dunn & Mayhew, 2004; 50 percent in realistic settings (as indicated by, e.g., Owhoso,
Solomon, Shields, & Whittington, 1999). Messier, & Lynch, 2002).
Thus, although the archival research stream shows that (and In contrast to these formalized organizational structures and
which) contextual conditions affect audit quality, this stream also procedures is emerging behavioral literature on the error man-
faces substantial limitations. First, it is vague regarding the agement climate (e.g., Gold et al., 2014) and the wider JDM litera-
mediating mechanisms between an audit's contextual conditions ture (e.g., Bonner, 2008), which focus on less formal practices and
and the resulting audit quality (DeFond & Zhang, 2014; Francis, individual decision making. The emerging literature on the error
2004), which Francis observes as follows: ‘To date, research on management climate in accounting firms indicates that considering
this topic has … not go[ne] inside the “black box” of the ac- informal practices with respect to errors is another crucial
counting firm's organizational structure and operations’ (Francis, component of understanding the production of audit quality (Gold
2011: 138). Second, archival research seems to be overly et al., 2014; Gronewold et al., 2013; Stefaniak & Robertson, 2010).
concentrated on the auditor independence component of audit The main argument in this stream is that informal self- and peer-
quality. Indeed, much archival research on the legal environment, detection of errors and auditors' predisposition to report them
auditor tenure, the provision of non-audit services, and ac- within the firm are additional means of supporting audit quality.
counting firm size theorizes auditor independence as the medi- The wider JDM literature provides important insights regarding
ating mechanism of contextual conditions and the resulting audit these individual predispositions as well, by demonstrating the
importance of auditors' individual knowledge, skills, emotions,
cognitions, and related psychological dispositions and proc-
2
These findings are also supported by analytical models on the effect of legal essesdoften also depending on situational conditionsdfor the
regimes on audit quality (DeJong, 1985; Schwartz, 1997). quality of auditors' decisions (see Bonner, 2008, and Nelson & Tan,
2005, for summaries). error management have been outlined in diverse streams of
Social research related to audit quality is mostly inspired by literature outside the field of accounting, such as the literature on
sociological theories, action theory, and critical theory (Covaleski, high reliability organizations (e.g., Weick & Sutcliffe, 2001), error
Dirsmith, & Samuel, 1996; Hopwood & Miller, 1994; Power, 1997). management culture (e.g., Frese & Keith, 2015), normal accidents
It aims to understand the social origins of specific practices, i.e., it (Perrow, 1984, 1994), safety at work (Morgeson, Nahrgang, &
focuses on accounting and auditing as a ‘social and institutional Hofmann, 2011), and psychological safety (Edmondson, 1999).
practice’ (Miller, 1994: 1; see also Cooper & Robson, 2006). Social Despite their different approaches, views, and definitional nu-
research regards auditors as embedded agents in the institutional ances, scholars from these diverse fields all agree that errors and
heritage of the accounting field and the institutional practices of their management are key to understanding the quality of work
the accounting firm. Hence, auditors' cognitions, emotions, and outcomes.
judgments as social agents are subject to the structural influences The literatures mentioned above suggest several reasons that
of signification, power, and social norms. For instance, an error management may also be critical for the quality of work
ethnographic field study in a Big 6 firm by Covaleski et al. illus- outcomes in the audit environment. First, errors are in direct con-
trates how management by objectives and mentoring become flict with audit quality because they may lead auditors to false
disciplinary technologies (Foucault, 1979), transforming ‘pro- conclusions. Thus, preventing and addressing errors before they
fessionals into … organizational members whose work goals, accumulate is essential (Cannon & Edmondson, 2005). Second, er-
language, and lifestyle come to reflect the imperatives of the rors may stimulate learning within organizations because they
organization’ (Covaleski, Dirsmith, Heian, & Samuel, 1998: 293; provide clear signals that something is wrong and must be changed
see also Dirsmith et al., 1997). From a different angle, Barrett et al. (Edmondson, 1999; Sitkin, 1992). Thus, the manner in which
(2005) study how accounting practices in a globalized accounting occurring errors are handled becomes essential for learning within
firm are produced and reproduced in daily managerial practice. accounting firms, which is important in the efforts to continuously
Examining the coordination mechanism of multinational audits, improve the services provided. Third, research suggests that errors
the authors show how global organizational structures and the occur more often in environments with high workloads, intense
local implementation of procedures interact in a dialectical time pressure, quick changes between tasks, the need to learn new
manner. The authors particularly illustrate a tension between things, complex technology, varying customers, and high coordi-
abstract global structures and systems, facilitating the stan- nation demands (Keith & Frese, 2010). All these characteristics are
dardization and local appropriation of these structures and sys- very typical in the audit environment, which suggests that pre-
tems that ‘can both facilitate and undermine their use’ (Barrett venting and handling occurring errors plays an important role in
et al., 2005: 7).3 auditors' everyday work.
Overall, behavioral and social research offers critical insights Recent audit literature that has brought error management
for understanding the production of audit quality within ac- theory from a behavioral approach to auditing supports this view
counting firms and shows that this production involves direct and by showing that the manner in which audit errors are approached
interactive effects across different levels of analysis. This is indi- in an accounting firm affects audit quality (e.g., Gold et al., 2014). In
cated by behavioral studies on organizational structures and sys- particular, experiments have shown that different error manage-
tems and related RAQs (Malone & Roberts, 1996), studies on error ment climates in an accounting firm affect auditors' willingness to
management climate (Gronewold & Donle, 2011), and the wider internally report self-discovered errors in situations in which error
research on auditors' JDM quality (Bonner, 2008), along with social reporting is indispensable for error correction and, hence, that this
research that suggests that the social interaction within account- willingness directly affects audit quality (Gold et al., 2014;
ing firms may be adequately captured by considering an interplay Gronewold et al., 2013; Stefaniak & Robertson, 2010). Moreover, a
of structures with agency (i.e., the actions and discourse of human survey study by Gronewold and Donle (2011) suggests that audi-
agents within the organization) (e.g., Barrett et al., 2005; Dirsmith tors' individual predispositions to address their own errors are
et al., 1997). However, despite these recurring indications of influenced by how they perceive their audit organization's error
interactive effects among various levels of analysis (organization, management climate. This suggests that individual predispositions
team, and individual) and between structures and agency, the may mediate organizational-level influences on actual error man-
audit quality literature continues to take a rather static perspective agement practices.4
on how these levels interact and mostly looks selectively at the In our study, we are particularly concerned with the man-
unidirectional effects of mostly upper levels on lower levels of agement of action errors. We define action errors (hereafter
analysis (e.g., how specific organizational factors influence indi- referred to as ‘errors’) as ‘unintended deviations from plans,
vidual judgments). goals, or adequate feedback processing, as well as incorrect ac-
tions resulting from lack of knowledge’ (Frese & Keith, 2015:
2.3. An error management perspective on audit quality 622). Transferred to the audit context, this definition includes
both ‘mechanical’ (e.g., calculation errors or technical application
To understand this dynamic multi-level interaction in the errors of standard audit procedures) and ‘conceptual’ audit errors
production of audit quality in accounting firms, we take an error
management perspective. Error management is concerned with
the joint effort made within an organization to (1) prevent and
4
The audit literature on error management theory is still emerging and has been
(2) handle errors (Goodman et al., 2011). Relevant concepts of
focused on the mentioned aspects of error management climate and error
reporting. This literature has primarily investigated the effects of experimentally
given climates (i.e., ‘open’ vs. ‘blame’ climates) on auditors' internal error reporting
3
In addition to studies on the institutional and structural origin of audit work, decisions, but leaves open many questions about how such climates emerge and
the social research program has problematized the more technical understanding of what other kinds of error management practices may exist or evolve in audit firms.
audit quality as it appears in archival research and addresses the social processes of Therefore, error management as a broad concept, including both how it emerges
‘making things auditable’ (Power, 1996). Furthermore, e.g., Malsch and Gendron and how it is executed, is not yet fully established within the audit literature. The
(2013: 870) examine the consolidation of commercial values in the auditing pro- base literature on error management outside the field of accounting therefore re-
fession and show how ‘the logic of commercialism is strengthened in accounting mains important for further informing theoretical development on error manage-
firms’ structures and practitioners' mindset’. ment in accounting firms.
(e.g., setting wrong goals, making improper plans, lacking the result, there is a great divide between scholars adopting an error
knowledge to perform an audit procedure, or unwarranted prevention approach and those adopting an error resilience
judgment) (e.g., Ramsay, 1994). However, it is important to note approach.
that errors differ from violations (e.g., fraud). Violations are Despite these contradictions, the opposing camps agree that a
intentional actions to break a rule or refuse to conform to stan- main challenge of effective error management lies at the indi-
dards (Frese & Keith, 2015). In contrast, errors are both unin- vidual level. Research suggests that effective error management
tentional and potentially avoidable (Frese & Keith, 2015). Thus, may be severely impeded by three human characteristics. First,
violations such as fraud and other forms of misconduct (e.g., humans tend to attempt to avoid feeling embarrassed, vulnerable,
Cooper, Dacin, & Palmer, 2013; Palmer, 2013; Vaughan, 1999) are or incompetent (Argyris, 1976). Therefore, they are reluctant to
not within the scope of our study.5 Furthermore, errors must be engage in procedures that may uncover their own errors and to
distinguished from their consequences (Frese & Keith, 2015). communicate occurring errors openly to others (Zhao & Olivera,
Although errors are mostly associated with negative conse- 2006), which might inhibit both the prevention of an accumula-
quences such as stress, quality deficits, and failure, they may also tion of errors and the rapid handling of errors. Second, humans
have positive consequences such as learning, resilience, and the have difficulty identifying errors correctly within complex cause-
motivation to adapt (Frese & Keith, 2015; Sitkin, 1992). and-effect chains (Do € rner & Schaub, 1994), which may impede
In attempting to understand how to manage errors, the base effective engagement in prevention procedures and handling
literature on error management has evolved into two opposing occurring errors adequately. Third, humans prefer to analyze
camps: error prevention and error resilience (Goodman et al., 2011; successes instead of errors (Sitkin, 1992), which may limit learning
Wildavsky, 1991). Scholars adopting an error prevention approach from errors in organizations.
argue that quality is best achieved by preventing errors and their However, both the prevention camp and the resilience camp
accumulation through formal organizational structures and pro- provide rich insights into error management across quite
cedures. Organizational structures are understood in this literature different levels of analysis. The prevention camp has noted the
as formal policies and processes at the organization level, such as relevance of formal organizational structures and procedures
standard operating procedures, internal control policies, and that are governed by an explicit blueprint or plan to prevent
training programs (Goodman et al., 2011). Prevention procedures errors and their accumulation (e.g., organizational design rules or
are formal rule-directed activities of front-end employees taken to standard operating procedures) (Goodman et al., 2011). The error
prevent errors and their accumulation in daily work activity, e.g., resilience camp has stressed the importance of individual coping
through double checks and reviews. The underlying assumption of skills and informal shared resilient practices that emerge in social
this prevention logic is that organizations can identify and define interaction (e.g., psychological safety, error management culture,
most or even all potential errors and prevent the occurrence of or processes of mindfulness) (Goodman et al., 2011). Both
these errors through adequate formal structures and procedures streams highlight the crucial role of the individual (i.e., in pre-
(Goodman et al., 2011; Hofmann & Frese, 2011a). After an adverse venting errors or responding to them resiliently). Taken together,
event has occurred, such structures and procedures are adjusted to these insights from the broader error management literature
prevent similar events in the future (Goodman et al., 2011). Overall, outside the accounting field theoretically guide our empirical
the error prevention approach suggests that quality is the outcome analysis of error management in accounting firms, to which we
of a lack of variance in predefined formal organizational structures, turn next.
processes, and procedures (Goodman et al., 2011; Hofmann & Frese,
2011a). 3. Research methods
In contrast, scholars adopting an error resilience approach argue
that quality is best achieved by informally and flexibly reacting to We engaged in an in-depth case study of one of the Big 4
errors (Reason, 1990; van Dyck, Frese, Baer, & Sonnentag, 2005). accounting firms located in Germany. To protect the anonymity of
Error resilience is ‘the ability to maintain positive adjustment or to the firm studied, we refer to it as ‘The Firm.’ The Firm has op-
bounce back’ (Goodman et al., 2011: 162), i.e., to recover from erations in more than 100 countries with more than 500 offices
adverse events such as errors. The error resilience camp suggests worldwide and is organized along multiple dimensions, such as
that individuals, teams, and organizations must be able to quickly geographic locations, lines of service, and industry-sector spe-
and informally cope with errors (Goodman et al., 2011). The un- cializations. To gain insights into error management on multiple
derlying assumption is that human errors are ubiquitous and that levels of analysis, the case study method appeared most appro-
not every error can be prevented (Frese & Keith, 2015; Reason, priate (Eisenhardt, 1989; Yin, 2013). This method involves tracing
1990; Weick, 2012). As a result, organizations should promote in- individuals and teams in their natural organizational context to
dividual resilience (Goodman et al., 2011) and shared practices to gain insights into complex interactions at multiple levels of
handle occurring errors (Edmondson, 1999; van Dyck et al., 2005). analysis (Covaleski & Dirsmith, 1990; Power & Gendron, 2015;
Accordingly, the error resilience approach opposes the error pre- Radcliffe, 2010). Following a naturalistic inquiry, according to
vention approach by suggesting that ‘unvarying procedures can't which researchers should be familiar with the culture of the
handle what they didn't anticipate’ (Weick et al., 1999: 86). Thus, organizations they study (e.g., Denzin, 1971; Hammersley &
the idea that predefined formal structures and procedures ‘are the Atkinson, 1983), one of the authors worked at The Firm during
source of reliability conflates variation and stability and makes it the busy seasons over a period of three years. This gave us, as a
more difficult to understand the mechanisms of reliable perfor- research team, unique access to context-rich data for exploring
mance under trying conditions’ (Weick et al., 1999: 86e87). As a error management in a Big 4 accounting firm.
3.1. Data collection

5
We acknowledge, however, that there is a fuzzy boundary and therefore some 3.1.1. Participant observation
overlap between the two concepts because fraud may, e.g., evolve from initially
unintentional misconduct and either ‘normalize’ over time or occur ‘accidentally’
A primary method of data collection was participant observa-
(at least in the initial stages), e.g., because of the concurrence of complex organi- tion, which involved actively working within audit teams. During
zational conditions (Cooper et al., 2013; Perrow, 2010; Vaughan, 1999). our study, one of the authors actively worked in 14 audit teams as
an embedded investigator.6 The total time spent in the audit teams proved helpful in allowing the emergence of new themes before
was approximately 18 months over a period of three years. Working limiting informants' responses with specific questions. For the
within these teams included working at the offices of various cli- first interviews, after participants' free reports of an error that
ents, which gave us a natural opportunity to constantly contrast had occurred during an audit, more specific questions regarding
error management across different teams operating under different different topic areas and aspects of error management were
client and work settings. The number of members of the core audit asked, again soliciting free responses related to personal expe-
engagement teams varied from three to twelve. Insights from our riences. A structured listing of thematic complexes and items
participant observation were documented in field notes and from questionnaires previously used to study high reliability or-
prompted further questions during interviews and subsequent ganizations (Weick & Sutcliffe, 2001), error management culture
observations. This technique allowed us to gain an intimate fa- (van Dyck et al., 2005), and individual error orientation
miliarity with the functioning of audit teams in The Firm in real (Rybowiak, Garst, Frese, & Batinic, 1999) served to orient the
time. Moreover, working alongside auditors helped us to build trust interviews. We note, however, that the questionnaire items on
with our informants (Yin, 2013). This mutual trust, along with the the listing were never directly asked. Rather, the interviewer was
intimate familiarity with The Firm's value system and language, careful in formulating questions in a way that simply introduced
proved essential for the open discussion of errors and error man- the respective theme or aspect of error management in order to
agement with the auditors. ensure that we did not miss any facets of error management
known from prior research. This approach was also used to avoid
priming participants any more than necessary to make them
3.1.2. Interviews consider the respective notion in their experiences. After the first
A second data collection method was semi-structured in- ten to fifteen interviews, we reached a point of theoretical
terviews. Using theoretical sampling (Glaser & Strauss, 1967), we saturation for most of the themes indicated by the listing. Thus,
applied different criteria for collecting data in order to find var- we began to further explore emerging themes that had devel-
iations that could explain emerging patterns of error manage- oped during participant observations and prior interviews
ment. We selected interviewees along various dimensions, such (Glaser & Strauss, 1967). All interviews were tape-recorded (with
as the ranks of the interviewees, teams, offices, nationalities, and the participants' consent) and fully transcribed to facilitate the
service lines. We chose to interview auditors of different ranks data analysis.
(junior, senior, manager, partner) in order to develop a compre-
hensive understanding of error management within The Firm 3.1.3. Archival materials
from different perspectives. Different teams were chosen to In addition to conducting participant observations and in-
isolate team particularities. We interviewed auditors from a va- terviews, we analyzed relevant archival materials concerning The
riety of offices within Germany because previous studies have Firm's organizational structure and procedures. The analyzed
reported varying levels of audit quality in different offices within documents primarily stemmed from The Firm's global internal
the same national entity (Choi, Kim, Kim, & Zang, 2010; Francis & database. These documents included a description of the quality
Yu, 2009). We also interviewed auditors from The Firm's offices and risk management system, charts depicting the organizational
in other countries to consider national idiosyncrasies. These au- structure, practice manuals, codes of conduct, training materials,
ditors came from countries as diverse as the UK, Singapore, and learning, development, and staffing plans. These archival ma-
Ireland, Austria, Switzerland, Italy, the Netherlands, the Czech terials provided a more differentiated picture of the blueprints for
Republic, and India. In total, we conducted semi-structured in- the organizational structures and procedures to guide auditors'
terviews with 30 auditors across all levels of seniority from 12 activities (Yin, 2013). According to our comparative approach, this
offices in 10 countries. Additionally, we interviewed seven information was also useful in uncovering new themes. Collec-
management consultants from The Firm, which allowed us to tively, we used the field observations, interviews, and document
compare the responses of auditors with those from another inspections to mutually triangulate the findings from the different
group of knowledge workers (Alvesson, 2001). This comparison data sources (Yin, 2013).
helped to sharpen the specifics of error management in auditing.
Moreover, we interviewed the national head of quality and risk 3.2. Analytical approach
management. Table 1 summarizes the descriptive characteristics
of the interviewees. Our analysis followed an abductive approach that builds on
We began all interviews with a broad question regarding in- the interaction among data, existing theoretical frameworks in
stances of errors that participants could recall. This technique the literature, and the emerging theoretical themes (Alvesson &
Ka€rreman, 2011; Alvesson & Sko € ldberg, 2009; Mantere &
Ketokivi, 2013; Orton, 1997). We used an iterative process of
6
The author was employed part-time by The Firm. The teams he worked in were collecting, coding, and categorizing ‘empirical material as a
informed about the double role as an embedded investigator. We do not have any resource for developing theoretical ideas’ (Alvesson & Ka €rreman,
indications that this influenced how the auditors within the teams behaved beyond
a very brief initial habituation phase. We found that the auditors worked under
2011: 12). This entailed a process of subsequent abstraction from
fierce time pressure, which made it nearly impossible to maintain ‘non-natural raw data by coding, categorizing, and linking categories to
behavior’ over an extended period. The embedded investigator usually observed emerging themes and reflecting them using existing frameworks
the auditors for several weeks within the audit teams, and we found that after a in building new theory (Gioia, Corley, & Hamilton, 2013).
very brief habituation phase, the auditors did not pay any further attention to being
Although our empirical inquiry created inductive hunches from
observed. Therefore, over several weeks, a quite robust and substantiated under-
standing of how auditors managed errors resulted. The investigator was paid for the our fieldwork, we tried to make sense of these insights by
audit work because he was employed by The Firm, but the research project did not applying multiple theories such as error climate or error orien-
receive any financial support by The Firm. Indeed, the investigator worked part- tation as thought tools, not to fit data to the theory, but rather to
time to combine his interest in doing research and working as an auditor. Shortly explore the data using diverse theoretical framings to determine
after the field research work finished, the embedded investigator rejoined
academia full-time. His current position is fully independent from The Firm. The
which one fits best. As suggested by Langley (1999), coding and
Firm did not impose any restrictions on what could or could not be written and analysis will not produce theory without an uncodifiable creative
published provided that The Firm's identity and client identities were not revealed. leap (see also Suddaby, 2006). Consequently, this abductive
Table 1
Characteristics of interviewees.
Service Line Rank Nationality Years of Experience Area of Specialization
Audit Partner 1 Germany 20þ Financial Statements Audit

Partner 2 Germany 15þ Financial Statements Audit
Senior Manager 1 Ireland 8þ Financial Statements Audit
Senior Manager 2 Germany 8þ Financial Statements Audit
Senior Manager 3 Germany 8þ Financial Statements Audit
Manager 1 Spain 7e8 Financial Statements Audit
Manager 2 India 7e8 Financial Statements Audit
Manager 3 Malaysia 7e8 Financial Statements Audit
Manager 4 Germany 6 Financial Statements Audit
Manager 5 Germany 8þ Financial Statements Audit
Senior 1 Singapore 3þ Financial Statements Audit
Senior 2 Singapore 3þ Financial Statements Audit
Senior 3 Germany 4 Financial Statements Audit
Senior 7 Germany 5þ Financial Statements Audit
Senior 9 Germany 3þ Financial Statements Audit
Junior 1 The Netherlands 2 Financial Statements Audit
Junior 2 Czech Republic 2 Financial Statements Audit
Junior 3 UK 2 Financial Statements Audit
Junior 4 Malaysia 1 Financial Statements Audit
Junior 5 Singapore 3 Financial Statements Audit
Junior 6 Germany 3 Financial Statements Audit
Consulting Partner 1 Germany 20þ IT Process Consulting
Senior Manager 1 Germany 8þ IT Process Consulting
Senior 1 Germany 5 IT Process Consulting
Junior 1 Austria 3 IT Process Consulting
Junior 2 Austria 1 IT Process Consulting
Junior 3 Germany 1 IT Process Consulting
Junior 4 Germany 1 IT Process Consulting
HR Manager 1 Germany 5þ Training and Development
theory development followed numerous data-theory iterations investigator with contextualized knowledge of The Firm's struc-
and feedback loops (Lincoln & Guba, 1985; Strauss & Corbin, tures, procedures, and practices, the other two team members
1998). The coding and comparison process of the transcribed played a ‘devil's advocate’ role by representing an outside
material was supported by the computer-based program ATLAS.ti perspective (Miles & Huberman, 1994). This practice of peer
7.0 for qualitative data analysis. debriefing was extended to colleagues within our departments
Throughout the data analysis, we used triangulation to ensure and to other researchers who gave feedback at different stages of
the trustworthiness and credibility of our study (Jonsen & Jehn, the study. Furthermore, after writing up our case study and the
2009; Malsch & Salterio, 2016). Specifically, we maintained a resulting theoretical framework, we provided the findings to
practice of rigorously questioning the interpretations throughout several auditors from The Firm (one partner, one manager, and
the analysis to ensure that the emerging categories were two seniors) for member checking and to receive feedback.7 We
grounded in the data. Whenever conflicts in coding and catego- integrated their suggestions in order to further strengthen our
rization arose, we discussed these instances and returned to the case study and the theoretical model.
data to substantiate the claims with documentary evidence.
Whereas one member of our research team was an embedded 3.3. Data analysis process: abstracting from the empirical material
In compliance with professional standards (e.g., International

7
Member checking and engagement of experienced practitioners is recom- Auditing and Assurance Standards Board [IAASB] 2016, Interna-
mended, e.g., in objective hermeneutics (e.g., Oevermann, Allert, Konau, & tional Standard on Quality Control [ISQC 1]), accounting firms
Krambeck, 1979; Soeffner, 2004) and by Strauss (1987) within grounded theory.
devote substantial effort to quality control, with key mechanisms
It is also closely linked to a practice of ‘peer de-briefing’ (Lincoln & Guba, 1985), in
which a project is discussed with colleagues who have not worked on the same being a standardized audit methodology, rigorous documentation
project. The underlying idea of this procedure is to check whether the research requirements, and the hierarchical workpaper review process.
findings are inter-subjectively comprehensible and reflect a shared set of experi- These mechanisms are classic error prevention structures and
ences within The Firm. Some of the auditors we asked for feedback had only procedures that aim at ensuring that the audit work underlying the
partially been exposed to the same data; however, they were part of the same
community of practice, and their assessment helped us to determine the extent to
issued opinion is free from (material) audit errors. Although ac-
which our findings were idiosyncratic or reflect broader patterns that these audi- counting firms' strong focus on error prevention was therefore
tors have also experienced at The Firm. well-known in the audit literature when we started our field
research (albeit without using this error management terminol- realizing what is going on (rp1).12 Furthermore, our interviews were
ogy), the role of error resilience was largely unknown.8 scattered with reiterations of ‘you simply have to stay calm when
It therefore grabbed our attention early in the data analysis errors occur’ or ‘you have to save the situation first.’ We grouped
process that we did observe distinct resilient practices within audit this description of the struggle of acting calmly when facing an
teams. This apparent co-existence of strong error prevention error into the second-order category of cool-headed error handling
structures and procedures on the one hand and regularly exercised (rp2). Moreover, the auditors engaged in activities to triangulate
error resilient practices in the auditors' daily operations on the their own findings or claims of team members and clients with
other hand cannot be explained by the current state of the error further evidence. We abstracted these activities to the more general
management literature either inside or outside the auditing field.9 resilient practice of triangulation in practice (rp3). A fourth pattern
Therefore, the audit environment apparently allowed an explora- that emerged through descriptions of how error handling is
tion of the conditions and relationships that may explain why and ‘pushed around within the team’ or that ‘everything can be handled
how the two approaches could co-exist. because there is somebody at The Firm who will know about it’ was
To understand these conditions and relationships in more detail, abstracted to the resilient practice of informed decision making
we began an iterative process of moving back and forth between (rp4).
the empirical data and theoretical frameworks to gain a systematic In the second phase, we used these four resilient practices (RP) as
understanding of their co-existence. This process of abstraction and a starting point to understand what enabled these resilient practices
systematization aims at identifying dominant patterns and (RP) to emerge within teams. Revisiting the initial codes suggested
explaining how they are related (Strauss & Corbin, 1998; Maxwell, that the individual orientation toward errors was crucial. Using
2013). However, to develop a more fine-grained and balanced ac- expressions such as ‘you get an awareness that errors happen all
count from our empirical data, we also searched for ‘alternative the time,’ ‘we have to accept that errors happen in our work,’ and
voices’ or perspectives that were less dominant, along with rup- ‘there will always be wrong decisions,’ the auditors described an
tures within the dominant patterns and their relationships anticipation of errors that appeared quite unusual in the German
(Alvesson & Sko € ldberg, 2009). work context.13 Reflecting on these cues with the literature
Although in practice, the analysis process was more iterative (Rybowiak et al., 1999), we abstracted this notion to the concept of
than linear, the data analysis process and its major intermediate error anticipation (eo1). Furthermore, the auditors frequently
results can be described in the following five main phases.10 This referred to an experienced ‘emotional blunting over time,’ along
description allows the reader to retrace the iterative data analysis with the concept of ‘Tiefenentspanntheit,’ the outward appearance,
process. In the first phase, we analyzed the informal within-team mostly of more senior auditors, of keeping calm in the event of an
practices that enabled the audit teams to anticipate and quickly error. We interpreted these cues as part of the more abstract
address occurring errors. This phase of analysis suggested four concept of increasing error coping (eo2) skills of the more senior
distinct resilient practices (RP).11 For example, we noticed that au- auditors. Notably, error anticipation (eo1) and error coping (eo2)
ditors showed and described ‘a constant struggle to know what is seemed to be shared by most of the more senior auditors we
happening within the team,’ and they asserted that ‘communica- interviewed across countries as diverse as Germany, the Czech
tion is essential to catch errors early on.’ We abstracted such Republic, France, the UK, Singapore, and India.
empirical cues into the more abstract resilient team practice of In the third phase, which was interrelated with the second
phase, we attempted to understand what leads to the development
of this error anticipation (eo1) and error coping (eo2) over time. Our
8
hunch was that it occurs over time because junior auditors
Recent experimental studies on the error management climate (e.g., Gold et al.,
exhibited substantially less error anticipation (eo1) and error coping
2014) have begun to consider firm-internal error reporting as an example of a
resilient error management practice. Because these studies used experimentally (eo2). That said, was this a result of a (self-) selection process, of
created settings, it remains unclear whether or to what extent the conditions for continuous socialization, or both? Because the theme of individual
error resilience to occur are given or not given in accounting firms anddif they development with regard to errors frequently arose within our
aredhow they arise. Gronewold and Donle (2011) report results below item-scale interviews, we asked the interviewees about their thoughts on it.
midpoints for auditors' predisposition to engage in resilient-type behaviors (sig-
nificance was not tested), although the descriptive statistics are limited and refer to
The answers suggested that this development was largely the
a mixed sample with external, internal, and public-sector auditors, i.e., quite consequence of being constantly confronted with small-scale errors
different institutional audit environments. Moreover, audit studies that use error at work. For example, the auditors mentioned that ‘reviews
management theory all mention potential threats in the audit environment to constantly note the errors you make.’ In addition, they explained
practicing a ‘high degree’ of error management (as articulated by Gronewold &
that ‘you are always changing teams, tasks, and clients, so there is
Donle, 2011) or to openly report errors (as studied by Gold et al., 2014), e.g., the
fear of being sanctioned for having made an error in an environment in which no chance of not making mistakes.’ Additionally, the auditors re-
errors should be avoided. Therefore, the regular exercise of resilient practices in an ported that ‘through feedback, your strengths and weaknesses are
accounting firm could not be readily expected ex ante. noted to you.’ Through further discussion with the auditors and
9
This is because the audit-specific error management literature has not yet been further participant observation, we became more aware that
developed in this regard, and opposing positions in the base literature on error
certain formal procedures within the teams played an important
management imply that typically either an error prevention or an error resilience
approach is dominant in a given organization (Goodman et al., 2011; Wildavsky, role in socializing the auditors in this regard. These formal pro-
1991). cedures mostly had a prevention function (albeit not necessarily an
10
In the following explanation of the five phases, we broadly refer to central exclusive and straightforward one). The most prominent of these
empirical results (the emerging concepts and linkages) of our study to make the formal prevention procedures within the auditors' daily work that
process of analysis traceable for the reader. Referring broadly to our results in this
methods section is necessary because the process of analysis was dependent on the
findings (i.e., major intermediate findings entailed subsequent steps in data analysis
12
and/or collection). However, the detailed presentation of these findings together To facilitate the referencing of the emerging concepts with the figures below
with the provision of supporting textual, observational, and documentary evidence that summarize the data analysis process (Fig. 1) and the resulting multi-level
will follow in the upcoming ‘Case findings’ section. model of error management (Fig. 2), we indicate the second-order concepts
11
To facilitate the referencing of the emerging concepts with the figures below with lower-case letters and an increasing number in case of several second-order
that summarize the data analysis process (Fig. 1) and the resulting multi-level concepts, e.g., (rp1) for the resilient practice of ‘realizing what is going on.’
13
model of error management (Fig. 2), we indicate the abstracted umbrella con- Comparing 62 countries, Germany is second to last with respect to error
structs with capital-letter abbreviations, e.g., (RP) for resilient practices. tolerance (Frese, 2005).
affected the auditors' socializing with errors were frequent work- 4. Case findings
paper reviews (pp1), feedback procedures (pp2), and job rotation
(pp3).14 Reflecting upon these insights and comparing them with In this section, we present our findings in three main steps. First,
our understanding of the formal organizational structures (OS) and we empirically describe errors in the audit environment to clarify
systems, we realized that these procedures were associated with the subject matter of our study. Second, we describe our empirical
The Firm's quality and risk management system (os1), its learning and findings on the identified themes in our case study in the form of a
development system (os2), and its multidimensional matrix organi- ‘thick narrative.’ Thus, here we provide the detailed empirical
zation (os3). material on the identified first-order concepts, along with their
In the fourth phase, we further aggregated and abstracted our abstraction into the second-order concepts and their grouping
second-order concepts into umbrella constructs, which are into the umbrella constructs, as already briefly summarized in the
associated with error management at The Firm. We grouped the ‘Data analysis process: abstracting from the empirical material’
constructs of realizing what is going on (rp1), cool-headed error section and Fig. 1. This narrative is organized by the umbrella
handling (rp2), triangulation in practice (rp3), and informed decision constructs in the order in which they emerged in our empirical
making (rp4) as being informal resilient practices (RP) within audit data collection and analysis process. The findings and their in-
teams. Reflecting the notions of error anticipation (eo1) and error terconnections unveiled in this narrative entail an idealized model
coping (eo2) at the individual level with the literature, we found of error management within The Firm that we abstracted from our
that auditors developed what the error management base literature empirical data. This idealized model describes how informal resil-
refers to as an individual's error orientation (EO) (Rybowiak et al., ient practices (RP) within audit teams crucially depend on in-
1999). Furthermore, workpaper reviews (pp1), feedback (pp2), and dividuals' error orientation (EO), which gradually develops through
job rotation (pp3) were grouped as formal prevention procedures experiences with formal prevention procedures (PP) within the audit
(PP) within the teams.15 Finally, we grouped the quality and risk teams that are constituted and reconstituted through organiza-
management system (os1), the learning and development system tional structures (OS). As such, we describe error management
(os2), and the multidimensional matrix organization (os3) as formal within accounting firms under ideal conditions as a self-reinforcing
organizational structures (OS) of the organization. This abstraction system. Third, we identify ruptures within this system that explain
process resulted in the data structure (Gioia et al., 2013; why and when error management is likely to be ineffective or to
Patvardhan, Gioia, & Hamilton, 2015) that is summarized in Fig. 1. fail. To indicate the origins of the data sources, we (i) label quotes as
In the final phase, we investigated the dynamic interaction spoken by participants in the field by putting them in quotation
between different levels of analysis (Gioia et al., 2013). This marks; (ii) additionally label interview quotes as (Int.) to differen-
process involved the task of identifying coupling or linking re- tiate them from field quotes; and (iii) label data from archival
lationships between the individual, team, and organizational materials as (Arc.).
levels. We therefore began discriminating linking relationships
among these different levels of analysis and used our empirical 4.1. Errors in auditing
material to facilitate grounding and reflection (see also Alvesson
& Ka €rreman, 2011). Four linking relationships and associated During participant observation, we quickly became aware that
ruptures within these relationships emerged from this analysis: errors were ubiquitous in audit teams. The errors we observed
structure-team linking (L1)16: translating structures into proced- came in different degrees, yet many did not involve high levels of
ures; team-individual-linking (L2): socializing individuals; individ- discretion, such as judgment errors on complex accounting issues.
ual-team-linking (L3): mobilizing reflection-in-action; and team- Rather, we observed a plethora of ‘smaller’ errors that, neverthe-
structure-linking (L4): updating structures. These linking re- less, could have material consequences for the audit opinion.
lationships helped us to finalize our theoretical model by Typical errors included performing standard audit procedures
coupling these different levels of analysis in an integrated multi- without properly addressing the assertion in question, accepting
level model of error management. Based on the described anal- inadequate explanations or other audit evidence obtained from the
ysis procedure, we will now turn to provide a detailed empirical client, and making wrong calculations, among others. We found, in
account of the emerging patterns and relationships by means of a line with theoretical ideas on this matter, that the ubiquity of errors
rich narrative within the ‘Case findings’ chapter. within audit teams arose mainly from the conditions that particu-
larly the junior auditors were likely to experience in the teams.
Junior auditors were assigned tasks in which they had little expe-
rience, struggled to learn the standard audit procedures, and
worked under intense time pressure at an unfamiliar client, in a
work context involving high coordination demands with the client,
within the core team, with supporting IT and tax specialists, and
14
Hence, the effect of socializing auditors with errorsdthat these three prevention with component teams around the world.
procedures had according to our findingsdwas decisive for including them in our
We observed that occurring errorsdwhen discovered by the
model within the ‘prevention procedures’ category. Other potential prevention pro-
cedures that were not signaled to have such an effect were not included. auditors themselves or brought up by other team membersdwere
15
The category ‘prevention procedures (PP)’ does not claim to be a complete set of oftentimes referred to with statements such as ‘damn, I should have
all error prevention mechanisms that may be in place at The Firm. Instead, it known better’ or ‘sorry, I did not know this.’ These typical reactions
comprises those formal team-level procedures with a (not necessarily exclusive or indicate that the auditors seemed to share a common under-
straightforward) prevention function that our data and analyses suggested as
standing of what constitutes an error. We attributed this shared
causative for auditors' development of an error orientation (EO) over time (mostly
driven by the effect of these formal procedures to constantly confront the auditors understanding to intensive ‘on-the-job’ and ‘off-the-job’ training
with errors that they make in their work). and the socialization of the auditors within The Firm and the pro-
16
We use the abbreviations (L1), (L2), (L3), and (L4) as references for the proposed fession. This includes the application of professional and firm-
relationships between the umbrella constructs to facilitate cross-referencing internal audit methodology and quality control standards that
throughout the paper. The letters tie in to Fig. 2 and to the respective sub-
headings within the ‘Case findings’ section titled ‘Multi-level linking: self-rein-
prescribe how audit procedures should be performeddimplying
forcing versus disruptive dynamics,’ in which we provide a narrative of the re- deviances from these prescriptions as errors. While we observed
lationships and associated ruptures. some negotiations in the review process about whether an error
Fig. 1. Data structure.
made was ‘material,’ our findings suggest a high consensus among these practices seemed to be shared by most audit teamsdalbeit to
auditors on what constitutes an error.17 In this vein, we found that varying degreesdthey were not formally prescribed. Rather, these
when an error was recognized, auditors usually tried immediately practices were repeated activities that emerged in informal in-
to assess the error's ‘materiality’ as their initial criterion to deter- teractions among audit team members. We therefore moved on to
mine how to further address it.18 explore these practices in audit teams that we have labeled resilient
What particularly grabbed our attention, however, was that the practices (RP).
audit teams seemed to engage in distinct practices, which enabled
them to quickly detect and handle occurring errors as a team. While 4.2. Team level: resilient practices (RP)
4.2.1. Realizing what is going on (rp1)

17
Note that we observed this high consensus mainly for smaller errors that were A shared informal practice within teams that became salient
relatively easy to recognize as an error when being prompted to them (either by the early on was the practice that we labeled realizing what is going on.
auditors themselves via self-discovery or by other team members), i.e., errors with This practice enabled the team to quickly detect occurring errors in
a relatively low degree of ‘obscurity’ (Power, 1997).
18
order to address them. More senior auditors frequently referred to a
Early assessment of a presumable error's materiality does not appear trivial, as
it would, e.g., require a strict differentiation between the error and its consequences
felt need to have a constant awareness of ‘what is going on within
for the (correctness of the) audit opinion. The latter will be decisive for the error's the team,’ ‘what are the issues,’ ‘where are the strengths and
materiality, but will oftentimes not be known and will be difficult to assess (e.g., the weaknesses of team members,’ and whether ‘junior team members
consequences for the audit opinion of not having collected sufficient evidence in an actually understand what they are doing.’ Interestingly, we even
audit step will importantly depend on whether undetected financial statement
noted how seniors felt uneasy when they saw a lack of communi-
errors remain as a result of this audit error, which is unknown to the auditor).
Nevertheless, the auditors in our study stated that they routinely made such initial cation within the team, especially with the most junior auditors
assessments and appeared quite confident in doing so, without showing noticeable with little experience; something that they described as an
awareness of the mentioned problems. Thus, while it was not within the scope of ‘awkward feeling when somebody does not ask a question for a
this study to enter more deeply into these problems, auditors' assessment of the while.’ As a result, particularly more senior auditors frequently
materiality of an error's consequences appears to be a relevant and interesting
question for future research. As described in the text, we took a different direction
offered questions to check about the current state of the work of
in this study by entering deeper into the emerging shared practices at the audit team members, such as ‘how is it going with the A/R aging?’ This
team level and their respective antecedents. practice also involved providing quick and informal feedback
within the teams to get more-junior auditors ‘back on track’ and to (management consultants), auditors were considered to be very
quickly catch ‘when things went in the wrong direction.’ This ‘skeptical.’ This was even considered a matter of pride among au-
practice of realizing what is going on, however, was not limited to ditors, reflecting their tendency to critically triangulate claims or
the on-site team. We found that teams often engaged in intensive evidence with different sources of (other) evidence. It also entailed
communication with managers and partners who were at the office a tendency not to be afraid of asking further questions in case
or at other clients, and our participant observation indicated how something seemed not to be ‘plausible,’ even when this involved a
important this practice was for the quality delivered by the audit threat of appearing unknowledgeable or ‘stupid.’ In a similar vein,
teams. In teams in which we had the impression that people hes- auditors frequently applied ‘plausi checks’ (colloquial term used by
itated to quickly communicate and share information, it seemed to the auditors for ‘plausibility checks’). These ‘plausi checks’ were
be almost foreseeable that at some point, something would ‘blow also documented in workpapers as a way to triangulate, e.g., a
off.’ This struggle to realize what is going on, as well as its perceived calculation presented by the client or even the auditors themselves.
relevance, were put quite explicitly by one partner in an interview We found that such triangulation (or cross-examination) practices
when he noted: also played a major role in junior auditors' ‘on-the-job’ training.
During our participant observations, we recognized a recurring
‘Because all the things that can go wrong can be identified
practice: junior auditors were assigned a problem-solving mission
through quick communication, I think the worst that can
at the client site (e.g., understanding a specific accounting issue)
happen when you are a Manager or a Senior, or whatever, is that
and were repeatedly sent back to the client until they returned with
others do not clearly communicate how far along they are, what
a solution that demonstrateddin the view of the senior auditorda
they struggle with, and what they do and do not understand.’
‘proper,’ well-grounded understanding of the issue at hand. We saw
(Int.)
that junior auditors usually felt uncomfortable being sent back to
the client. As a result, however, in similar future situations, this
practice made them sit in front of the client and ask further ques-
tions until they felt that they had ‘properly understood,’ instead of
4.2.2. Cool-headed error handling (rp2)
choosing the easy way of quickly leaving the client, which might
We often observed that teams engaged in an informal practice
not have given the ability to withstand their senior auditors' cross-
that we labeled cool-headed error handling, in which they tried and
examination when they returned.
struggled to remain calm when detecting an error. This does not
mean that the audit teams always engaged in this cool-headed
4.2.4. Informed decision making (rp4)
error handling practice, and it does not mean that the auditors
An important informal practice for resiliently dealing with
were not emotionally affected by the errors, either. Nevertheless,
knowledge gaps was the practice that we labeled informed decision
the cool-headed error handling seemed to be a shared and common
making. This audit team practice involved rapid consultation with
practice that served the purpose of ‘saving the situation first,’ as the
other members of The Firm in case a question could not be solved or
auditors put it. This notion of ‘saving the situation first’ was also
evaluated by the team on site. A manager described this practice as
noted in several interviews. One auditor expressed this notion as
follows. In a typical audit, there are two to three critical audit issues
follows:
that cannot be finally evaluated by the team on site, mostly because
‘Yes, […] but it is the current situation [referring to an error that they do not have the expertise to solve this audit (or underlying
happened]. It is a problem, and now we just have to find a way to accounting) issue. These points, when identified by the junior au-
deal with it.’ (Int.) ditors, are addressed to the manager. If the manager cannot solve
the problem, it is quickly brought to the attention of the partner. If
the question still cannot be properly addressed, it is transferred to
Another manager expressed the same idea as follows:
specialists. These can be other partners, managers, or other experts,
‘This [error] happened and this has to be admitted frankly. But e.g., in the department of professional practice. While we found this
now let us see how we can rescue the situation. […] With escalation practice illustrative of how different levels were
“rescuing the situation,” I do not mean to cover up, but to talk commonly involved in decision making, this is not to say that it
openly about it and find a solution. This means to see which always actually worked like this. There was, e.g., some reluctance to
consequences it [the error] has and whether it can be handled, involve specialists and the department of professional practice
so that it does not result in more severe consequences.’ (Int.) right away, mainly as a result of time and cost considerations.
Additionally, young auditors in particular sometimes felt anxious to
admit that they did not possess the knowledge to make proper
Our participant observation indicated that this cool-headed er-
judgments on specific accounting issues. In other cases, these
ror handling practice was crucial for the outcome of audits because
knowledge gaps led the auditors to postpone the task and work on
it helped to quickly handle the error instead of engaging in forms of
other tasks because they felt the pressure to ‘get their stuff done.’
blaming. However, when a junior auditor began to engage in
Oftentimes, when these practices hindered quick and informed
blaming, we often saw senior auditors intervene. These in-
decision making, problems were created toward the end of the
terventions involved statements such as ‘this can happen to
audits. We believe this is the reason why this practice was widely
anybody’ and ‘you know, we all make mistakes.’ This practice was
considered critical for the success of an audit, which became
important for the teams because a ‘good connection’ between the
particularly apparent when it was not practiced.
team members and with the client without blaming was consid-
ered critical for ‘getting the job done.’ Again, this does not mean
4.3. Individual level: error orientation (EO)
that there was no blaming at all. However, blaming was relatively
uncommon during our participant observations, considering the
While resilient practices (RP) sometimes varied considerably,
omnipresence of errors that occurred during an audit.
they were still remarkably present. Our findings suggest that they
are crucial for addressing daily errors during an audit and thus, are
4.2.3. Triangulation in practice (rp3) an important aspect of the quality of the service delivered. We
Comparing The Firm's auditors to other knowledge workers therefore began to explore what enabled the emergence of these
shared informal practices, and our findings indicate that they doesn't help. You always have to look forward and tell yourself:
crucially depended on the individuals' orientation toward errors. OK, what are we going to do now in this specific situation?’ (Int.)
Although the auditors varied in their error orientation (EO), we still
found that more experienced auditors of The Firm had a distinct
The auditors themselves also made jokes about this increasing
mindset with respect to errors. This distinct approach was evi-
‘Tiefenentspanntheit,’ as illustrated by an email that was circulated
denced in our interviews by an almost mantra-like repetition of
within The Firm. The email included four moving images of cats of
phrases such as ‘to err is human,’ ‘we make mistakes all the time,’ ‘I
different kinds representing junior auditors, senior auditors, man-
am sure that I am always committing errors,’ and ‘I approach things
agers, and partners. While the junior auditor cat was a skinny,
with the knowledge that I know that I will make mistakes’ (Int.).
hyperactive cat that went crazy pulling its hair, the senior cat was
This is well captured in the following quote by a manager:
calmer and wore headphones, demonstrating a cooler, yet still
‘And that technical/professional things can also go wrong, considerably nervous, approach. The manager and the partner cats
everybody has already experienced that. Nobody is unfailing. were increasingly dulled, with the most senior cat being a big, fat
And sometimes you make a wrong decision and you thought it cat with thick fur, calmly moving its head.
was right, but indeed it was wrong. This can happen to anyone.’ Based on the observation of the development of the auditors
(Int.) over time, we continued to explore why the auditors for the most
partdalthough with different degreesdunderwent this develop-
ment. Participant observation, particularly of first-year and second-
Another manager stated:
year auditors, provided us with important clues. While the young
‘It depends a bit on the person, if it is an intern or an associate I recruits enthusiastically tried to do their best and prove themselves
expect some errors to come across. I am not saying that such within the working world, most of them seemed to have a very
errors do not happen to me as a manager also … We are not hard first ‘busy season.’ Indeed, almost all of them were stressed
machines, we are humans and we tend to make mistakes; so it is out and expressed a certain apathy after their first busy season. In
eventually about learning from them and at least ensuring that attempting to identify the causes of these phenomena, further
you are not making the same errors the next time.’ (Int.) participant observation and interviews helped us to understand
that the development of skills to cope with the experienced stress
resulted to a considerable degree from experiences with three
The expressed awareness and open communication about errors
standard formal procedures within The Firm that were applied at
struck us because it seemed to be uncommon and somehow un-
the audit team level: ‘workpaper reviews,’ ‘job rotations,’ and ‘feed-
usual, especially in a German work context. Thus, we followed up
back.’ We next explore these formal procedures and their effect on
on it. Further observations over time and the interviews indicated
individual junior auditors' development in more detail.
that this orientation toward errors included two main aspects. On
the one hand, the auditors that we observed seemed to develop a
considerable degree of error anticipation (eo1), as expressed in 4.4. Team level: prevention procedures (PP)
statements such as ‘to err is human’ and the related statements
quoted above. This preoccupation of more experienced auditors 4.4.1. Workpaper reviews (pp1)
with anticipating errors is also captured in the following quote by a In our participant observations, we found that workpaper re-
manager. This quote is the reaction of a manager when a senior views play an important role in explaining the stress experienced
auditor told the manager that his audit team had finished one day by the junior auditors. Workpaper reviews are a standard proced-
ahead of time, an event that could actually be good news for the ure to detect errors and prevent their accumulation in order to
manager because it would indicate efficient auditing. However, this prevent audit team failures such as issuing a flawed audit opinion.
kind of event rarely occurs because teams usually work under high The workpaper reviews are performed within the audit teams as a
time pressure, so they usually do not finish early. Hence, the required formal and ongoing procedure. Whenever an audit step
manager doubted that a rigorous audit could have been completed ‘prepared’ by an auditor is completed, a more senior auditor must
ahead of time, as he stated with disbelief: ‘review’ the workpapers, which are documented either on paper or
electronically. The review process is strictly organized in a hierar-
‘Last week, a senior came to my office. He told me that he had
chical and ‘cascaded’ manner across multiple levels so that senior
finished the job one day ahead of time. Immediately, I got
auditors review junior auditors, managers review senior auditors,
worried.’ (Int., emphasis added)
and partners review managers. In turn, the entire engagement is
often again reviewed by a team-independent reviewer (second
On the other hand, we found that individuals increasingly partner review or engagement quality review). We found that the
developed error coping (eo2) skills. An auditor expressed this as preventive function of the workpaper reviews resulted both from
follows: ‘Over time, you somehow experience an emotional being a coercive mechanism to correct deviations from standard
blunting when something goes wrong.’ Remarkably, we found that procedures and from motivating the auditors to work more dili-
The Firm's auditors even had a name for this rather relaxed atti- gently because they anticipated the review. Although this general
tudedthey called it ‘Tiefenentspanntheit.’ This ‘Tiefenentspann- notion of reviewing and being reviewed was deeply ingrained in
theit’ was characterized by a strong tendency to restrain negative the daily work of an auditor at The Firm, this is not to say that these
emotional reactions by suppressing emotions or reappraising the workpaper reviews were always performed in accordance with
error situation whenever errors occurred. ‘Tiefenentspanntheit’ standard operating instructions. Indeed, we also observed in-
was a key characteristic that we found throughout our participant stances in whichdat least allegedlyd‘not so crucial’ audit pro-
observation and interviews of more experienced auditors across cedures were reviewed in a superficial manner.
national boundaries. A partner has expressed this distinct way of However, what appeared theoretically more interesting was the
coping with errors as follows: socializing role that the workpaper reviews apparently played with
the individual auditors with regard to their error orientation (EO) by
‘If I got upset every time an error occurs then I would be doing
pointing out any errors made. During our participant observation
nothing else. There are so many things that could upset you. … It
within the teams, we found that young auditors had a rather
ambiguous attitude toward these workpaper reviews. The senior it.’ However, this lack of time was only part of the explanation
auditor would regularly ask the subordinate junior auditors about because requesting feedback took no longer than five minutes.
‘what's ready to be reviewed.’ During the time he or she reviewed Rather, the postponement was a result of a deliberate strategy that
the workpapers, we observed that the reviewed auditor had a keen one partner called ‘cherry picking’ (Int.):
awareness of all the signals the senior auditor provided that might
‘They are hoping that maybe in the next job they perform better.
indicate spotted errors in the workpapers. This concern was un-
So they will procrastinate and then at the end they will just
derstandable, because the senior auditor has an important voice in
cherry pick [… This is] to receive feedback only for the jobs in
the performance rating of the junior auditor. At the end of the re-
which they believe to have performed better.’ (Int.)
view, the reviewer typically provided a review sheet with a (long)
list of review notes that had to be addressed. We saw that these
long lists were usually ‘concerning’ and even ‘frustrating’ for This meant that junior auditors would wait for jobs to run more
younger auditors. Although more senior auditors considered these smoothly and then request feedback on these cherry-picked jobs.
long lists of review items as more ‘normal,’ the process of becoming Since auditors expressed their concern that they could ‘never
accustomed to them took time and was never entirely complete. perform at 100% because of the time pressure,’ this practice of
When discussing the review process in one of our interviews, a postponing the request for feedback reports continued ‘until there
senior auditor expressed her experiences, as shown in the was no other option than to request feedback reports’ at year end.
following quote. The quote captures the increasing awareness of
errors and that ‘everyone makes mistakes’ and hints at the frus- 4.4.3. Job rotation (pp3)
tration that never seemed to vanish entirely: Another formal procedure in The Firm that we found to be
‘At the beginning, I was really concerned when I handed in an relevant in auditors' socialization process was job rotation, which
audit report for review to the manager and the partner, and I got means auditors take on different tasks in different engagements or
it back all red. But, as you know, after a while, you really get used change roles over time. In practice, this means that during a busy
to it. It's simply not possible to get everything right, and you season of six months, a junior auditor may well work on five to ten
know … everyone makes mistakes.’ (Int.) audit engagements depending on their length. Job rotation involves
working in new teams, with new colleagues, at new sites, with new
client personnel, in new industries, and on new accounting issues.
In addition to this constant job rotation, auditors take on new re-
4.4.2. Feedback (pp2) sponsibilities each year according to their new roles within The
A second important prescribed procedure that we associated Firm's hierarchy, which means that even if auditors remain within
with the auditors' socialization with errors was on-the-job feed- the same audit engagement team, they will be assigned new tasks
back. At the end of an audit engagement (or after every two to four that they have not performed before. Although job rotation is
weeks on longer jobs), auditors were encouraged to obtain formal usually not considered a classic preventive procedure and may even
feedback for their on-the-job performance, which was an integral cause errors because of inexperience, several of our interviewees
formal procedure after each completed job. This performance indicated that it may serve an important preventive function for
feedback covered strengths and weaknesses and was ‘linked to The Firm in the long run for two main reasons. First, job rotation
promotions, salary, and the assignment of appropriate tasks’ (Arc.). provides a multitude of auditing experiences for auditors, which
Auditors within The Firm were given feedback on a regular basis. were seen as important for the professional development of junior
Feedback requests were incentivized by linking the number of auditors in particular. In turn, this experience was thought to
obtained feedback reports to the individual year-end bonus improve the professional judgment of auditors. Second, job rotation
scheme. Specific job feedback was complemented every six was deemed to be important because it forced auditors to take ‘a
months, with an overall discussion of the feedback collected over fresh perspective’ on the audited financial statements and related
those months with a ‘counselor’ (Arc.) who would help the auditor processes. As the managers and partners explained, each new
reflect on ‘personal development’ (Arc.). All feedback reports and colleague ‘asks new stupid questions,’ which was seen as a mech-
the resulting bonuses were discussed with the counselor and a anism to prevent systematic audit errors. In addition, systematic
partner in a ‘year-end discussion’ (Arc.). Because of their link to the audit errorsdwhich often build up over the yearsdwere seen as a
bonuses, as well as to the reputation within The Firm, the feedback severe risk.19
was loaded with tensions, including frustration, particularly after However, in addition to identifying these stated reasons for job
the year-end discussion. Furthermore, we found that certain audi- rotation, we found that job rotation had a profound impact on
tors also used feedback as a control device for subordinate auditors' auditors' socialization with respect to errors. Similar to workpaper
behavior by threatening that unwillingness to perform a task would reviews and feedback, auditors expressed very ambiguous feelings
be reflected in the ‘rating for this job.’ toward job rotation. On the one hand, they repeatedly expressed
Despite these issues, our observations suggest that feedback their appreciation of job rotation because it offered ‘new
also served an important role in familiarizing auditors with errors
because the feedback documented ‘what went well and what did
not go well on the job,’ which saliently made the auditors aware of 19
This makes job rotation a double-edged sword in terms of preventing errors.
errors that they had to address and cope with. We think that it is for Although the training-on-the-job and fresh-perspective aspects may prevent er-
this reason that feedback was also considered ambivalent. On the rors, the inexperience aspect may be an additional source of errors. Under ideal
circumstances, the ‘fresh perspective’ institutionalized by the job rotation proced-
one hand, everyone agreed that ‘feedback is important’ and that
ure may prevent systematic audit errors and their unquestioned repetition across
‘feedback helps,’ as commonly expressed in statements such as ‘I audits, whereas the additional errors made because of job rotation should be
would like my senior to give more feedback.’ On the other hand, caught by the workpaper review process or direct response of the supervisors to
junior auditors appeared especially afraid of requesting feedback. whom the ‘new stupid questions’ are asked. Job rotation is part of the prevention
This fear was particularly apparent in the practice of postponing procedures (PP) category because this category captures those formal team-level
procedures with a prevention function (in this case, only one of two ‘edges of the
feedback reports. Junior auditors tended to delay requesting writ- sword’) that our data and analyses suggest are important for auditors' socialization
ten feedback reports to the latest possible date. This postponement with errors, i.e., the auditors' development of an error orientation (EO). Our sub-
was justified with arguments such as ‘there is too little time to do sequent findings clearly indicate that this is the case.
challenges’ and ‘working with other colleagues,’ along with a ‘steep ‘rank’ (Arc.). These expectations begin with goals such as ‘you
learning curve.’ On the other hand, auditors also complained about manage your tasks and time appropriately’ (Arc.) and ‘you effec-
the difficulties caused by constant job rotation. Most importantly, tively lead teams’ (Arc.) and become more revenue focused for
junior auditors felt that they ‘could never do something properly’ or higher ranks. As a result, specific role expectations and learning
that ‘you never have the time to fully understand something.’ We stages were standardized for each position and rank to assure a
interpreted these statements as auditors' frustration about the certain level of quality (and later on, revenue contribution) of the
frequent errors that they made because of a lack of experience auditors in The Firm. This reflects the nature of professional orga-
when rotating jobs. This frustration also involved the feeling that nizations that entails a process of cognitive standardization
they constantly had to make a tradeoff between ensuring that their (Larsson, 1977), and the learning and development plan is a critical
work is finished on time and ensuring that it is free from material HR mechanism in this endeavor. However, from an organizational
error. We believe that this was one of the reasons job rotation was perspective, this standardization also provided The Firm with the
described as stressful, as exemplified by the words of a senior flexibility to quickly shift people between engagement teams.
manager: Taken together, although the learning and development system
certainly emphasized error prevention through skilling, it also
‘But sometimes, you know, you think about how it would be if
enabled The Firm to deal more resiliently with emerging crises as
you had a bit more steadiness in our job, not always new tasks
an organization through its ability to find and quickly draw on a
and all this stuff. Just a bit more quiet.’ (Int.)
global pool of experts with a certain set of skills.
4.5.3. Multidimensional matrix organization (os3)

4.5. Organizational level: organizational structures and systems The matrix structure organized The Firm along several di-
(OS) mensions, including geographical locations, service lines, and in-
dustries. While we found that these different dimensions created
4.5.1. Quality and risk management system (QRM) (os1) tensions within the organization, for instance, between service
The workpaper reviews performed within the teams are a major lines fostering particular professional standards and industries
coercive element of The Firm's organizational quality and risk emphasizing local market knowledge and growth, it also became a
management system (QRM). The QRM is a set of organization-wide powerful coordination framework for the organization's error
policies, processes, and procedures intended to ensure that The management. Dealing with the multidimensionality of a matrix
Firm's services comply with professional standards and satisfy meant, in practice, that it became an organizational tool for
stakeholders' expectations. Specifications are derived from the In- enabling error management. Error prevention was enhanced by
ternational Standards on Auditing, which specify the goal of the designing and maintaining institutionalized structures and pro-
QRM as a mostly preventive structure. At The Firm, this was cedures, which allowed the allocation and coordination of exper-
expressed by a slogan related to the QRM ‘to protect the firm and tise within and across specialized departments or practice groups.
the clients’ (Arc.). While the existence of the QRM was mostly These organizational structures not only encouraged the develop-
accepted as being important for The Firm, the QRM also created ment of further expertise but also made operations more predict-
frequent tensions when, e.g., quality procedures conflicted with the able by organizing accountability (e.g., who is in charge and who is
‘revenue goals’ and ‘profitability goals’ of managers and partners, responsible for what task). Simultaneously, however, the design of
who complained about ‘overregulation’ and fought for ‘client the multidimensional matrixdin contrast to a one-dimensional
acceptance.’ From an error management perspective, the QRM took hierarchydmaintained the organization's flexibility, which
an interesting dual role in preventing errors and resiliently enabled The Firm to respond more quickly to the unexpected. The
handling them. On the one hand, the QRM was considered a classic matrix created arenas, in which complex problems could be dis-
preventive structure that standardized the audit process by, e.g., cussed and handled by incorporating expertise that was not avail-
implementing a firm-wide ‘audit methodology’ and ‘engagement able within one's own organizational unit (e.g., engagement team,
quality reviews’ at the engagement level, along with enforcing service line, etc.). It is this duality of the matrix that not only created
formal team procedures such as workpaper reviews. However, the a stable coordination device according to different axes of
QRM processes were also perceived as an enabling tool to better specialization but also enabled the ad hoc inclusion of new
perform audit tasks. For instance, in the months after the busy expertise.
season QRM-related processes such as the audit methodology were
repeatedly updated based on the audit teams' experiences.
4.6. Multi-level linking: self-reinforcing versus disruptive dynamics
Accordingly, the QRM was considered to comprise not only coercive
(L1, L2, L3, L4)
mechanisms of quality enforcement but also best practice tem-
plates that required professional discretion and helped auditors
So far, we have introduced emerging patterns from our analysis
improve their work.
on the organizational level, team level, and individual level mostly
in isolation. We now more precisely develop how these levels of
4.5.2. Learning and development system (os2) analysis interact and are linked through process relationships that
Closely related to the QRM is the learning and development unleash specific enabling or disrupting dynamics of the error
system within The Firm. We found that The Firm engaged heavily in management system as a whole. In particular, our findings suggest
training and retraining its professionals. The training activities four major linking processes that connect elements on the three
within The Firm followed different formats, such as ‘training off the levels. These linking relationships are the structure-team linking
job’ (training sessions), ‘training on the job’ (experiential learning (L1), the team-individual linking (L2), the individual-team linking
during the engagement), and ‘training near the job’ (training others (L3), and the team-structure linking (L4). In the following, we
in training sessions). All these training elements were planned for describe these links and outline the ruptures that may occur within
each employee in a structured ‘learning and development plan.’ these linking relationships, which may explain why error man-
This plan established behavior ‘expectations’ and skillsets for each agement may also fail.
4.6.1. Structure-team linking (L1): translating structures into perspective.’ Furthermore, feedback (pp2) was sometimes hand-
procedures picked for jobs that went well to avoid critical feedback reports.
Above, we described that the organizational structures (OS) and Overall, the procedures created a high level of stress. Our findings
systems of The Firm provide the organizational context in which indicate that this stress caused sleeping disorders, health issues,
the audit engagement teams operate. All three structures and and frequent complaints, which were often also considered as
systems involve numerous policies, processes, and procedures. reasons for quitting the job.
Three of these associated team procedures particularly attracted
our attention because of their error prevention role for the audi- 4.6.3. Individual-team-linking (L3): mobilizing reflection-in-action
tors. While these procedures ought to follow a firm-wide blue- We described above how individual error orientation (EO) may
print, we recognized that the implementation of these team facilitate resilient practices emerging within teamsdrealizing what
procedures considerably depended on how they were interpreted is going on (rp1), cool-headed error handling (rp2), triangulation in
and locally adapted to the specificities of the audit case by the practice (rp3), and informed decision making (rp4). More specifically,
local teams. For example, workpaper reviews (pp1) ought to be our findings suggest that individual error anticipation (eo1) and
performed on a continuous basis during the audit. However, we error coping (eo2) are crucial psychological predispositions for
observed multiple times that these reviews were performed long engaging in resilient practices (RP). For instance, we suggest that
after the engagement team had finished their work on site, which without the necessary error anticipation (eo1) skills, auditors would
renders timely and constructive feedback illusionary and impedes simply not engage in the practice of realizing what is going on (rp1)
timely follow-up work. Feedback (pp2) within teams crucially and would hardly engage in the practice of triangulation in practice
depended on managers' and team leaders' interpretation of what (rp3). Both require the anticipation of errors. Moreover, error coping
constitutes appropriate feedback. While some managers consid- (eo2) skills enable relatively unemotional or cool-headed error
ered that going without any major critique at the end of a job handling (rp2) and informed decision making (rp4) within teams.
would mean praise for the team, others took much effort to pro- This is because error coping is associated with emotional regulation
vide detailed constructive feedback for each person within the and cognitive strategies to address errors when they occur
team. Moreover, job rotation (pp3) often depended both on the (Rybowiak et al., 1999).
overall staffing situation within the local offices and on the Nevertheless, our findings also indicate that the emergence of
negotiation skills of the engagement manager staffing the jobs. resilient practices within teams is very fragile. For example, we
Therefore, the actual implementation of the procedures heavily repeatedly observed a breakdown in realizing what is going on (rp1),
depended on how general structural templates were translated which occurred particularly in teams in which the team leader was
locally and adapted to specific conditions by local audit teams and relatively authoritarian, which inhibiteddor at least did not
their leaders. encouragedquick informal information sharing. Breakdowns also
occurred when other reasons impeded quick communication,
4.6.2. Team-individual-linking (L2): socializing individuals sometimes as simple as working in different rooms. Another
Our findings indicate that workpaper reviews (pp1), feedback example is that informed decision making (rp4) did not always work
(pp2), and job rotation (pp3)dwhat the base literature on error the idealized way in practice. Particularly young auditors some-
management may consider preventive procedures (PP)dserved an times felt anxious to admit that they did not possess the knowledge
important role in socializing auditors in addressing errors. to solve an accounting issue. In other cases, these knowledge gaps
Particularly, our findings suggest that the auditors develop an led the auditors to postpone the respective task and instead move
increasing error orientation (EO), which comprises elevated error on to work on other tasks because they felt the pressure to ‘get their
anticipation (eo1) and pronounced error coping (eo2) skills. Both stuff done.’ Our findings suggest that both instances interfered with
workpaper reviews and feedback are coercive mechanisms to informed decision making (rp4) because errors were not communi-
detect deviations from standard procedures or expected behav- cated quickly enough, which often led to problems that impeded
iors. Repeatedly outlining such deviationsdor errorsdsensitizes the quality of the audit.
the auditors to errors occurring. To address the experienced
ubiquity of errors, the auditors develop emotional and cognitive 4.6.4. Team-structure linking (L4): updating structures
strategies to cope with them. Additionally, we found that the so- Considering the error resilient interaction within the audit
cializing effect may be associated with the constant job rotation teams helped us to make more sense out of the double role of the
that permanently involves working on new tasks. Although job organizational structures (OS) of The Firm. While these organiza-
rotation was considered to have a preventive function through tional structures (OS) were considered mostly as enablers of error
bringing in ‘fresh perspectives’dhelping to prevent systematic prevention, they also allowed the organization to resiliently react to
audit errors and their repetition across auditsdit also involved occurring errors. The underlying principles of organizational struc-
individual auditors making more errors, further sensitizing them tures (OS) are similar to the principles of the resilient practices (RP)
to errors. within teams, namely, to being able to quickly detect and react to
However, this socialization function connecting prevention errors, however, on an organizational level. Based on this obser-
procedures (PP) with individual error orientation (EO) also often vation, we suggest that the resilient practices' underlying principle
failed. Our findings indicate that a number of factors contributed of flexibly adapting to new situations becomes institutionalized
to this failure. For example, junior auditors postponed the and is reflected within organizational structures (OS) over time.
completion of audit steps until the end of the audits in the hope However, the updating of formalized structures and systems is also
that the workpaper reviews (pp1) would be less detailed because of fraught with ruptures. For example, while the off-busy season
the increasing time pressure for the reviewers. The procedure of during the summer months was often used to update templates,
job rotation (pp2)dwhich is intended to acquaint auditors with processes, and systems for the upcoming busy season, these
different sets of experiencedin some instances became instead a continuous changes faced resistance. This resistance is nicely
replication of highly similar jobs and client issues, which then captured by the frustration expressed by an audit team leader
failed to stimulate much professional learning or a ‘fresh during a meeting of all auditors from one office:
Fig. 2. Multi-level model of error management.
‘I have been at The Firm for five years now. And in three out of basic premise of the model is that audit quality is a result of the
these five years there was a new feedback system [for the formal work of the audit team (audit team level, with a gray background
feedback requests] that I had to use. Why can we not simply in Fig. 2), which can only be understood comprehensively by
choose one and stick with it?!’ (emphasis added) moving one level down (individual level) and one level up
(organizational level) (Hackman, 2003). In this chapter, we
further develop and specify the multi-level error management
model by reflecting it against the extant body of literature in two
5. Toward a multi-level model of error management in steps. First, we reflect the ‘Top-down path: from the organiza-
accounting firms tional level to the individual level’ of the model against the
literature and second, we reflect the ‘Bottom-up path: from the
The case study findings developed in the previous chapter individual level to the organizational level.’
suggest a multi-level error management model, which is sum-
marized in Fig. 220. The underlying idea of this multi-level model
5.1. Top-down path: from the organizational level to the individual
is that error management in accounting firms may be under-
level
stooddunder ideal conditionsdas the result of a self-reinforcing
system that embraces multiple levels of analysis. More specif-
The described organizational structures and systems (OS) provide
ically, we suggest that organizational structures and systems (OS),
firm-wide organizational policies and processes in an attempt to
formal prevention procedures (PP) performed at the team level,
coordinate the work of audit teams across more than 500 offices in
the individual auditors' error orientation (EO), and informal
more than 100 countries. Drawing on the work of Barrett et al.
shared resilient practices (RP) in teams interact and jointly
(2005), we conceptualize these organizational structures and sys-
constitute and reconstitute each other. However, we also find
tems (OS) as abstract templates for action through which admin-
that this ideal self-reinforcing system is fraught with ruptures
istrative power and control is exercised within accounting firms
that explain why error management in accounting firms may also
(Barrett et al., 2005). By reproducing these abstract templates in
fail (ruptures are indicated as double lines that interject the
local audit work, they provide consistency and coherence in what
linking relationships (L1), (L2), (L3), and (L4) within Fig. 2). A
auditors do across time and location (Barrett et al., 2005). Part of
these overall organizational structures and systems are procedures
20
Note that the arrows in the model indicate a dominant path of effects as sug-
that are performed within the local audit teams. In particular, the
gested by our data and analyses; however, they do not indicate an exclusive, causal workpaper reviews (pp1), feedback (pp2), and job rotation (pp3)
step-by-step phenomenon. procedures emerged as important elements in understanding error
management within The Firm.21 procedures (PP)dsuch as when engaging in RAQsdthe socialization
However, we also found that the appropriation of these struc- effect may be less intense or even divert to ‘learning how to sup-
tures and procedures within the local audit teams was sometimes press errors’ instead of accepting them as ‘normal’ and how to
problematic. We have described these problems as ruptures within appropriately address them. Thus, engaging in RAQs may likely
the structure-team linking (L1). These ruptures occur when the have negative consequences for junior auditors' error orientation
abstract templates are interpreted and re-embedded in the local (EO) and, ultimately, the audit quality provided by audit teams.22
team context in inadequate ways (Barrett et al., 2005). We have By outlining this socializing function of error prevention pro-
described how prevention procedures (PP) were not performed as cedures, our findings also connect to the debate on auditors' so-
designed by illustrating, e.g., bad workpaper reviews (pp1), delayed cialization (Anderson-Gough, Grey, & Robson, 1998, 2000, 2001,
feedback (pp2) (see Thornock, 2016, for the negative effects of 2005). This literature stressed the socializing effect of procedures
delayed feedback), or malfunctions in job rotations (pp3). Such and techniques (Anderson-Gough, Grey, & Robson, 2001, 2005,
ruptures have also been a matter of concern in the behavioral audit 1998; Covaleski et al., 1998) regarding social knowledge about
quality literature that examines reduced audit quality behaviors becoming a ‘professional,’ along with adequate ‘conduct,’ including
(RAQs) (e.g., Coram, Glavovic, Ng, & Woodliff, 2008; Malone & modes of dress, suitable behavior, and discourse with the client
Roberts, 1996). This literature has highlighted the role of auditors' (Anderson-Gough et al., 1998, 2001, 2005). This literature also
actions that deviate from predefined procedures, which increase outlined the associated issues of auditors' socialization in struggles
the risk of forming an inappropriate audit opinion (Coram et al., over identity (Covaleski et al., 1998) and gendering effects
2008; Malone & Roberts, 1996). Consistent with this literature, (Anderson-Gough, Grey, & Robson, 2005).
our findings indicate that RAQs are particularly likely to occur when We complement this literature on the socialization of junior
teams work under high time pressure (Pierce & Sweeney, 2004) auditors by explaining the functioning of the socializing process
and when auditors perceive the strength of the quality control with respect to skills in coping with errors, i.e., what we have
system to be low (Malone & Roberts, 1996). described as the development of an error orientation (EO). Gendron
However, our study extends these literatures on deviant be- and Spira (2009) have argued, albeit in a different context, that
haviors and RAQs in one important aspect. Although our findings experiencing atypical events such as errors may lead ‘individuals to
are consistent with the literature indicating that RAQs have a direct engage in acts of reflective interpretation that can ultimately
negative effect on audit quality by ultimately hindering audit teams modify their interpretive schemes’ (Gendron & Spira, 2009: 990).
in getting to know about (and then adequately addressing) This modifying process can be specified by drawing on the error
potentially remaining errors in the audited financial statements coping literature (Lazarus, 1993; Rybowiak et al., 1999), suggesting
(e.g., Malone & Roberts, 1996; Pierce & Sweeney, 2006), the multi- that the development of an error orientation (EO) by auditors re-
level model of error management also suggests a negative indirect flects the learning of skills and strategies to anticipate and
effect of RAQs on audit quality. Specifically, we find that RAQs may emotionally and cognitively cope with errors within the error-
affect how junior auditors are socialized with respect to errors. Our prone environment of auditing. The observed error anticipation
study suggests that adequate performance of the prevention pro- (eo1) resonates with proactive coping strategies, i.e., the processes
cedures (PP) increases junior auditors' error orientation (EO) by of anticipating potential stressors (such as errors) to reduce their
accustoming them to the ‘normality’ of errors and suitable ways to emotional impact (Rybowiak et al., 1999). The findings on error
address them. Becausedaccording to our modeldthis error orien- coping (eo2) reflect the development of both cognitive and
tation (EO) enables the emergence of resilient practices (RP) (as emotional strategies to address the occurring errors and the asso-
further discussed in the following subsection on the bottom-up ciated problems (Lazarus, 1993; Rybowiak et al., 1999).
processes), this error orientation is crucial for the provision of However, our findings also reflect the struggles of the auditors
audit quality. In case of deviations in performing the prevention associated with this particular socialization process. This process is
indicated by the junior auditors' reporting that they often suffered
from stress, showed a certain apathy after the first busy season, and
experienced work-related health issues. Related struggles are also
21
Drawing on our empirical findings and the base literature on error manage-
the focal theme of an emerging literature that has focused on the
ment, we suggest that all three procedures have important preventive functions
(this does not mean, however, that they do not also serve other important func- emotionally and cognitively stressful aspects of auditing (Gue nin-
tions). As described in the ‘Case findings’ chapter, the prevention function of Paracini, Malsch, & Paille , 2014; Gue nin-Paracini, Malsch, &
workpaper reviews and formal engagement feedback consists of both (1) being Tremblay, 2015; Kornberger, Justesen, & Mouritsen, 2011). For
coercive mechanisms to enforce certain standard procedures, and (2) increasing the example, Gue nin-Paracini et al. (2014) have described the fear
auditors' motivation to work more diligently. Furthermore, the preventive function
associated with the audit process. Similarly, Kornberger et al. (2011)
of job rotation is to uncover systematic audit errors within audit teams by bringing
in a ‘fresh perspective.’ Although job rotation also has educational and pragmatic describe ‘the big mountain’ that they ‘put in front of you’ as man-
staffing purposes (and may produce some new individual errors), our findings agers. While the focus of their study is on identity formation, these
indicate that job rotation is nevertheless considered as a means to prevent sys- authors also find evidence of a high level of stress and some fear
tematic audit errors within audit teams because new auditors bring a fresh
when auditors become managers.
perspective that may uncover blind spots and false assumptions in the audit
approach. This view, as expressed by auditors within our study, resonates with the Our study builds on and extends this emerging stream of liter-
base literature on error management and particularly the research on high- ature by outlining the emotional and stressful struggles of junior
reliability organizations (e.g., Weick et al., 1999), which stresses the idea of auditors in their socialization with the plethora of errors in audit-
adopting multiple perspectives to uncover false assumptions and thus to prevent ing. Thus, it highlights the role of formal procedures in contributing
systematic errors.
22 to the stress and fear that junior auditors are especially likely to
A similar negative long-term effect of flawed procedures also seems to be
indicated in a recent study by Westermann et al. (2015), in which the authors look experience with respect to workpaper reviews (pp1), feedback (pp2),
at the role of feedback as part of auditors' on-the-job learning for the development and job rotation (pp3). In addition, we suggest that auditors learn to
of junior auditors. In a footnote, the authors report that audit partners increasingly cope with these stressors to a certain degree by anticipating errors
lament the quality of feedback within audit teams and their detrimental long-term and developing emotional and cognitive coping strategies, which
effects. The argument is that feedback is an important mechanism for developing
junior-level auditors into reflective practitioners, and thus any decrease in the
are reflected by the two components of the error orientation (EO)
quality of feedback should be of concern. We think that the concept of an error construct. However, there seem to be individual differences in how
orientation and that of the reflective practitioner are related. well junior auditors learn to cope with the stressful aspects of
auditing. Future research will have to examine these individual ‘tone at the top’ is a potentially relevant factor (e.g., Gold et al.,
differences in more detail. 2014; Gronewold et al., 2013). In this regard, our study sheds
light on the emergence of shared resilient practices (RP), which
seem to be much more distributed and bottom-up driven than
5.2. Bottom-up path: from the individual level to the organizational currently discussed in the audit literature.
level However, we also demonstrate that the emergence of shared
Our findings indicate that an individual's error orientation (EO) resilient practices (RP) within teams is fraught with ruptures. We
facilitates the emergence of what we have described as shared describe how the interrelated practices sometimes became less
resilient practices (RP) within the teams. Individuals who share a effective. This implies moving away from an ideal situation and
similar (functional) orientation toward errors can engage in shared toward a less effective error management climate or, to employ
practices to address them effectively (Frese & Keith, 2015; Weick & Weick and Roberts' (1993: 371) term, moving toward ‘heedlessness’
Roberts, 1993). Following action theory (Frese & Zapf, 1994), in- in teams. Particularly, when, e.g., more authoritarian managers
dividuals regulate their activities based on information or signals discouraged open debates, the interrelation of practices became
they receive when they orient themselves in their environment less effective. Weick and Roberts (1993: 371) again point to this
(Frese & Zapf, 1994). A particularly strong error orientation (EO) phenomenon: ‘(a)s interrelating deteriorates and becomes more
regulates auditors' activities with regard to anticipating and coping primitive, there is less comprehension of the implications of
with errors (Rybowiak et al., 1999). Although the effect of individual unfolding events, slower correction of errors, and more opportu-
orientations on collective action related to errors is little explored nities for small errors to combine and amplify.’ Our findings on the
in the accounting literature (Gronewold & Donle, 2011), it resonates ruptures in the emergence of the resilient practices (RP) and the
with a stream of the base literature from the error resilience camp resulting multi-level model suggest that the ruptures undermine a
often referred to as high reliability organizations (HROs) (e.g., productive interrelating of resilient practices (RP), which entail
Weick & Roberts, 1993; Weick et al., 1999). The literature on HROs negative effects on the resulting quality of the audit.
examined organizations that work in a manner that is highly reli- Furthermore, our study indicates an important area for future
able under error-prone circumstances, such as in the cases of research that converges around the question of how existing rele-
aircraft carriers, emergency room teams, and firefighters. In an vant organizational structures (OS) are updated and changed. We
attempt to summarize what makes HROs distinct, Weick et al. explained that the organizational structures related to error man-
(1999) indicate that HROs share certain informal practices that agement play a double role. On the one hand, they are somewhat
enable them to resiliently manage unexpected events. However, coercive and ‘are designed to force reluctant compliance and to
they suggest that these resilient practices are rooted in collectively extract recalcitrant effort’ (Adler & Borys, 1996: 69). On the other
shared cognition (Weick et al., 1999). Our findings address this hand, they provide The Firm as an organization with great flexi-
general idea in the audit context, indicating that a shared error bility to react to unexpected events. In particular, the flexibility and
orientation (EO) among individuals enables the emergence of enabling role of the described organizational structures (OS) reso-
shared resilient practices (RP) within the audit teams. Based on nate with the underlying principles of resilient practices (RP) to
these findings, we propose that both theory and practice may quickly react to errors occurring within audit teams.24 Based on
benefit from transferring insights from the HRO literature to the these observations, we theorized that auditors' daily interaction
accounting field. This may be a promising path to further develop within audit teams becomes manifest and changes organizational
the notion of resilient practices (RP) in auditing. structures (OS) over time. This theorizing follows a line of thinking
A related growing stream in the accounting literature that that has outlined the idea of the duality of structure and agency
introduced the idea of the relevance of shared resilient practices (RP) (Barrett et al., 2005; Dirsmith et al., 1997; Giddens, 1984), along
for audit quality is the error management climate literature (Gold with practice theory (Whittington, 2007, 2011). Following these
et al., 2014; Gronewold & Donle, 2011; Gronewold et al., 2013). lines of thinking, scholars have argued that structures both ‘influ-
This literature is concerned with shared practices to address ence and are influenced by social actions in the day to day activities
occurring errors. The focal argument has been that an error man- across time and space’ (Dirsmith et al., 1997: 4). The outlined multi-
agement climatedby affecting, for instance, how individuals level model resonates with this general idea by describing both a
communicate occurring errors (Gold et al., 2014)dinfluences audit top-down and a bottom-up path involved in error management.
quality. Our study connects to this stream of literature and con- Our own study only shows the first indications of such a practice-
tributes to it in two main ways. First, while our findings support the driven path to organizational change in accounting firms. We
general relevance of resilient practices (RP) for the production of believe that a promising theoretical lens in conducting research in
audit quality, we move from the relatively abstract notion of an this domain is the emerging research stream on institutional work
error management climate toward describing the shared and that addresses how agents create, maintain, and transform insti-
actually applied practices involved. As such, we put some empirical tutionalized structures (e.g., Lawrence, Leca, & Zilber, 2013;
‘flesh on the bones’ to what auditors actually do in their daily ac- Lawrence, Suddaby, & Leca, 2009).
tivities as part of a high error management climate (e.g., Gold et al.,
2014; Gronewold & Donle, 2011). Second, the multi-level model of
6. Concluding discussion
error management extends the literature on error management
climate in accounting firms in an important theoretical aspect. So
In this paper, we have suggested that taking an error manage-
far, the literature remains largely silent about how shared practices
ment perspective may be an insightful lens to develop an under-
actually emerge and, hence, an error management climate actually
standing of how audit quality is produced within accounting firms.
evolves,23 except for some general assumptions, such as that the
Drawing on a comprehensive case study including extensive
fieldwork of 18 months of participant observation, 38 interviews,
23
This is even true for the wider research on work climates and culture, as
indicated by a comprehensive review study on work climates that ‘failed to uncover
24
a single study aimed at modeling and testing the processes by which such changes In Fig. 2, this enabling role of organizational structures (OS) for resilient practices
in work climates emerge’ (Kuenzi & Schminke, 2009: 707; see also Gronewold et al., (RP) is indicated by the arrow that goes from organizational structures (OS) to
2013: 204, for a discussion of this question as an issue for further research). resilient practices (RP).
and archival materials, we have proposed a multi-level model of crucial for the emergence of resilient practices (RP) within the audit
error management in accounting firms. This model explains that to teams. Thus, our case findings suggest that prevention procedures
understand the operational production of audit quality within audit (PP) not only prevent an accumulation of errors and subsequent
teams, it is crucial to consider both the role of formal error pre- failure but also may become the breeding ground for the emer-
vention and the role of informal error resilience, along with how gence of resilient practices (RP) within teams. Future research may
the two interact across multiple levels of analysis. In particular, this examine under which conditions this mechanism holds by study-
research suggests that we should pay more attention to error ing the interaction in different organizational contexts.
management as a multi-level interaction system because the Finally, by describing and explaining the multi-level interplay of
components of the multi-level model are supplementing and the role of error prevention and error resilience, our study may also
complementing each other and may neither work nor be studied inform audit practice and its regulation. From early on, oversight
properly in isolation. In short, error management becomes self- bodies have highlighted the importance of accounting firms' ‘tone
reinforcing when coherent and coordinated, and disruptive when at the top’ in their inspections of the firms' quality control systems,
fragmented and undermined by contradictory practices and i.e., the relatively ‘soft’ basis of a high-quality culture in an ac-
arrangements. counting firm. However, in recent years, oversight reports and
This study makes several overarching contributions to the audit pronouncements have increasingly emphasized that ‘hard’ man-
quality and error management literatures. First, the multi-level agement control instruments, such as promotion, evaluation, and
model of error management contributes to the behavioral and so- remuneration criteria, may be the root causes of observed de-
cial audit quality literature by pointing to a conceptual integration ficiencies at the audit process level via establishing inappropriate
of discussions in the literature on the role of organizational quality incentives with regard to audit quality (Financial Reporting Council
control structures (e.g., Malone & Roberts, 1996), team workpaper [FRC], 2012; Public Company Accounting Oversight Board [PCAOB],
review and feedback procedures (e.g., Ramsay, 1994; Westermann 2008; see also Gold et al., 2014; for a related discussion of this
et al., 2015), shared team resilient practices (e.g., Gold et al., 2014; debate). Consequently, accounting firms are urged to appropriately
Gronewold & Donle, 2011), and individual cognitions and emo- align their management control instruments, hold their personnel
tions (e.g., Guenin-Paracini et al., 2014). These streams had mostly accountable for achieving high audit quality (e.g., PCAOB, 2013),
been thought of and discussed in isolation, despite indications of improve supervision and review (e.g., PCAOB, 2014), and even
interactions. The multi-level model of error management suggests stipulate disciplinary sanctions in the event of quality deficiencies
a way forward toward systematically integrating the multiple in- (PCAOB, 2008, 2012; see also PCAOB, 2014, emphasizing possible
sights in the literature by showing how QRM structures, prevention disciplinary action on behalf of oversight in response to discovered
procedures such as workpaper reviews, individual error orienta- deficiencies).
tion, and resilient practices interact. Accordingly, we hope that the At first glance, the emphasis that oversight bodies place on
multi-level model of error management opens a fruitful alley for management control procedures appears consistent with the
future research by applying this novel framework to how audit multi-level model of error management because the model also
quality is produced in practice. emphasizes the relevance of formal organizational structures (OS),
Second, the multi-level model contributes to the growing along with formal prevention procedures (PP). However, the multi-
stream within the behavioral audit literature on error management level model suggests that individuals' error orientation (EO) and
in accounting firms. To date, this stream has mostly focused on the resilient practices (RP) are similarly important for the production of
specific aspects of error management climate and error reporting audit quality. Therefore, our research supports the notion that it
(Gold et al., 2014; Gronewold et al., 2013). Our model contributes to would be appropriate for oversight bodies to re-balance their focus
this literature stream both by capturing error management in ac- between ‘harder’ and ‘softer’ aspects of quality control. Although
counting firms as a broader construct beyond error reporting and focusing on ‘hard’ management controls may be convenient from
by explaining how error management practices emerge and how an inspection point of view, re-balancing the focus toward the
they are performed. This conveys an understanding, under which ‘softer’ aspects such as assessing error orientation (EO) and resilient
conditions a broad set of resilient-type shared error management practices (RP) and the necessary ‘bottom-up’ processes to enable
practices (that previous studies have subsumed under the more them may be similarly or even more revealing for underlying rea-
abstract notion of an ‘error management climate,’ which typically sons for audit ‘deficiencies’ at the outcome level. Capturing and
has been experimentally ‘set’ in those studies) may evolve in ac- assessing individuals' error orientation and the largely informal
counting firms in practice. resilient practices (RP)dalong with the largely ‘bottom-up’ driven
Third, the multi-level model of error management also con- processes that entail their emergencedis undoubtedly a chal-
tributes to the base literature on error management. Although lenging task. However, it may be crucial in order to comprehen-
previous research (often with a psychological or sociological sively understand the fragile interaction within accounting firms
background) has repeatedly stressed the great divide between the that underlies the production of audit quality in the long run.
error prevention camp and the error resilience camp, little research
has attempted to examine the interplay of these two approaches Acknowledgments
(Goodman et al., 2011). The initial research, which has indicated
that error prevention and error resilience may co-occur (Vogus & The authors greatly appreciate the helpful comments from ed-
Sutcliffe, 2007a, 2007b), remains vague about ‘the mechanisms itor David Cooper and two anonymous reviewers. We would also
through which these two approaches combine’ (Goodman et al., like to thank Neal Ashkanasy, David Brock, Michael Frese, Chris
2011: 165). By examining error management in accounting firms, McKenna, Bill McKinley, Tim Morris, Jan Mouritsen, Michael Smets,
we can suggest such a mechanism by considering multiple levels of Tomo Suzuki, Philip Wallage, and participants at the EAA Doctoral
analysis. Although the previous base literature on error manage- Colloquium 2011, the 2012 EAA Congress, the 2013 Academy of
ment has stressed the function of organizational structures and Management Annual Meeting, and the Research Seminar at the
procedures in preventing errors (Goodman et al., 2011), the same Free University of Berlin for their helpful suggestions and com-
literature has overlooked the socializing function of some of these ments on earlier drafts of this paper. A previous version of this
aspects for the individual's error orientation (EO). As we have paper was awarded a Best PhD Paper Award at the 2013 Academy of
argued, this socialization of an individual's error orientation (EO) is Management Annual Meeting. We also greatly appreciate the
partial funding of this research from Leuphana University of DeFond, M. L., Raghunandan, K., & Subramanyam, K. (2002). Do non-audit service
fees impair auditor independence? Evidence from going concern audit opin-
Lüneburg.
ions. Journal of Accounting Research, 40(4), 1247e1274.
DeFond, M. L., Wong, T. J., & Li, S. (1999). The impact of improved auditor inde-
pendence on audit market concentration in China. Journal of Accounting and
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The economic consequences associated with integrated report quality:

Capital market and real effects
Mary E. Barth a, Steven F. Cahan b, Li Chen b, Elmar R. Venter c, *
a
Graduate School of Business, Stanford University, USA
b
University of Auckland, Auckland, New Zealand
c
University of Pretoria, Pretoria, South Africa
Article history: The International Integrated Reporting Council's Framework identifies two goals for integrated reporting:
Received 4 December 2015 improved information for outside providers of financial capital and better internal decision making. We
Received in revised form extend prior research that finds a positive association between integrated report quality (IRQ) and firm
23 August 2017
value by examining two channels through which this association may ariseda capital market channel
and a real effects channel. To conduct these tests, we disaggregate firm value into three components:
liquidity, cost of capital, and expected future cash flows. Using data from South Africa where integrated
reporting is mandatory and an IRQ measure based on proprietary EY data, we find a positive association
Keywords:
Integrated reporting
between IRQ and liquidity, which supports the capital market channel. We find no evidence of a relation
Corporate social responsibility between IRQ and cost of capital. We also find a positive association between IRQ and expected future
Firm value cash flows. Because this association could reflect better investor cash flow forecastsda capital market
Cost of capital effect, better internal decisionsda real effect, or both, we attempt to distinguish these explanations. We
Expected future cash flows find higher IRQ is (not) associated with higher realized future operating cash flows (greater analyst target
Liquidity price forecast accuracy), and find higher IRQ is associated with higher investment efficiency. These
Investment efficiency findings support the real effects channel. Together, our findings are consistent with integrated reporting
South Africa
achieving its dual objective of improved external information and better internal decisions.
1. Introduction integrated reporting has the dual objective of providing informa-

tion to external and internal decision makers. We empirically
The question we address is how integrated report quality, IRQ, is evaluate the extent to which, and how, integrated reporting ach-
associated with firm value. In particular, we identify two channels ieves this dual objective.
through which IRQ may be associated with firm valueda capital Since the release of the IIRC Framework in 2013, worldwide in-
market channel that relates to improved information for outside terest in integrated reporting continues to grow. According to the
providers of capital and a real effects channel that relates to IIRC, more than 1500 firms currently prepare an integrated report,
improved internal decision making. Our motivation for focusing on including AES Brasil, Clorox, GE, Mitsubishi, Novo Nordisk, Tata
these effects is that the International Integrated Reporting Council's Steel, and Vivendi. There also has been strong support for integrated
(IIRC) Framework identifies two aims for integrated reporting: (1) reporting from the large accounting firms as well as standard-
improving the quality of information available to outside providers setters and professional accounting bodies in various countries.
of financial capital to enable more efficient capital allocation and Among regulators, the IIRC Framework recently was endorsed by
(2) supporting integrated internal thinking, decision-making, and China's Ministry of Finance, and the Securities and Exchange Board
actions that focus on value creation for the firm. Thus, in contrast to of India (SEBI) is encouraging the top 500 listed firms in India to
accounting standards or other types of disclosure regulation, e.g., adopt voluntarily integrated reporting starting with the 2017e2018
the U.S. Securities and Exchange Commission's (SEC) Form 10-K, financial year. Further, the IIRC has started to engage with other
standard-setters, including the International Accounting Standards
Board (IASB) and the U.S. Financial Accounting Standards Board
(FASB), as part of the Corporate Reporting Dialogue to consider
* Corresponding author. University of Pretoria, Department of Accounting,
Lynnwood Road, Hillcrest, Pretoria, 0002, South Africa. alternative disclosure models, and Richard Howitt, the IIRC Chief
E-mail address: elmar.venter@up.ac.za (E.R. Venter). Executive Officer, has identified 2018 as the start of a “global
44 M.E. Barth et al. / Accounting, Organizations and Society 62 (2017) 43e64
adoption phase,” the goal of which is to make integrated reporting performance, accounting quality, firm complexity, overall disclo-
the norm (Howitt, 2017). Against this backdrop, empirical evidence sure quality, and other factors. We also find that firms with larger
on the benefits associated with integrated reporting is sparse. annual increases in IRQ have larger decreases in bid-ask spreads.
As a first step in our evaluation, we determine whether the Relating to expected future cash flows, we find a significant positive
finding in prior research of a positive association between IRQ and association between annual changes in IRQ and changes in analyst
firm value holds for our sample. We then disaggregate firm value estimates of future share prices, i.e., target prices. The relation also
into three componentsdliquidity, cost of capital, and expected is positive for levels of expected cash flows, but not significantly so.
future cash flowsdand determine whether IRQ is associated with Relating to cost of capital, we find no evidence of a relation between
greater liquidity, lower cost of capital, and higher expected future IRQ and the average of four cost of capital proxies commonly used
cash flows. We conduct the analyses of each component using in the literature. Taken together, these findings indicate that IRQ is
levels and changes specifications. Relating to the two channels associated with firm value through increased liquidity and ex-
through which IRQ can affect firm value, we view liquidity and cost pected future cash flows.
of capital as capital market effects. However, a positive relation To provide additional insights into which features of integrated
between IRQ and expected future cash flows could be attributable reports are associated with firm value, we map the proprietary dis-
to capital market participants being able to estimate future cash aggregated EY quality data into 12 categories that reflect the guiding
flows more accurately because they have better informationda principles and content elements in the IIRC's integrated reporting
capital market effectdor managers making better decisions that framework. We find that connectivity, stakeholder relationships,
generate higher future cash flowsda real effectdor both. Thus, we materiality, and conciseness are the most important drivers of our
determine whether analysts' target price forecast accuracy is higher findings for firm value and for its liquidity and expected cash flow
for firms with higher IRQ, which would support the capital market components. The importance of connectivity is particularly pertinent
interpretation, and whether realized future operating cash flow is because connectivity is closely linked to integrated thinking, which is
higher for firms with higher IRQ, which would support the real key to achieving the dual objective of integrated reporting.
effect interpretation of the relation between IRQ and expected Results from our analyses relating to analyst cash flow forecast
future cash flow. We provide additional evidence on the real effect accuracy and realized future operating cash flows indicate that our
channel by determining whether IRQ is associated with firms’ in- finding of a positive relation between IRQ and expected future cash
vestment efficiency by examining a specific type of internal deci- flows is driven by real effects rather than capital market effects.
sion, i.e., investment decisions. First, we do not find an association between IRQ and analysts’ target
Our data come from South Africa where integrated reporting is a price forecast accuracy, which suggests that higher IRQ is not
requirement of the Johannesburg Stock Exchange (JSE). The advan- associated with more accurate cash flow forecasting. Second, we
tage of the South African setting is that we avoid concerns about find a significantly positive association between IRQ and ex post
self-selection that arise when issuance of an integrated report is operating cash flows, which is consistent with improved decision
voluntary. A distinguishing feature of our study is that we obtain making by managers. We also find a significantly positive associa-
proprietary data from EY, which rates the quality of integrated re- tion between IRQ and investment efficiency, which also supports
ports of the top 100 JSE firms each year in terms of market value of the real effects channel. Our investment efficiency evidence is
equity, to measure IRQ. We have access to each firm's report quality consistent with integrated reporting facilitating integrated thinking
category, which is released publicly, and the underlying scores for whereby managers of firms with higher IRQ recognize in-
each quality dimension, which are not. According to the chair of the terdependencies between various types of capital and parts of the
EY panel that rates the reports, the ratings focus on the quality of the firm, which enables them to make better investment choices.
disclosure, specifically whether the integrated report gives readers a Our study contributes to the literature and practice in several
sense of the firm's strategy and value creation process. Thus, our ways. First, we add to the limited empirical research on integrated
measure of IRQ is not simply a disclosure index that captures the reporting by extending Lee and Yeo (2016) and Zhou, Simnett, and
presence or absence of particular items. In addition to the inde- Green (2017), which also focus on South African firms. Whereas Lee
pendent nature of the rating and its focus on quality, there are two and Yeo (2016) examine whether IRQ is associated with firm value,
benefits of using the EY ratings: the EY adjudicators are experts and we investigate the channels by which this association occurs.
the detailed EY score sheet and data allow us to disaggregate the IRQ Whereas Zhou et al. (2017) investigate two capital market effects of
score into its components based on the IIRC Framework.1 integrated reports, i.e., analyst forecast properties and cost of cap-
We find a positive relation between IRQ and firm value, ital, they do not link these effects to firm value and do not consider
measured by Tobin's Q, which is consistent with the findings in Lee real effects, which we do. Second, we answer Leuz and Wysocki’s
and Yeo (2016). We also find that firms with larger annual increases (2016, 530) call for research on disclosure in “novel settings” in
in IRQ have larger increases in firm value. Relating to liquidity, as countries outside the U.S. and to examine “nontraditional disclo-
predicted, we find that IRQ is negatively associated with bid-ask sure” and “the real effects of disclosure mandates.” Third, we
spread, an inverse measure of stock liquidity, after controlling for extend the literature on implications of extra-financial information
corporate governance, Corporate Social Responsibility (CSR) (Dhaliwal, Li, Tsang, & Yang, 2011; Dhaliwal, Radhakrishnan, Tsang,
& Yang, 2012; Lu, Shailer, & Yu, 2017; Plumlee, Brown, Hayes, &
Marshall, 2015). The relations we document include controls for
the issuance of a standalone CSR report as well as accounting
1
Regarding the first benefit, the three adjudicators who evaluate the integrated quality and overall disclosure quality. Thus, our evidence shows
reports on behalf of EY are professors at the University of Cape Town with extensive
that integrated reports are associated with benefits incremental to
experience in reading and evaluating firms' corporate reports. Together they have
more than 50 years of such experience. One adjudicator serves on the board of those associated with existing reports, such as standalone CSR re-
directors of the Global Reporting Initiative and was a member of the Integrated ports. Fourth, we provide evidence for managers, practitioners,
Reporting Working Group of the South African Integrated Reporting Committee, standard-setters, regulators, and investors as they evaluate the
and another offers an elective module in integrated reporting at the University of merits of integrated reporting. For example, the SEC issued a
Cape Town Business School. Regarding the second benefit, we are among the first to
provide evidence on the association between the separate components of IRQ and
Concept Release on proposed changes to business and financial
economic consequences. These benefits come at the expense of a sample restricted disclosures required by Regulation S-K and asked, “How important
to the top 100 JSE firms. to investors is integrated reporting, as opposed to separate financial
M.E. Barth et al. / Accounting, Organizations and Society 62 (2017) 43e64 45
and sustainability reporting?” (SEC, 2016, 214). firms focus on long-term value creation. They contend that inte-
The rest of the paper proceeds as follows. Section 2 provides grated reports allow investors to make better resource allocation
background, discusses theory, and develops hypotheses. Regarding decisions by providing a more comprehensive view of the firm, and
firm value and its components, Section 3 explains the research call for stock exchanges and securities regulators to mandate in-
design relating to liquidity, cost of capital, and expected future cash tegrated reporting to “ensure swift and broad adoption” (Gore &
flows and Section 4 presents the findings. Section 5 explains the Blood, 2011). To date, only one countrydSouth Africadmandates
research design and associated findings relating to cash flow real integrated reporting.
and capital market effects, and Section 6 does so for the investment In South Africa, integrated reporting pre-dates the establish-
efficiency real effect. Section 7 contains additional analyses. Section ment of the IIRC and release of its Framework. To address concerns
8 concludes. about ineffective management in the post-apartheid era, in 1993
the South African Institute of Directors commissioned the King
2. Background, theory, and hypotheses Committee with the mandate to promote the highest standards of
corporate governance in South Africa (West, 2006). Hence, South
2.1. Background Africa's history of apartheid has been influential in shaping social
and environmental governance (De Villiers, Rinaldi, & Unerman,
The IIRC was created in 2010 in the wake of the global financial 2014). Fueled by the belief of the King Committee that conven-
crisis. Supported by the Accounting for Sustainability (A4S) initia- tional financial reporting was no longer meeting the needs of firms'
tive led by HRH The Prince of Wales and the Global Reporting stakeholders, a key recommendation of the third version of the
Initiative (GRI), the IIRC's mandate is to develop a framework for King Code (King III) is that firms be required to issue an integrated
integrated reporting and to promote its use. Issued in 2013, the IIRC report to present the firm's performance in terms of its finance and
Framework states that the primary purpose of an integrated report its sustainability (King, 2013).
is to explain to providers of financial capital how an organization Because the King Code is a JSE listing requirement, the release of
creates value over time. The IIRC Framework is principles-based King III meant that primary listed firms were required to issue an
and does not provide a standard format for integrated reports. integrated report for annual periods ending on or after 1 March
Instead, the framework sets out seven guiding principles and eight 2010, or explain why they did not issue one. This apply-or-explain
content elements for an integrated report. These principles and regulation raises the question of whether integrated reports are
elements relate to six capitals that the firm uses to create value, truly mandatory. However, the apply-or-explain approach recog-
which enables the firm to explain how it creates value.2 nizes that often the issue is not whether to comply, but rather how
Proponents of integrated reports contend that such reports to apply the principles and recommendations (IoD, 2009). Disclo-
address deficiencies of traditional corporate reporting (EY, 2014a). sure regarding how the firm complies with integrated reporting is
Integrated reports are broader in scope in that they include finan- mandatory, but the firm can comply in different ways or apply an
cial and non-financial information. For example, whereas financial equivalent practice.3
statements provide coverage of financial capital, they only partially In May 2010, the Integrated Reporting Committee of South Africa
address manufactured, intellectual, human, social, and natural (IRC) was established to develop guidelines on high quality inte-
capitals (IIRC, 2016a). Thus, the intent of integrated reports is to grated reporting practices. The IRC's discussion paper on a frame-
address all resources and relationships that materially impact the work for an integrated report, which was released on 25 January
value-creation activities of the firm in the short, medium, and long 2011, was the first national initiative on integrated reporting. In
terms (Cohen & Simnett, 2015). March 2014, the IRC endorsed the IIRC Framework for South African
A key feature of integrated reports that distinguishes integrated firms and ceased issuing its own guidance. See De Villiers et al. (2014)
reporting from other reporting formats is the concept of connec- for further background on the development of integrated reporting.
tivity, which means that an “integrated report should show a holistic Outside South Africa, integrated reporting continues to gain
picture of the combination, interrelatedness and dependencies be- momentum, albeit primarily as a voluntary reporting option. For
tween the factors that affect the organization's ability to create value example, recently, China's Ministry of Finance endorsed the IIRC
over time” (IIRC, 2013, 5). Connectivity is related to integrated Framework (Howitt, 2016), India's SEBI asked the top 500 listed
thinking and, according to the IIRC (2016a, 4), integrated thinking is firms in India to adopt integrated reporting (Majmudar & Rana,
an “integral component of integrated reporting.” The IIRC (2016a, 8) 2017), and a new corporate governance code issued by Securities
states that by “breaking down internal silos and increasing the Commission Malaysia encourages Malaysian firms to adopt inte-
shared understanding of how value is created,” integrated thinking grated reporting (Kana, 2017). Further, the U.S. Securities and Ex-
can lead to improved decisions at the management and board levels change Commission (SEC) issued a Concept Release on proposed
as well as more focused reporting and better communication with changes to business and financial disclosures required by Regula-
the firm's stakeholders. Thus, embedded in the IIRC Framework is tion S-K and asked, “How important to investors is integrated
the dual objective of improving information for external users and reporting, as opposed to separate financial and sustainability
improving internal decision making. reporting?” (SEC, 2016, 214). The European Union's recent non-
In a 2011 Wall Street Journal article, former U.S. Vice President Al financial reporting directive is seen as a “stepping stone” to inte-
Gore and David Blood identified mandating integrated reporting as grated reporting (Howitt, 2016).
one of five steps needed to support sustainable capitalism whereby In addition, the IIRC collaborates with other standard-setters to
ensure that integrated reporting plays a role in improving corporate
2
The seven guiding principles are: strategic focus and future orientation, con-
3
nectivity of information, stakeholder relationships, materiality, conciseness, reli- We hand collect data on firms' compliance for all primary listed firms on the JSE
ability and completeness, and consistency and comparability. The eight content in 2014 and find that 97.7% of the firms declare that their report is integrated. Of the
elements are: organizational overview and external environment, governance, six firms that did not so declare, four provided reasons consistent with the apply-
business model, risks and opportunities, strategy and resource allocation, perfor- or-explain principle. Hence, the effective compliance rate is 99.2%. Such a high level
mance, outlook, and basis of preparation. The six capitals are: financial, of compliance is inconsistent with compliance being voluntary. Other researchers
manufacturing, human, intellectual, social and relationship, and natural. See IIRC also classify South Africa's integrated reporting regime as mandatory (e.g., De
(2013). Villiers et al., 2014; Eccles & Krzus, 2015; Serafeim, 2015).
reporting. For example, in 2014, the Sustainability Accounting market participants, and a real effects channel, which relates to the
Standards Board (SASB) and the IIRC reached a memorandum of quality of the decisions made by managers. Thus, in contrast to Lee
understanding to accelerate the practical implementation of inte- and Yeo (2016) and Zhou et al. (2017), our objective is to determine
grated reporting (SASB, 2014). In April 2017, the Corporate Lead- whether integrated reporting achieves the IIRC's dual objective of
ership Group on Integrated Reporting, a partnership between the enhancing information quality and improving internal decision
IIRC and GRI discussed how GRI standards can be incorporated into making.5
the integrated reporting process (IIRC, 2017). The IIRC also has
joined with other standard-setters including the IASB and FASB to
explore alternative reporting models as part of the Corporate 2.3. Theory and hypotheses
Reporting Dialogue, and in an address to the IIRC, Hans Hoo-
gervorst, chair of the IASB, acknowledged that users need infor- Prior research studies voluntary and mandatory disclosure.
mation, in addition to general purpose financial reports, to make Mandatory disclosure studies can be categorized into those
their decisions (IASB, 2017).4 examining the effects of individual accounting standards and those
examining the adoption of a complete set of accounting standards
such as International Financial Reporting Standards (IFRS) (e.g.,
2.2. Related research
Leuz & Wysocki, 2016). We study mandatory disclosure, but instead
focus on the mandatory adoption of a new reporting framework,
De Villiers et al. (2014) and Velte and Stawinoga (2017) provide
i.e., integrated reporting.
overviews of the emerging literature on integrated reporting. Most
Although IFRS and integrated reporting both seek to improve
studies on integrated reporting are qualitative. Given that our study
information available to investors, there are significant differences.
is quantitative, we limit our discussion to archival studies that use
First, the IFRS Framework is based on principles, but the standards
South African data.
specify how to account for and disclose information about partic-
Baboukardos and Rimmel (2016) and Bernardi and Stark (2017)
ular types of transactions. In contrast, integrated reporting is based
investigate the adoption of mandatory integrated reporting in
solely on the IIRC Framework and is entirely principles based.
South Africa. Baboukardos and Rimmel (2016) find an increase in the
Second, IFRS applies only to financial information whereas inte-
value relevance of earnings after integrated reporting was mandated
grated reporting combines financial and non-financial information
by the JSE, but a decrease in the value relevance of equity book value.
into a single report with a focus on value creation. Third, IFRS
Bernardi and Stark (2017) find a significantly positive association
specifies the content of financial reports, but does not discuss how
between Bloomberg's environmental, social, and governance (ESG)
the reports are communicated to investors. Communication with
scores and analyst earnings forecast accuracy for 40 South African
investors and stakeholders is fundamental to integrated reporting.
firms in the period after integrated reporting became mandatory,
For example, the IIRC Framework states: “The primary purpose of
but not in the pre-mandatory period. Bernardi and Stark (2017)
an integrated report is to explain to providers of financial capital
conclude that the mandatory presentation of integrated reports
how an organization creates value over time” (IIRC, 2013, 4). Fourth,
enhances analysts' understanding of the ESG data. Whereas these
although IFRS may indirectly affect firms' internal decisions by
studies focus on the mandatory integrated reporting adoption event,
increasing monitoring by investors (e.g., Biddle, Callahan, Hong, &
we examine the effects of cross-sectional differences in IRQ after
Knowles, 2015), IFRS is silent on how it may affect managers’ in-
integrated reporting became mandatory in South Africa.
ternal decision making. In contrast, the IIRC (2013, 2016a) expects
Lee and Yeo (2016) examine the association between Tobin's Q
internal decision making to improve as a result of integrated
and a self-constructed proxy for IRQ for a sample of 822 South
thinking. Thus, an examination of mandated integrated reporting is
African firm-year observations from 2010 to 2013. The proxy is a
distinct from that of mandatory IFRS adoption and, given the
rating score based on an assessment of five aspects of each of the
growing interest in integrated reporting around the world, is a topic
eight IIRC Framework content elements. Lee and Yeo (2016) find
worthy of additional research (e.g., De Villiers et al., 2014).
that IRQ is positively associated with Tobin's Q and the association
Our study also is related to the literature on the implications of
is more pronounced for complex firms and firms with external
extra-financial information (e.g., Dhaliwal et al., 2011; Dhaliwal, Li,
financing needs. Using data from 2009 to 2012, Zhou et al. (2017)
Tsang, & Yang, 2014; Lu et al., 2017; Plumlee et al., 2015). Whereas
also develop a self-constructed proxy for IRQ that captures 31
prior studies focus on voluntary CSR reporting, integrated reporting
disclosure components across the eight content elements. Zhou
is mandatory in our setting. Studies examining voluntary reporting
et al. (2017) find a negative association between changes in IRQ
likely suffer from selection bias. Managers who voluntarily disclose
and subsequent changes in analyst earnings forecast errors, but not
information effectively reveal that the benefits of the disclosure
changes in forecast dispersion. They also find a negative association
exceed the cost. Empirical tests of the association between volun-
between changes in IRQ and subsequent changes in cost of equity
tary disclosure quality and economic consequences likely docu-
capital, but only for firms with low analyst following.
ment the different incentives of disclosing and non-disclosing
Lee and Yeo (2016) and Zhou et al. (2017) document economic
firms, especially because correcting for self-selection bias is chal-
benefits of higher IRQ. We examine how those economic benefits
lenging (Lennox, Francis, & Wang, 2012).6 Because mandatory
arise. We investigate two channels through which IRQ may be
associated with firm value, specifically, a capital market channel,
which relates to the quality of information provided to capital 5
There are three additional differences. First, the mandatory integrated reporting
period in our sample, 2011 to 2014, is longer than that in Lee and Yeo (2016), 2011
to 2013, and in Zhou et al. (2017), 2009 to 2012, who combine voluntary and
4
In addition, recent country-level corporate reporting initiatives have incorpo- mandatory sample years. Second, we use an external measure of IRQ, which
rated integrated reporting principles. For example, since October 2013 firms in the mitigates concerns relating to self-constructed indices. Third, the EY sample covers
United Kingdom are required to prepare a standalone strategic report as part of a larger portion of JSE market capitalization than Lee and Yeo (2016), 90% versus
their annual report. Although the “Guidance on the Strategic Report” issued by the 73%.
6
Financial Reporting Council (FRC) includes integrated reporting principles, the Discretion to publish a report voluntarily is different from exercising discretion
objective of this reporting is to provide relevant information to shareholders (FRC, in implementing mandatory reporting requirements. The former gives rise to se-
2014). In contrast, the objectives of integrated reporting include promoting internal lection bias, whereas the latter is the topic of interest in a vast literature on earnings
integrated thinking and decision making (Deloitte, 2015). quality. See Dechow, Ge, and Schrand (2010) for a review.
disclosers may be forced into a second-best reporting alternative, (2004) theory, which suggests that liquidity stimulates the entry
findings based on mandatory settings help establish a lower bound of informed investors into the market thereby making prices higher
for economic consequences of disclosure quality. Further, our and more informative. The higher prices can have a feedback effect
estimation equations include controls for the issuance of a volun- that affects managerial decisions, which leads to better perfor-
tary, standalone CSR report and, thus, we provide evidence on mance and higher firm value. Recognizing this, informed traders
whether mandated integrated reports are associated with eco- trade even more aggressively, which results in a positive cascade
nomic benefits incremental to those associated with CSR reports. whereby good news leads to more good news. Fang et al. (2009) find
We focus on the relation between integrated reporting and firm the relation between liquidity and performance is stronger for firms
value because at its core the IIRC Framework is about the value with high business uncertainty. Because integrated reports deal
creation process. We examine two possible channels through with capitals that are difficult to quantify and contain forward-
which integrated reporting may affect firm value, i.e., the capital looking information that lacks certainty, higher IRQ may affect
market channel and the real effects channel. Following Amihud and liquidity by stimulating additional trading by informed investors.
Mendelson (2012), we investigate three determinants of firm value, Thus, our first hypothesis is:
i.e., liquidity, cost of capital, and expected future cash flows.7 Based
H1. There is a positive association between IRQ and a firm's stock
on Leuz and Wysocki (2016), we view liquidity and cost of capital as
liquidity.
part of the capital market channel. Whether expected future cash
flows reflect a capital market effect, a real effect, or both is an A theoretical link between cost of capital and disclosure exists to
empirical question. the extent that disclosure affects a firm's non-diversifiable risk (Beyer
A theoretical link between liquidity and disclosure quality is et al., 2010). Lambert, Leuz, and Verrecchia (2007) posit that ac-
well established (Leuz & Wysocki, 2016). In a standard agency counting information can influence cost of capital directly through
framework, information asymmetry leads to adverse selection, the market's assessment of the riskiness of future cash flows.
which leads investors with less information to price-protect or exit There are at least three channels through which disclosure can
the market to reduce losses that would arise from trading with affect cost of capital. First, disclosure can reduce information
more informed investors. These actions reduce liquidity, decrease asymmetry. Second, theory suggests disclosure can improve in-
share prices, and increase cost of capital because investors demand vestors' awareness of non-financial aspects of the firm, which re-
a premium as compensation for risk (e.g., Easley & O'Hara, 2004; sults in a larger investor base with increased risk sharing amongst
Francis, Nanda, & Olsson, 2008; Gietzmann & Ireland, 2005). investors (Merton, 1987). Merton’s (1987) capital market equilib-
Disclosure can reduce information asymmetry and increase firm rium model allows for incomplete information. In that setting, in-
value by decreasing investors' monitoring cost and levelling the vestors only purchase shares of firms that they know about because
playing field among investors (Verrecchia, 2001; see Beyer, Cohen, gathering and processing information about a firm is costly. Third,
Lys, & Walther, 2010 for a review). Consistent with this theory, investors do not know the firm's true expected return. Theory
empirical studies find a positive relation between disclosure quality suggests that disclosure reduces parameter uncertainty and esti-
and liquidity. Welker (1995), Healy, Hutton, and Palepu (1999), and mation risk, parts of which are non-diversifiable (Barry & Brown,
Brown and Hillegeist (2007) find a positive relation in the context 1985).
of voluntary disclosure and Daske, Hail, Leuz, and Verdi (2008) find The IIRC (2013) contends that integrated reports can help in-
that liquidity increased after mandatory adoption of IFRS. vestors understand the risks to which the firm is exposed and how
Integrated reporting can reduce information asymmetry about its strategy and business model respond to those risks. Thus, inte-
the capitals that affect value. Because investors have limited grated reports can affect a firm's cost of capital by: (1) improving
attention and processing power, behavioral theory suggests that and expanding the information available to capital market partic-
improving the salience of information affects investors' perceptions ipants, thereby lowering information asymmetry, (2) providing an
(Hirshleifer & Teoh, 2003). As Zhou et al. (2017) explain, integrated inexpensive, but complete, overview of a firm's activities, thereby
reports can provide new value relevant information, and can pre- expanding the firm's investor base, and (3) reducing parameter
sent information, even if previously disclosed, in a more concise uncertainty and estimation risk because it can help providers of
and useful manner. In addition to financial capital, the IIRC financial capital better understand how a firm creates value by
Framework requires that managers of firms report on material as- presenting a holistic picture that relates the six capitals on which a
pects relating to manufactured, intellectual, human, social and firm depends. Further, the strategic focus and future orientation
relational, and natural capitals. Although some aspects of the other guiding principle of integrated reporting and the content elements
capitals may be addressed by voluntary CSR reports, e.g., environ- relating to the business model, risks and opportunities, strategy
mental issues, a criticism of CSR reports is that they are discon- and resource allocation, and outlook can be useful to investors in
nected from the firm's strategy, business model, and financial reducing parameter uncertainty and estimation risk.
performance (e.g., Serafeim, 2015). As such, providers of financial Thus, our second hypothesis is:
capital obtain an incomplete and disjointed picture of the firm's
H2. There is a negative association between IRQ and cost of
ability to create valuedin its broader sensedover the short, me-
capital.
dium, and long terms.
To the extent that disclosure increases liquidity, there also are The relation between IRQ and expected future cash flows could
non-agency based theories that link liquidity to firm value. For reflect a capital market effect, a real effect, or both. A capital market
example, Fang, Noe, and Tice (2009) find that liquidity is positively effect can arise if integrated reports improve investors' ability to
related to firm value. Their results support Khanna and Sonti’s estimate future cash flows by improving the quality, range, and
connectivity of information. Thus, higher quality reports could
improve investors’ forecasting. To the extent that investors bias the
forecasts downward when faced with incomplete information, the
7
In pricing a financial asset, Amihud and Mendelson (1986) posit that investors more detailed and integrated disclosures in the integrated report
consider liquidity costs and their time horizons. The former affects firm value
through the cost of capital whereas the latter creates a concave relation between
could lead to higher forecasted future cash flows and higher valu-
liquidity costs and expected returns. However, liquidity also can affect firm value ations. In addition, disclosure about the six capitals can be
through other channels as in Khanna and Sonti (2004).
informative to stakeholders, such as customers and employees, expected future cash flows, EFCF, and i and t denote firm and year.
who associate with more socially responsible firms. This can result All variable definitions are in Appendix 1.
in increased financial performance (Plumlee et al., 2015). IRQ_R is the annual percentile rank of IRQ (see Section 3.3). The
A real effect can arise if real decisions made by managers are coefficient on IRQ_R, b1, represents the difference in economic
different from the decisions that would be made in the absence of consequences between the firm with the lowest and highest IRQ
integrated reporting. One of the benefits of integrated reporting each year (Larcker & Rusticus, 2010). Because bid-ask spreads in-
touted by the IIRC is that its use can lead to integrated thinking and crease with illiquidity, if higher quality integrated reports are
integrated decision-makingde.g., by breaking down silos and associated with higher liquidity, we expect b1 is negative in the
focusing on long-term, instead of short-term, strategydthat results Bid_Ask version of equation (1). If higher quality integrated reports
in better real decisions and enhanced firm value. Similarly, Eccles are associated with lower cost of capital, we expect b1 is negative in
and Serafeim (2015) explain that whereas traditional financial re- the COC version. If higher quality integrated reports are associated
ports serve mainly an information function, integrated reports can with higher expected future cash flows, we expect b1 is positive in
affect internal decision making. the EFCF version. To reduce the likelihood of correlated omitted
Thus, our third hypothesis is: variables, we also estimate equation (1) based on first differences of
all variables, i.e., a changes specification, which effectively uses the
H3. There is a positive association between IRQ and expected
firm as its own control.8
future cash flows.
To correct for cross-sectional and time-series dependence in
Although higher expected cash flows increases firm value, the regression residuals from estimating equation (1), we cluster
higher expectations could result from better managerial decision standard errors by firm and by year (Gow, Ormazabal, & Taylor,
making, which should result in higher ex post realized operating 2010). Although cluster-robust methods can over-reject a true
cash flows, i.e., a real effect, or from investors' enhanced ability to null when the number of clusters is small, bootstrapping can
forecast cash flows, which decreases any information-related overcome the small cluster concern (Cameron, Gelbach, & Miller,
downward bias they may assess, i.e., a capital market effect. This 2008). Thus, because we have only four time clusters, we cluster
line of reasoning leads to our fourth and fifth hypotheses, which based on bootstrapping 10,000 iterations.
help distinguish the real and capital market effects explanations for
a relation between IRQ and expected future cash flows. 3.2. Liquidity, cost of capital, and expected future cash flow proxies
H4. There is a positive association between IRQ and ex post real-
ized operating cash flows. Our hypotheses require proxies for three constructs: liquidity,
cost of capital, and expected future cash flows. This section dis-
H5. There is a positive association between IRQ and investors’ cusses our proxies for each construct.
cash flow forecast accuracy. Leuz and Verrecchia (2000) observe that bid-ask spread cap-
To provide additional evidence of a link between IRQ and real tures information asymmetry because when information asym-
effects, we investigate a particular real effect, namely investment metry is small investors are less concerned about adverse selection
efficiency. Conceptually, investment efficiency refers to undertak- and, as a result, are more willing to trade, which results in lower
ing projects with positive net present value (NPV) under the bid-ask spreads (Cheng, Dhaliwal, & Neamtiu, 2011; Leuz &
assumption of no market frictions, such as adverse selection or Verrecchia, 2000; Muller, Riedl, & Sellhorn, 2011). Following
agency costs. As such, under-investment results in passing up in- Bushee, Core, Guay, and Hamm (2010), we use bid-ask spread as a
vestment opportunities with positive NPV, whereas over- proxy for information asymmetry generally and an inverse proxy
investment results in investing in projects with negative NPV for liquidity specifically. Bid_Ask is the natural logarithm of the
(Biddle, Hilary, & Verdi, 2009). Given the dual objective of inte- median of the difference between daily closing bid and ask prices
grated reporting, namely improved information for outside pro- divided by their midpoint (Daske et al., 2008; Lang, Lins, & Maffett,
viders of financial capital and better internal decision making, it is 2012). Our calculation period commences the day after the prior
possible that high quality integrated reports can improve invest- year's integrated report release and ends on the day of the current
ment efficiency by reducing information asymmetry and improving year's integrated report release. We hand collect report release
shareholders’ monitoring ability (Biddle et al., 2009). dates from the JSE Stock Exchange News Service (SENS).9
Thus, our sixth hypothesis is: Proxies for cost of capital are subject to measurement error
because of the assumptions of the models on which they are based
H6. There is a positive association between IRQ and investment and data used to estimate them (Hail & Leuz, 2009). As a result,
efficiency. there is lack of agreement in the literature about the appropriate
proxy (e.g., Dhaliwal et al., 2014). We follow the literature that uses
3. Research design relating to components of firm valuedH1 the average of four cost of capital proxies as the proxy for cost of
through H3 capital (e.g., Daske et al., 2008; Hail & Leuz, 2006, 2009).
3.1. Estimation equations

8
We do not include firm fixed effects in levels specifications because, depending
To examine which components of firm valuedliquidity, cost of on the sample, we have, on average, only approximately 3.5 observations per firm.
capital, and expected future cash flowsdare associated with IRQ, However, the changes specification effectively includes firm fixed effects. Thus, we
we estimate equation (1), base our inferences on the levels and the changes findings taken together.
9
The EY awards for 2011, 2012, 2013, and 2014 were announced on 27 September
2012, 25 July 2013, 6 August 2014, and 7 August 2015. For each firm-year obser-
Econit ¼ b0 þ b1 IRQ Rit þ b2 Govit þ b3 CSRPerfit þ b4 CSR SAit vation, the date on which EY announced the awards was after the date on which
firms released their integrated report for that year. Thus, the market effects in our
þ b5 LowAQit þ b6 Complexit þ b7 Fogit þ b8 Primeit contemporaneous tests cannot be attributed to the announcement of the EY
X
þ bj Controlsit þ εit (1) awards. To determine when the report is publicly available, we search press re-
leases on the JSE SENS. When firms do not announce release of the integrated
report, we use the date they release their annual report or final set of financial
where Econ is bid-ask spread, Bid_Ask, cost of capital, COC, or statements.
Specifically, our cost of capital proxy, COC, is the mean of the cost of based on the 2012 draft IIRC Framework is correlated with the EY
capital proxies in Claus and Thomas (2001), Gebhardt, Lee, and quality categories, which adds validity to our use of the EY scores to
Swaminathan (2001), and Ohlson and Juettner-Nauroth (2005), measure IRQ. Although EY used different score sheets each year to
and the modified price-earnings-growth (PEG) model of Easton reflect integrated reporting guidelines in effect at the time, our
(2004). In calculating COC, we measure share price at the inte- comparison of the guiding principles and content elements
grated report release date for the current year, and use one-year- included in the various score sheets reveals that the fundamental
ahead analyst forecasts issued between the release of the prior principles of what constitutes a high quality integrated report did
and current years' integrated reports. not change substantially over time.
As our proxy for expected future cash flows we use one-year- We have proprietary access to the underlying scores of the three
ahead target share prices forecasted by financial analysts adjudicators that support the publicly announced quality cate-
(Plumlee et al., 2015). Because we only use one-year-ahead fore- gories. Because the underlying scores contain more information
casted target prices, the effect of discounting target prices to the than the quality categories, we construct our proxy for IRQ from the
current year is negligible. Thus, to avoid introducing noise into our detailed information. We identify 12 score components that are
proxy of expected future cash flows by discounting using an esti- consistent across the four annual score sheets. These are strategic
mated firm-specific discount rate, we use the undiscounted target focus and future orientation, SFO; connectivity of information,
price forecasts. Our proxy for expected future cash flows, EFCF, is CONT; stakeholder relationships, STHR; materiality, MAT; concise-
the natural logarithm of the mean of target price per share forecasts ness, CONS; organizational overview and external environment,
issued within 90 days after the release of the integrated report. We OOEE; governance, GOV; business model, BMOD; risks and oppor-
use a 90-day window to obtain a reasonable sample size for our tunities, RIOPP; performance, PERF; basis of preparation and pre-
tests. sentation, BPP; and other, OTH. For each year, we allocate the
questions in the EY score sheet to one of these components and
allocate to OTH questions that do not fit any of the remaining
3.3. Measure of IRQ
components.
Because the number of questions included in the EY score sheet
We construct our proxy for IRQ from the scores underlying the
varies across years, the number of questions we allocate to each
annual EY Excellence in Integrated Reporting Awards. The EY
component also varies. We calculate the raw, i.e., unscaled, score for
evaluations reflect the assessment of three external independent
each question as the mean score of the three adjudicators. We
adjudicators who score each integrated report on multiple criteria;
calculate the score for each of the 12 components as the sum of the
these individuals were the same for all four of our sample years. The
firm's raw score for each question allocated to that component,
chair of the adjudication panel states that the “marking process is
scaled by the sum of the maximum available score for all the
not simply about ‘ticking the box.’ More emphasis is placed on the
questions allocated to that component. Our proxy for integrated
quality of information presenteddthe relevance, understandabil-
report quality, IRQ, is the mean of the 12 component scores.11
ity, accessibility and connectedness of that information, whether
Table 1 provides descriptive statistics relating to IRQ. Panel A
users of the integrated reports would have a reasonable sense of the
presents statistics that compare IRQ across the EY quality cate-
issues that are core to the operations of each of the companies, and
gories. Panel A reveals that in each year, mean IRQ increases
whether companies have dealt with the issues that users would
monotonically from the lowest EY quality categorydprogress to be
have expected” (Graham, 2014, 16).10 EY categorizes the reports
madedto the highest quality categorydtop 10. For example, in
into five quality categoriesdtop 10, excellent, good, average, and
2014, the mean is 25.33% in the progress to be made category and
progress to be madedexcept for 2011 when EY did not use the
82.00% in the top 10 category. Table 1, Panel B, presents distribu-
average category. The quality category for the firm's integrated
tional statistics by year and reveals that mean IRQ is the highest in
report is publicly announced.
2011, 59.57%. Because the EY awards represent a comparison of
Appendix 2 contains a summary of the integrated reporting
report quality across firms in a particular year, higher scores in 2011
guidance that EY incorporated into the adjudicator score sheets for
suggest the EY adjudicators have adjusted their standards over
each year. We evaluated the score sheets used by the adjudicators
time.12 Table 1, Panel C, reports inter-rater reliability statistics for
and found them to be consistent with the IIRC Framework and,
IRQ by year. The intra-class correlation coefficient ranges from 0.91
thus, believe the scores are appropriate to use as a basis for
measuring IRQ. Zhou et al. (2017) find that their measure of IRQ
11
There are at least two alternative approaches to constructing an IRQ measure
10
The scores of the individual adjudicators are inputs to determine the final from the EY data. The first is to sum the raw, i.e., unscaled, scores for each question
ranking. Widely differing adjudicator scores are reviewed to ensure information and divide it by the sum of the maximum score available for each question. This
was not overlooked; the final ranking is based on the mean of the adjudicators' yields a score in which the 12 components are weighted based on the number of
scores, overall perceptions, and discussion among the adjudicators (EY, 2015). EY questions related to that component in EY's score sheet for that year. This yields an
(2014b, 25) provides the following reasons why it only publishes at a high level unadjusted IRQ, UA_IRQ, for which the raw score for each question is, as is IRQ, the
the considerations taken into account in scoring the reports and does not make mean score of the three adjudicators. The second is to calculate the raw score for
public the detailed score sheet: “As a consequence of our intention to change the each question as the median of the adjudicators' scores. We calculate MED_IRQ as
mark plan on an annual basis and the subjectivity involved in its use, the actual the sum of the raw score of each question divided by the sum of the maximum
mark plan is not made public. Furthermore, a mark plan that is publicly available score available for each question. Not surprisingly, untabulated statistics reveal that
could have the disadvantage of encouraging gamesmanship among the partici- IRQ, UA_IRQ, and MED_IRQ are highly correlated. The weakest Pearson correlation in
pants, rather than striving to encourage true excellence in integrated reporting.” the four years is 0.99 between IRQ and MED_IRQ in 2011. Given these strong positive
Thus, we are unable to reveal the detailed score sheets. We interviewed Graham on correlations, using UA_IRQ or MED_IRQ in place of IRQ is unlikely to affect our
21 August 2014 about the adjudication process of scoring the integrated reports. He inferences.
12
indicated that it takes between one-half and 4 hours to evaluate a report, An alternative explanation for higher IRQ scores in 2011 is that quality
depending on the extent to which a firm has implemented integrated reporting decreased over time. A conversation with the chair of the EY adjudication panel on
principles. He also indicated that the adjudicators distinguish between credible 1 December 2016 confirmed that the EY adjudicators were more lenient in the first
information and puffery. Graham stated: “For some firms, it is merely a public re- year of the awards given the lack of guidance on integrated reporting at that time.
lations exercise through pictures, but we would never rate those well. It is hard for a With the release of new integrated reporting guidance, the adjudicators adjusted
firm to be excellent without clear key performance indicators. If a firm has a lot of their expectations of what constitutes a high quality integrated report and became
green washing and narratives are too long, it is not going to be excellent”. stricter. He confirmed that the scores do not reflect deterioration in IRQ over time.
Table 1
Descriptive statistics for IRQ.
Panel A: IRQ compared with EY categories
Top 10 Excellent Good Average Progress to be made

EY Category % % % % %
IRQ (Mean)
2011 84.53 76.31 63.98 N/A 45.03
2012 74.13 65.58 54.98 42.42 25.40
2013 72.78 65.86 50.82 40.27 22.73
2014 82.00 72.78 60.17 45.14 25.33
Number of firms
2011 10 17 29 N/A 44
2012 10 18 30 26 16
2013 10 25 29 20 16
2014 10 21 27 25 17
Panel B: IRQ
Mean Median Std. dev. Min. Max.

% % % % %
2011 59.79 61.88 17.14 24.93 93.13

2012 50.70 52.20 16.30 14.85 80.40
2013 50.17 49.20 16.68 15.77 77.32
2014 55.32 58.63 18.63 17.13 88.63
Panel C: IRQ Inter-rater reliability
2011 2012 2013 2014
Intraclass correlation coefficient 0.91 0.92 0.91 0.94

F-value 10.84 11.74 11.67 15.74
p-value 0.00 0.00 0.00 0.00
(F-statistic ¼ 10.84; p-value ¼ 0.00) in 2011 to 0.94 (F- of capital, and Cho, Lee, and Pfeiffer (2013) find that CSR perfor-
statistic ¼ 15.74; p-value ¼ 0.00) in 2014, which suggests a high mance is negatively associated with bid-ask spread. CSRPerf is the
degree of reliability amongst the adjudicators’ ratings. mean of the environmental and social scores from Asset 4. We also
To the extent that the raw scores change over time, they are not include an indicator variable to capture whether a firm issues a
comparable across years. To address this problem, we convert IRQ standalone CSR report in addition to its integrated report, CSR_SA.
into percentile ranks each year following the literature using As- Cho, Guidry, Hageman, and Patten (2012) and Patten (2002) show
sociation for Investment Management and Research (AIMR) scores that CSR performance and disclosure are separate constructs, and
as a proxy for disclosure quality (e.g., Botosan & Plumlee, 2002; Dhaliwal et al. (2011) find that firms issue a standalone CSR report
Lang & Lundholm, 1993, 1996; Larcker & Rusticus, 2010; in an attempt to lower cost of capital. Following Simnett,
Lundholm & Myers, 2002). Specifically, each year we calculate the Vanstraelen, and Chua (2009), we base CSR_SA on data we hand
rank of IRQ, IRQ_R, as (firm rank ‒ 1)/(number of firms e 1). IRQ_R collect from Corporate Register at www.corporateregister.com and
ranges from zero for the lowest ranked firm to one for the highest firms’ websites.
ranked firm. Consistent with how Lundholm and Myers (2002) Equation (1) includes a control for accounting quality because
treat the change in AIMR rankings, we use the annual change in Francis et al. (2008) show that earnings quality is negatively asso-
IRQ_R to measure a firm's change in relative IRQ. ciated with cost of capital, and Lang et al. (2012) show that liquidity
We also report results from equation (1) after replacing IRQ_R is higher for firms with lower incidence of earnings management.
with the percentile rank score of each of the 12 components.13 Although discretionary accruals is a commonly used proxy for ac-
Because the IRQ components are highly correlated with each counting quality, prior research uses property, plant, and equip-
other, we estimate the equations separately for each component. ment and inventory as key inputs to estimate discretionary
accruals. These inputs are not as pertinent to financial firms, which
3.4. Control variables constitute 31.16% of our sample. Thus, instead, following Bowen,
Rajgopal, and Venkatachalam (2008), we use the number of small
Based on prior literature, we include variables in equation (1) as positive earnings surprises, LowAQ, as our earnings quality mea-
controls for other factors that may be correlated with IRQ_R or sure. LowAQ is the percentage over the prior four years of small
associated with the economic consequences we test (e.g., Dhaliwal earnings surprises, which is a difference between 0 and 0.01 of net
et al., 2011, 2012, 2014; Hail & Leuz, 2006). We include a control for income in year t minus net income in year te1, scaled by total assets
corporate governance, Gov, because Chen, Chen, and Wei (2009) at the end of year te2. To construct LowAQ, we require at least two
find that corporate governance is negatively associated with cost earnings surprises. LowAQ equal to zero (one) represents the
of capital, which also affects firm value. Gov is the mean of the highest (lowest) accounting quality.
board function, board structure, compensation policy, and share- Equation (1) also includes a control for firm complexity, Com-
holder rights scores from Asset 4. We include a control for CSR plex, because it may be more difficult for complex firms to imple-
performance, CSRPerf, because El Ghoul, Guedhami, Kwok, and ment the concepts of integrated reporting. For example, the extent
Mishra (2011) show the importance of controlling for CSR perfor- to which firms comply with the IIRC Framework's guiding princi-
mance in tests of the association between CSR disclosure and cost ples of conciseness and connectivity of information may differ for
firms with multiple segments or divisions and firms with a simple
structure and operations. Complex is the mean of the annual decile
13
We thank a reviewer for suggesting this analysis. rank of earnings volatility, stock return volatility, and number of
segments (De Franco, Hope, Vyas, & Zhou, 2015). otherwise, Loss, and the equity book-to-market ratio, BTM (Lang
The quality of a firm's integrated report may be a proxy for a et al., 2012).17 The expected future cash flows version includes
firm's overall disclosure quality. Thus, we include in equation (1) a expected growth, ExpGr, the ratio of the mean one-year-ahead
control for overall disclosure quality. Li (2008) uses the Gunning analyst target price to the actual price minus one measured on
Fog index as a measure of the readability of annual reports and the integrated reporting release date, and accruals, Accr, the dif-
shows that firms with a larger Fog index have lower earnings ference between net income before extraordinary items and pref-
persistence and lower future profitability. Lehavy, Li, and Merkley erence dividends and net cash flow from operating activities, scaled
(2011) find that less readable annual reports are associated with by total assets (Barth, Cram, & Nelson, 2001; Bilinski, Lyssimachou,
greater analyst earnings forecast dispersion, lower forecast accu- & Walker, 2013; Doyle, Lundholm, & Soliman, 2003).
racy, and greater forecast uncertainty. Biddle et al. (2009) use the The bid-ask spread and expected future cash flows versions
inverse of the Fog index as a proxy for financial reporting quality include idiosyncratic risk, IRisk, the standard deviation of residuals
and show that the index is positively associated with investment from a firm-specific regression of daily stock returns on market
efficiency. Because we seek to measure disclosure quality separate returns over the past year. The cost of capital version includes an-
from IRQ, we base our measure on the Fog index relating to firms' alyst forecast dispersion, Disp, the natural logarithm of the standard
press releases, which we collect from JSE SENS. JSE listed firms are deviation of one-year-ahead earnings per share forecast divided by
required to announce through SENS news of events, e.g., directors the absolute value of the consensus earnings per share forecast; the
trading in shares or other price sensitive information. Firms also equity book-to-market ratio, BTM; forecasted long-term earnings
can voluntarily announce information through SENS. Our disclo- growth, LtGr, the difference between the two-year-ahead
sure quality proxy, Fog, is the Gunning Fog index of the press re- consensus earnings per share forecast and the one-year-ahead
leases a firm made during the current year, multiplied by minus one consensus earnings per share forecast scaled by the one-year-
so that Fog is increasing in disclosure quality.14 ahead consensus forecast; and leverage, Lev, the ratio of total
Firms with a secondary JSE listing are not subject to the apply- debt to the sum of total debt and book value of common equity
or-explain integrated reporting regulation.15 However, EY's sam- (Dhaliwal et al., 2014; Zhou et al., 2017). All versions include year
ple includes the 100 largest JSE firms based on market capitaliza- and industry fixed effects.18
tion, regardless of whether the firm has a primary or a secondary
JSE listing. EY (2014b, 2015) notes that although many secondary
listed firms do not label their annual reports as integrated, the re- 3.5. Data and sample
ports include many integrated reporting principles and EY has
ranked some of the reports as excellent. Thus, to preserve sample Integrated reporting became effective for firms listed on the JSE
size, we include both primary and secondary listed firms in our for annual periods beginning on or after 1 March 2010. As Section
sample. However, equation (1) includes an indicator variable, 3.3 discusses, we use data compiled by EY South Africa for its
Prime, which equals one for firms with a primary JSE listing and Excellence in Integrated Reporting Awards to construct our IRQ
zero otherwise, as a control for different reporting incentives be- proxy. The first awards were based on integrated reports for 2011.
tween primary and secondary JSE listed firms.16 We use data from 2011 to 2014. EY compiles data on the top 100
We also include in equation (1) controls for additional factors, firms on the JSE based on market capitalization at the end of each
Controls. All versions of equation (1) include the CAPM beta, Beta, calendar year. These firms represent approximately 90% of the
and size, Size, the natural logarithm of beginning-of-year market market capitalization of the JSE in 2011 and 2012 (EY, 2012; EY,
value of equity. The bid-ask spread version includes an indicator 2013) and approximately 94% in 2013 and 2014 (EY, 2014b; EY,
variable that equals one if the firm reports a loss and zero 2015). Thus, even though our sample is small relative to archival
studies based on U.S. or cross-country data, it covers most of the JSE
in terms of market capitalization. Our sample consists of the 80
firms evaluated by EY in all four years. We use these firms to ensure
14
Other control variables such as CSR_SA, LowAQ, and Size also may capture our IRQ measure is not affected by changes in sample composition.
overall disclosure quality. In addition, we repeat our main analyses using a We obtain remaining data from Compustat Global, Datastream,
disclosure quality proxy based on management forecasts, MFDisc. MFDisc measures IBES, Asset4, SENS, and hand-collection. The sample size varies
the frequency and precision of management forecasts in the current and preceding
across analyses because of data availability.
two years (Baginski & Rakow, 2012; Plumlee et al., 2015). We obtain management
forecasts from the Capital IQ Key Developments database. The database covers 164 Table 2 details our sample. Panel A reveals that the sample for
key developments, of which three contain management forecasts: “corporate the bid-ask spread analyses consist of 292 firm-year observations
guidance e lowered” (#26), “corporate guidance e raised” (#27), and “corporate from 79 firms and the sample for the cost of capital (expected
guidance e new/confirmed” (#29). We do not limit the forecasts to earnings only future cash flows) analyses consist of 221 (189) firm-year
because other forecasts such as production and capital expenditure are important
for mining firms, which comprise a large part of our sample. MFDisc is the natural
logarithm of the product of “supplier,” “frequency,” and “precision” plus one.
Supplier equals one if a firm issued at least one management forecast, and zero 17
We do not include analyst following as a control variable in our bid-ask spread
otherwise, frequency is the number of management forecasts issued, and precision equation because doing so would substantially reduce our sample size. Although
is the average of the precision of management forecasts issued, all during the some studies include analyst following as a control variable in bid-ask equations
current and preceding two financial periods. Precision equals one for general (e.g., Bushee et al., 2010), others do not (e.g., Daske et al., 2008). In addition, some
impression forecasts, two for minimum and maximum forecasts, three for range other control variables in the equation, e.g., size, governance, accounting quality,
forecasts, and four for point forecasts. Our inferences are unaffected by using Fog, and the issuance of a standalone CSR report, can be interpreted as proxies for
MFDisc instead of Fog as a proxy for overall disclosure quality. information environment and monitoring.
15 18
See paragraph 18.4 of the JSE Limited Listings Requirements Issue 21 (available Our controls for changes in Loss and CSR_SA are indicator variables; we
online at https://www.jse.co.za/content/JSERulesPoliciesandRegulationItems/JSE% construct three indicators for each. For Loss, the indicators reflect firms that
20Listings%20Requirements.pdf). changed from a loss to a profit, firms that reported losses in both years, and firms
16
Except for 2011, mean IRQ is similar for primary and secondary JSE listed firms. that changed from a profit to a loss. Firms that reported profits in both years are
In 2011, 2012, 2013, and 2014 mean IRQ for primary listed firms is 61.21, 51.26, 50.17, reflected in the intercept. For CSR_SA, the indicators reflect firms that issued a
and 55.82, and for secondary listed firms is 51.10, 46.57, 50.17, and 52.24. These standalone CSR report in the prior year but not in the current year, firms that issued
statistics suggest that even though the integrated reporting regulation is not a standalone CSR report in both years, and firms that did not issue a standalone CSR
mandatory for secondary listed firms, these firms provide integrated reports with report in the prior year, but did so in the current year. Firms that did not issue a
levels of quality similar to those of primary listed firms. standalone CSR report in either year are reflected in the intercept.
Table 2 4.2. Findings

Sample.
Panel A: Sample selection Firms Firm-years We begin by establishing that the association between IRQ and
EY observations (4 years x 80 firms per year) 80 320
firm value documented by Lee and Yeo (2016) is present in our
Firm with missing data (1) (4) sample. As do Lee and Yeo (2016), we follow an extensive literature
Firm-year observations with missing data (24) that uses Tobin's Q as a proxy for firm value.19 Tobin's Q is designed
Sample: Bid-ask 79 292 to reflect the market's valuation of a firm's assets relative to their
Observations with missing data (14) (71) carrying amounts (e.g., Lang & Maffett, 2011). This attribute makes
Sample: Cost of capital 65 221 Tobin's Q a suitable proxy in our setting because intellectual, hu-
Observations with missing data (6) (32) man, social, and natural capitals are only partially, or not, reflected
Sample: Expected future cash flows 59 189
in the carrying amount of assets. Hence, we investigate whether
IRQ is associated with firm value beyond what is contained in the
Panel B: Industry composition
financial statements. Table 3, Panel A, reveals that mean (median)
GICS sector Firm-years % Tobin's Q, TobinQ, is 1.81 (1.47).
Energy 8 2.74 Table 4, Panel A, presents regression summary statistics from
Materials 64 21.92 estimating equation (1) when TobinQ is the dependent variable.
Industrials 23 7.88 Regarding the levels specification, the coefficient on IRQ_R is pos-
Consumer (discretionary) 32 10.96
itive and significantly different from zero (coefficient ¼ 0.350, t-
Consumer (staples) 44 15.07
Health care 15 5.14 statistic ¼ 1.89). This finding suggests that Tobin's Q of the most
Financials 91 31.16 forthcoming IRQ firm is higher by 0.350 than that of the least
Information technology 3 1.03 forthcoming IRQ firm, which is a 23.8% increase over the median
Telecommunication services 12 4.11
Tobin's Q.
Sample: Bid-ask 292 100.00 Regarding the control variables, most notably, Cash, ROA, Beta,
and Prime have positive coefficients, which suggests that firm value
increases with cash levels, profitability, risk, and primary listing
observations from 65 (59) firms. Panel B reveals that the Financial
status. Complex has a negative coefficient, which indicates that
and Materials sectors have the largest number of observations:
more complex firms have lower firm value than less complex firms.
31.16% and 21.92% of the sample. The industry composition of the
AtGr also has a negative coefficient, which is inconsistent with
cost of capital and expected future cash flows samples is similar to
higher growth firms having higher firm value. However, untabu-
that in the bid-ask spread sample.
lated univariate statistics reveal that AtGr is positively correlated
with firm value, which indicates the negative coefficient reported
in Table 4 reflects AtGr's multivariate relation with TobinQ.
4. Results relating to liquidity, cost of capital, and expected The changes specification in Table 4 also provides support for
future cash flows the positive association between IRQ and firm value. The relation
between DIRQ_R and DTobinQ is positive and significant
4.1. Descriptive statistics (coefficient ¼ 0.117, t-statistic ¼ 1.74).
We extend Lee and Yeo (2016) by examining the association
Table 3, Panel A, provides distributional statistics for the vari- between Tobin's Q and the separate components of IRQ. Table 4,
ables we use in the levels analysis. Panel A reveals that mean and Panel B, reveals a significant positive association between TobinQ
median Bid_Ask is 6.07, and mean (median) EFCF is 4.64 (4.66). and materiality, MAT_R (coefficient ¼ 0.362, t-statistic ¼ 3.06),
Mean (median) of COC is 0.11 (0.10), which is comparable to the which is significant at a lower level than is IRQ_R in Table 4, Panel A
mean for South African firms of 0.11 reported in Dhaliwal et al. (coefficient ¼ 0.350, t-statistic ¼ 1.89). In addition, the coefficients
(2014). Mean (median) Gov and CSRPerf are 53.17 (53.94) and on connectivity, CONT_R, stakeholder relationships, STHR_R,
68.71 (77.59). Mean (median) Fog is 16.34 (16.41), which in- conciseness, CONS_R, and governance, GOV_R, are all significantly
dicates that, on average, a reader of average intelligence would need positive (t-statistics range from 1.93 to 2.15). The coefficients on
16 years of formal education to read the text once and understand its strategic focus and future orientation, SFO_R, risks and opportu-
content. Panel A also reveals that 86% of sample firms have a pri- nities, RIOPP_R, performance, PERF_R, and the basis of preparation
mary JSE listing, 45% issue a standalone CSR report in addition to an and presentation, BPP_R, are positive but not significantly so (t-
integrated report, and 6% report losses. Table 3, Panel B, presents statistics range from 1.39 to 1.59). The coefficients on organiza-
distributional statistics for the variables we use in the changes an- tional overview and external environment, OOEE_R, business
alyses, where D denotes annual change. Panel B reveals that the model, BMOD_R, and other, OTH_R, are not significantly different
standard deviation of DIRQ_R is 0.16 and the inter-quartile range is from zero.
0.19. Because IRQ_R varies between 0 and 1, together these statistics Next, we examine whether IRQ is associated with each of the
indicate there is considerable year-to-year change in IRQ_R, which three determinants of firm value. Table 5, Panel A, presents sum-
mitigates concern that IRQ_R is largely unchanged over time. mary statistics from estimating equation (1) when bid-ask spread is
Table 3, Panel C, presents Pearson and Spearman correlations the dependent variable in levels (changes), Bid_Ask (DBid_Ask).
between IRQ_R and the three dependent variables. Panel C reveals Regarding the levels specification, Table 5, Panel A, reveals that,
that IRQ_R is significantly negatively correlated with Bid_Ask in consistent with H1, the coefficient on IRQ_R is negative and
levels and changes; the Pearson (Spearman) correlations are 0.33
(0.33) and 0.13 (0.15). The correlations between IRQ_R and
EFCF are positive and significant in levels, but insignificant in
19
changes. All correlations between COC and IRQ_R are insignificantly We calculate Tobin's Q as total assets minus book value of equity plus market
value of equity, scaled by total assets (Daske et al., 2008; Lang et al., 2012). To
different from zero, except for the Spearman correlation, which is ensure the information in the integrated reports is reflected in firm value, we
significantly positive in levels. Regardless, we base our inferences calculate market value of equity using share price on the date the current year's
on multivariate analyses. integrated report is released.
Table 3
Descriptive statistics.
Panel A: Levels
N Mean Std. dev. Min P25 Median P75 Max
Bid_Ask 292 6.07 0.42 6.99 6.35 6.07 5.80 5.04

EFCF 189 4.64 1.05 1.88 3.88 4.66 5.35 6.95
COC 221 0.11 0.06 0.05 0.09 0.10 0.12 0.42
TobinQ 292 1.81 1.02 0.62 1.08 1.47 2.17 5.90
IRQ_R 292 0.52 0.29 0.00 0.27 0.52 0.77 1.00
Beta 292 1.13 0.46 0.08 0.76 1.17 1.49 2.51
CSRPerf 292 68.71 23.97 8.39 55.23 77.59 86.09 94.50
CSR_SA 292 0.45 0.50 0.00 0.00 0.00 1.00 1.00
Complex 292 5.49 1.90 1.67 4.00 5.33 6.67 9.67
Fog 292 16.34 1.75 20.05 17.59 16.41 15.21 11.78
Gov 292 53.17 16.01 12.26 43.03 53.94 63.26 86.73
LowAQ 292 0.16 0.24 0.00 0.00 0.00 0.25 1.00
Prime 292 0.86 0.34 0.00 1.00 1.00 1.00 1.00
Size 292 10.54 1.16 8.70 9.65 10.31 11.34 14.04
BTM 292 0.56 0.37 0.08 0.28 0.48 0.79 1.96
IRisk 292 1.33 0.33 0.77 1.12 1.28 1.48 2.60
Loss 292 0.06 0.24 0.00 0.00 0.00 0.00 1.00
Accr 189 0.03 0.08 0.34 0.07 0.02 0.01 0.38
ExpGr 189 0.08 0.14 0.47 0.02 0.08 0.16 0.45
Disp 221 2.33 1.32 5.14 3.10 2.48 1.87 2.51
Lev 221 0.28 0.20 0.00 0.12 0.25 0.38 0.83
LtGr 221 0.44 1.65 0.28 0.09 0.14 0.23 13.41
Panel B: Changes
N Mean Std. dev. Min P25 Median P75 Max
DBid_Ask 212 0.08 0.22 0.67 0.22 0.07 0.07 0.49

DEFCF 125 0.08 0.29 0.86 0.03 0.14 0.25 0.56
DCOC 153 0.01 0.03 0.12 0.02 0.01 0.00 0.11
DTobinQ 212 0.03 0.39 1.73 0.13 0.01 0.14 0.91
DIRQ_R 212 0.00 0.16 0.38 0.09 0.01 0.10 0.59
DBeta 212 0.03 0.33 0.76 0.19 0.03 0.25 0.95
DCSRPerf 212 1.30 5.73 12.80 1.00 0.70 2.43 20.60
DComplex 212 0.07 1.10 4.67 0.67 0.00 0.67 3.67
DFog 212 0.01 1.10 2.83 0.65 0.01 0.54 3.64
DGov 212 0.71 9.63 23.12 4.75 0.21 5.71 27.42
DLowAQ 212 0.02 0.11 0.25 0.00 0.00 0.00 0.25
DSize 212 0.15 0.25 0.64 0.02 0.16 0.29 0.88
DBTM 212 0.00 0.18 0.56 0.08 0.01 0.06 0.74
DIRisk 212 0.07 0.25 0.41 0.10 0.05 0.24 0.86
DAccr 125 0.00 0.09 0.32 0.04 0.00 0.03 0.28
DExpGr 125 0.01 0.13 0.36 0.09 0.00 0.05 0.36
DDisp 153 0.05 1.24 4.06 0.61 0.11 0.53 4.00
DLev 153 0.01 0.08 0.23 0.02 0.00 0.04 0.38
DLtGr 153 0.18 2.62 9.12 0.06 0.02 0.02 20.37
Panel C: Correlations
IRQ_R DIRQ_R
Pearson Spearman Pearson Spearman
(p-value) (p-value) (p-value) (p-value)
Bid_Ask 0.33 0.33 DBid_Ask 0.13 0.15

(0.00) (0.00) (0.06) (0.03)
EFCF 0.24 0.23 DEFCF 0.10 0.03
(0.00) (0.00) (0.28) (0.77)
COC 0.00 0.13 DCOC 0.05 0.01
(0.99) (0.05) (0.51) (0.92)
Panels A (Panel B) present descriptive statistics for all the variables used in the levels (changes) regression analyses for the sample period 2011e2014 (2012e2014) with
sufficient data to estimate the least restrictive specification of the regression equation. Panel C presents the Pearson and Spearman correlations between the dependent
variables and IRQ_R, with p-values in parentheses. All variables are defined in Appendix 1. All variables, excluding indicator variables, IRQ_R, LowAQ, Complex, and Beta, are
winsorized at the 1 and 99 percentiles.
significantly different from zero (coefficient ¼ 0.192, t- bid-ask spreads. Contrary to Amihud and Mendelson (1989), the
statistic ¼ 2.54), which indicates that firms with higher IRQ have a association between Beta and bid-ask spread is negative.
smaller bid-ask spreads and, thus, higher liquidity. The coefficient The changes specification reveals the same inferences regarding
estimate suggests that bid-ask spread of the most forthcoming IRQ IRQ. In particular, the coefficient on DIRQ_R is significantly negative
firm is 3.2% lower than that of the least forthcoming IRQ firm based (coefficient ¼ 0.184, t-statistic ¼ 4.48). Regarding the control
on median bid-ask spread. Regarding the control variables, Size variables, the coefficients on DBTM, DLowAQ, and DIRisk are posi-
(IRisk and Prime) is negatively (are positively) associated with bid- tive, and the coefficient on DComplex is negative. These findings
ask spread, which indicate that larger firms, firms with lower idio- reveal that firms with increases in the equity book-to-market ratio
syncratic risk, and firms with a secondary JSE listing have smaller and idiosyncratic risk, and decreases in accounting quality and
Table 4
Regression of Tobin's Q on IRQ.
Panel A: Levels and changes
TobinQ DTobinQ
Variable (Pred.) Coefficient t-stat. Variable (Pred.) Coefficient t-stat.
IRQ_R (+) 0.350** 1.89 DIRQ_R (+) 0.117** 1.74

AtGr 0.674** 2.08 DAtGr 0.234 1.33
Cash 1.562** 2.02 DCash 0.498 0.56
ROA 6.578*** 7.99 DROA 0.650 0.80
Lev 0.117 0.38 DLev 1.030 1.24
Beta 0.265** 2.56 DBeta 0.018 0.42
IRisk 0.055 0.43 DIRisk 0.045 0.38
Size 0.083 1.05 DSize 0.040 0.17
Gov 0.001 0.35 DGov 0.003 1.31
CSRPerf 0.001 0.38 DCSRPerf 0.004 0.59
LowAQ 0.196 0.99 DLowAQ 0.126 1.47
Complex 0.069*** 3.10 DComplex 0.017 0.82
Fog 0.036 1.18 DFog 0.018 1.28
Prime 0.411** 2.33
CSR_SA 0.073 0.71 CSR_SA indicators Yes
Div 0.065 0.62 Div indicators Yes
Industry fixed effects Yes Industry fixed effects Yes
Year fixed effects Yes Year fixed effects Yes
Adjusted R2 0.71 Adjusted R2 0.13
N 292 N 212
Panel B: IRQ components
SFO_R CONT_R STHR_R MAT_R CONS_R OOEE_R
Coefficient Coefficient Coefficient Coefficient Coefficient Coefficient

(t-stat.) (t-stat.) (t-stat.) (t-stat.) (t-stat.) (t-stat.)
TobinQ 0.303* 0.305** 0.223** 0.362*** 0.302** 0.272

(1.57) (1.93) (1.97) (3.06) (2.10) (1.23)
GOV_R BMOD_R RIOPP_R PERF_R BPP_R OTH_R

TobinQ 0.532** 0.134 0.251* 0.296* 0.288* 0.206

(2.15) (0.76) (1.59) (1.50) (1.39) (1.12)
Panel A presents regression results for equation (1) where the dependent variable is TobinQ or DTobinQ. The levels (changes) sample includes 292 (212) firm-year observations
for 79 firms. See Appendix 1 for variable definitions. All variables, excluding indicator variables, IRQ_R, LowAQ, Complex, and Beta, are winsorized at the 1 and 99 percentiles.
Standard errors are clustered by firm and by year based on bootstrapping methods using 10,000 iterations. *, **, and *** denote significance at a 10%, 5%, and 1% level based on a
two-tailed test, except for IRQ_R which is based on a one-tailed test.
Panel B presents the coefficients and t-statistics for each component of IRQ from separate regressions of TobinQ on the 12 categories of IRQ. Because the categories are highly
correlated we estimate the equations separately for each component. For brevity, the coefficients and t-statistics of control variables are not reported. All variables are defined
in Appendix 1. Standard errors are clustered by firm and by year based on bootstrapping methods using 10,000 iterations. *, **, and *** denote significance at a 10%, 5%, and 1%
level based on a one-tailed test.
complexity have increases in bid-ask spreads. Contrary to expec- PERF_R (coefficient ¼ 0.195), and STHR_R (coefficient ¼ 0.186)
tations, the coefficient on DGov is weakly positive. Taken together, have the largest relation with Bid_Ask. Materiality, MAT_R, organi-
the findings in Table 5, Panel A, indicate that IRQ is positively zational overview and external environment, OOEE_R, and risks and
associated with liquidity, a capital market effect.20 opportunities, RIOPP_R, also are significantly related to Bid-Ask, but
Regarding the bid-ask components analyses, Table 5, Panel B, Governance, GOV_R, is not.
reveals that strategic focus and future orientation, SFO_R, connec- Table 6 presents regression summary statistics from esti-
tivity of information, CONT_R, stakeholder relationships, STHR_R, mating equation (1) when cost of capital, COC or DCOC, is the
conciseness, CONS_R, business model, BMOD_R, performance, dependent variable. The statistics from the levels regression
PERF_R, basis of preparation and presentation, BPP_R, and other reveal that IRQ_R has a negative but insignificant relation with
components, OTH_R, are all significant in explaining Bid_Ask (all p- cost of capital (coefficient ¼ 0.011, t-statistic ¼ 0.57). The
values 1%). In terms of magnitude, SFO_R (coefficient ¼ 0.197), control variable coefficients indicate that higher risk firms have
higher cost of capital, whereas larger firms and primary JSE listed
firms have lower cost of capital. Table 6 also reveals that the co-
20 efficient on DIRQ_R in the changes specification is not significantly
Consistent with Daske et al. (2008) and Lang et al. (2012), our tests are based on
bid-ask spread for the current year, which acknowledges that information in the different from zero (coefficient ¼ 0.010, t-statistic ¼ 1.10). Thus,
integrated report could be revealed and incorporated in equity prices during the the findings in Table 6 provide no evidence of an association be-
year. However, proponents of integrated reporting contend that the connectivity of tween IRQ and cost of capital, which is inconsistent with H2.21
information and the presentation of a holistic view are important features of in-
tegrated reports, which suggests that investors benefit from having access to the
integrated report. As a result, we also conduct a short-window test around the
21
integrated report release date. Specifically, we measure bid-ask spread as the Although this result may appear contrary to Zhou et al. (2017), they find a
natural logarithm of the median of the daily bid-ask spread over days 5 to þ5 relation between a measure of IRQ and cost of capital only for firms with low an-
relative to the release date of the current year's integrated report. The untabulated alyst following. Because our sample includes only the top 100 JSE firms, which
findings reveal inferences similar to those based on Table 5. likely attract the most analyst attention, our results are consistent with theirs.
Table 5
Regression of liquidity on IRQ.
Bid_Ask DBid_Ask
IRQ_R () 0.192*** 2.54 DIRQ_R () 0.184*** 4.48

BTM 0.020 0.21 DBTM 0.196** 2.29
Size 0.222*** 8.21 DSize 0.001 0.01
Gov 0.000 0.27 DGov 0.002* 1.85
LowAQ 0.015 0.14 DLowAQ 0.236** 2.13
Complex 0.004 0.23 DComplex 0.027* 1.73
Fog 0.003 0.31 DFog 0.016 1.00
Beta 0.147* 1.91 DBeta 0.084 1.41
IRisk 0.176* 1.89 DIRisk 0.081* 1.83
Prime 0.168** 2.04
Loss 0.016 0.35 Loss indicators Yes
N 292 N 212

Bid_Ask 0.197*** 0.172*** 0.186*** 0.140** 0.166*** 0.135**

(2.72) (2.65) (2.65) (1.78) (2.52) (1.68)

Bid_Ask 0.118 0.131*** 0.151** 0.195*** 0.180*** 0.156***

(1.27) (2.85) (1.89) (2.86) (2.33) (2.82)
Panel A presents regression results for equation (1) where the dependent variable is Bid_Ask or D Bid_Ask. The levels (changes) sample includes 292 (212) firm-year ob-
servations for 79 firms. See Appendix 1 for variable definitions. All variables, excluding indicator variables, IRQ_R, LowAQ, Complex, and Beta, are winsorized at the 1 and 99
percentiles. Standard errors are clustered by firm and by year based on bootstrapping methods using 10,000 iterations. *, **, and *** denote significance at a 10%, 5%, and 1%
level based on a two-tailed test, except for IRQ_R which is based on a one-tailed test.
Panel B presents the coefficients and t-statistics for each component of IRQ from separate regressions of Bid_Ask on the 12 categories of IRQ. Because the categories are highly
Table 6
Regression of cost of capital on IRQ.
COC DCOC
IRQ_R () 0.011 0.57 DIRQ_R () 0.010 1.10

Beta 0.034*** 2.56 DBeta 0.008 1.24
Disp 0.003 0.63 DDisp 0.006* 1.85
BTM 0.003 0.21 DBTM 0.013 0.45
Lev 0.023 1.22 DLev 0.029 0.71
LtGr 0.004 0.44 DLtGr 0.001 0.28
Size 0.018* 2.15 DSize 0.029** 2.29
Gov 0.000 0.13 DGov 0.000 0.55
LowAQ 0.015 0.80 DLowAQ 0.010 0.56
Complex 0.003 1.54 DComplex 0.002* 1.74
Fog 0.001 0.90 DFog 0.002 1.12
Prime 0.078** 2.25
N 221 N 153
This table presents regression results for equation (1) where the dependent variable is COC or DCOC. The levels (changes) sample includes 221 (153) firm-year observations for
91 (60) firms. See Appendix 1 for variable definitions. All variables, excluding indicator variables, IRQ_R, LowAQ, Complex, and Beta, are winsorized at the 1 and 99 percentiles.
Table 7
Regression of expected future cash flows on IRQ.
EFCF DEFCF
IRQ_R (+) 0.386 1.26 DIRQ_R (+) 0.146** 2.02

ExpGr 1.140** 2.85 DExpGr 0.959*** 3.70
Accr 0.846 1.32 DAccr 0.105 1.13
Beta 0.075 0.35 DBeta 0.049 0.60
IRisk 0.361 0.96 DIRisk 0.048 0.40
Size 0.304** 2.35 DSize 0.047 0.58
Gov 0.003 0.50 DGov 0.002 0.75
LowAQ 0.228 0.59 DLowAQ 0.102 0.61
Complex 0.223*** 4.45 DComplex 0.013 0.60
Fog 0.064 1.37 DFog 0.019 0.80
Prime 0.321 0.54
N 189 N 125

EFCF 0.233 0.413* 0.508** 0.550** 0.508** 0.302

(0.71) (1.54) (1.76) (2.14) (2.22) (0.96)

EFCF 0.131 0.056 0.246 0.276 0.110 0.441**

(0.42) (0.17) (0.95) (0.91) (0.42) (1.75)
Panel A presents regression results for equation (1) where the dependent variable is EFCF or DEFCF. The levels (changes) sample includes 189 (125) firm-year observations for
59 (54) firms. See Appendix 1 for variable definitions. All variables, excluding indicator variables, IRQ_R, LowAQ, Complex, and Beta, are winsorized at the 1 and 99 percentiles.
Panel B presents the coefficients and t-statistics for each component of IRQ from separate regressions of EFCF on the 12 categories of IRQ. Because the categories are highly
However, Leuz and Wysocki (2016) note that evidence on the (coefficient ¼ 0.386, t-statistic ¼ 1.26), Table 7, Panel B, reveals
relation between disclosure and cost of capital is mixed, that the coefficients on stakeholder relationships, STHR_R, mate-
and Larcker and Rusticus (2010) find no relation between riality, MAT_R, conciseness, CONS_R, and other, OTH_R, are
disclosure and cost of capital using an instrumental variables significantly positive (t-statistics range from 1.75 to 2.22) and the
approach. coefficient on connectivity, CONT_R, is marginally so (t-
Table 7, Panel A, presents regression summary statistics for statistic ¼ 1.54). The coefficients on the other components are not
equation (1) when expected future cash flows, EFCF or DEFCF, is the significantly different from zero. Materiality, MAT_R, has the
dependent variable. Findings from the levels specification reveal largest coefficient, 0.550, which indicates that the expected future
that the association between IRQ_R and EFCF is positive, but cash flows of the most forthcoming MAT firm are 11.8% higher
insignificant (coefficient ¼ 0.386, t-statistic ¼ 1.26). Regarding the than those of the least forthcoming MAT firm based on median
control variables, the coefficients on ExpGr, Size, and Complex are expected future cash flows.
positive, which suggests that firms with higher expected growth, Together, the findings in Tables 4 through 7 reveal positive
larger firms, and more complex firms have higher expected future economic consequences associated with IRQ. We find that IRQ is
cash flows. The summary statistics from the changes specification positively related to firm value, and that this relation is largely
provide stronger evidence in support of an association between IRQ attributable to liquidity and expected future cash flows, and not
and expected future cash flows in that Table 7 reveals a significant cost of capital.22 The liquidity results support IRQ having a capital
positive relation between DIRQ_R and DEFCF (coefficient ¼ 0.146, t- market effect. Section 5 explores whether the relation be-
statistic ¼ 2.02). Combined, the findings in Table 7, Panel A, provide tween IRQ and expected future cash flows reflects a capital
some support that, consistent with H3, higher quality integrated
reports are positively associated with the expected cash flows
component of firm value.
22
Regarding the expected cash flows and the components Because we find a significant association for liquidity but not cost of capital, our
results are more consistent with a non-agency based reason for the liquidity effect
version of equation (1), although the coefficient on IRQ_R is
(e.g., Khanna & Sonti, 2004). That is, in an agency framework, liquidity affects firm
not significantly different from zero in Table 7, Panel A value by reducing the cost of capital, but our results do not support this link.
Table 8
Future operating cash flows.
CFO1 CFO2 CFOSUM
Variable (Pred.) Coefficient t-stat. Coefficient t-stat. Coefficient t-stat.
IRQ_R (+) 0.047* 1.42 0.049** 1.91 0.124** 1.97

Beta 0.018 1.24 0.030** 1.99 0.083*** 2.72
IRisk 0.020 0.58 0.045* 1.73 0.113* 1.72
Accr 0.338*** 2.65 0.270** 2.44 0.665** 2.18
RevGr 0.038 1.27 0.026 1.13 0.045 0.97
Size 0.014 1.40 0.009 0.85 0.017 0.70
Gov 0.000 0.43 0.000 0.60 0.000 0.37
CSRPerf 0.001 1.32 0.000 1.10 0.001 1.27
LowAQ 0.101*** 4.01 0.093*** 3.39 0.231*** 3.53
Complex 0.010* 1.96 0.013*** 3.01 0.028** 2.35
Fog 0.007 1.13 0.004 0.78 0.014 0.90
Prime 0.024 0.69 0.017 0.50 0.054 0.82
CSR_SA 0.001 0.09 0.004 0.30 0.001 0.05
Ind. fixed effects Yes Yes Yes
Year fixed effects Yes Yes Yes
Adjusted R2 0.32 0.35 0.36
N 285 208 208
This table presents regression results for equation (1) where the dependent variable is CFO1, CFO2, or CFOSUM. The CFO1 (CFO2, CFOSUM) sample includes 285 (208) firm-year
observations for 77 firms. All variables are defined in Appendix 1. All variables, excluding indicator variables, IRQ_R, LowAQ, Complex, and Beta, are winsorized at the 1 and 99
percentiles. Standard errors are clustered by firm and by year based on bootstrapping methods using 10,000 iterations. *, **, and *** denote significance at a 10%, 5%, and 1%
level based on a two-tailed test, except for IRQ_R which is based on a one-tailed test.
market effect, a real effect, or both. Regardless, we find that and CFOSUM), which is consistent with the long-term value crea-
connectivity, stakeholder relationships, materiality, and concise- tion concept of integrated reporting.
ness are the most consistent drivers of the significant associa- Second, we test the capital market effect channel in H5, i.e.,
tions between IRQ and firm value, liquidity, and expected future whether IRQ is associated with accuracy of analyst target price
cash flows. forecasts. If integrated reports improve investors’ ability to forecast
future cash flows more accurately, we expect a negative association
between IRQ and target price forecast errors. Thus, we estimate the
5. Expected future cash flows: real and/or capital market
relation between target price forecast error, TPE, and IRQ_R, the
effect? (H4 and H5)
common control variables in Section 3.4, IRisk, analyst following,
and analyst earnings forecast bias.23 The untabulated findings reveal
Our finding of a positive association between IRQ and expected
no significant association between IRQ_R and target price forecast
future cash flows in H3 is consistent with integrated reporting
errors. This lack of significance suggests that IRQ is not associated
improving decision making by managers, i.e., a real effect, which is
with improved analyst future cash flows forecast accuracy.
consistent with anecdotal and survey evidence (Black Sun, 2014;
Overall, these results are consistent with expected future cash
SAICA, 2015; IIRC, 2016b). However, the finding also is consistent
flows affecting firm value through managers’ real decisions, a real
with investors revising upwards estimates of future cash flows
effect. We find no evidence that this relation is driven by more
because they have a better understanding of the firm's capitals and
accurate forecasting of future cash flows, a capital market effect.
business strategy, i.e., a capital market effect. These two explana-
tions are not mutually exclusive.
First, we test the real effect channel in H4, i.e., whether IRQ is 6. Investment efficiency (H6)
positively associated with future realized operating cash flows. In
particular, we replace EFCF in our expected future cash flows To examine the association between investment efficiency, a real
analysis with ex post net cash flows from operating activities effect, and IRQ, we estimate the following ordered logit equation,
deflated by beginning-of-period total assets. We estimate separate
equations using one-year-ahead, two-year-ahead, and the sum of
Ineffitþ1 ¼b0 þ b1 IRQ Rit þ b2 Govit þ b3 CSRPerfit
one- and two-year-ahead net cash flows from operating activities,
CFO1, CFO2, and CFOSUM. Table 8 reveals a positive and margin- þ b4 CSR SAit þ b5 LowAQit þ b6 Fogit (2)
X
ally significant association between IRQ_R and CFO1 þ b7 Primeit þ bj Controlsit þ εit
(coefficient ¼ 0.047, t-statistic ¼ 1.42). The results are stronger
when we use CFO2 or CFOSUM as the dependent variable
(coefficients ¼ 0.049 and 0.124, t-statistics ¼ 1.91 and 1.97 for CFO2 where Ineff is investment inefficiency. Similar to Biddle et al. (2009)
and Navissi, Sridharan, Khedmati, Lim, and Evdokimov (2017), we
measure investment inefficiency as deviations from the expected
23
Target price forecast error is the natural logarithm of the mean of the absolute level of investment using a model that predicts investment as a
differences between target price forecasts and share price at the end of the 12- function of growth opportunities.24 In particular, Ineff is the annual
month forecast period, scaled by share price at the current year's integrated
report release date. Analyst following is the natural logarithm of the number of
analysts issuing one-year-ahead earnings forecasts for the current year between the
24
release dates of the integrated reports of the prior and current years. Analyst Consistent with prior research, we exclude financial firms from our sample
earnings forecast bias is the one-year-ahead analyst earnings forecast error, i.e., (Biddle et al., 2009; Chen, Young, & Zhuang, 2013; Lara, Osma, & Penalva, 2016).
consensus IBES earnings minus actual IBES earnings per share, divided by the ab- Because the investment efficiency literature does not estimate specifications in
solute value of actual IBES earnings per share. Consensus IBES earnings is the changes, we do not either. For this reason, and to preserve sample size, for this
median IBES one-year-ahead earnings forecasts for the current year issued between analysis, we do not limit our sample to the 80 firms evaluated by EY in all four
the release dates of the integrated reports of the prior and current years. years.
Table 9
Investment efficiency.
Model 1 Model 2
Ineff Under vs. Normal Over vs. Normal
Variable (Pred.) Coefficient z-stat. Coefficient z-stat. Coefficient z-stat.
IRQ_R () 1.290*** 3.00 1.133* 1.58 1.062** 1.95

Sales_Vol 3.771 1.56 3.785*** 3.46 0.208 0.14
CFO_Vol 17.580** 2.09 7.100*** 3.56 6.542*** 2.90
Inv_Vol 0.070 1.55 0.022 0.29 0.125 1.39
OpCycle 0.417 0.79 0.444 0.93 0.979* 1.68
LogAsset 0.124 0.39 0.075 0.25 0.090 0.44
BTM 0.201 0.23 0.525 0.56 3.722*** 4.19
Z_Score 0.124* 1.90 0.186 1.41 0.025 0.14
Tangible 0.005 0.00 0.885 0.48 1.527 1.36
CFO_Sales 0.821 0.59 2.538*** 2.73 8.188*** 6.15
Slack 0.150 0.53 0.677 1.15 1.017 1.31
Age 0.012 0.07 0.004 0.01 0.131 0.68
Cash 0.830 0.28 5.906*** 4.35 0.366 0.15
Lev 1.828** 2.41 1.469 0.95 1.669 1.50
Gov 0.004 0.44 0.011 0.31 0.019 0.88
CSRPerf 0.005 0.36 0.024 1.12 0.019 0.62
LowAQ 0.253 0.25 1.573 0.81 0.894 0.50
Fog 0.062 0.59 0.112 0.66 0.248* 1.88
Prime 0.486 0.55 0.918 0.75 0.083 0.11
CSR_SA 0.131* 1.88 0.403 0.88 0.026 0.04
Loss 1.274 1.14 0.089 0.08 0.985 0.85
Div 0.139 0.17 0.189 0.11 0.363 0.34
Industry fixed effects Yes Yes
Year fixed effects Yes Yes
Pseudo R2 0.10 0.32
N 209 209
This table presents the results of an ordered logit regression (Model 1) and multinomial logit regressions (Model 2) of Ineff on IRQ_R and control variables. The sample includes
209 firm-year observations of 64 firms. See Appendix 1 for variable definitions. All variables, excluding indicator variables, Ineff, IRQ_R, and LowAQ, are winsorized at the 1 and
99 percentiles. Standard errors are clustered by firm and by year and in the case of the multinomial logit regression on bootstrapping methods using 10,000 iterations. *, **, and
*** denote significance at a 10%, 5%, and 1% level based on a two-tailed test, except for IRQ_R which is based on a one-tailed test.
quartile rank of the absolute value of the residuals from equation Table 9 presents the results.26 Model 1 is the ordered
(3), which we estimate by Global Industry Classification Sector and logit regression where the dependent variable is Ineff. The coef-
year and require at least 10 observations in each industry-year. ficient on IRQ_R is significantly negative (coefficient ¼ 1.290, z-
statistic ¼ 3.00). This coefficient indicates that the odds of being
in the top quartile of Ineff is 0.275 times lower for observations with
Investitþ1 ¼ b0 þ b1 SalesGrowthit þ εitþ1 (3)
the highest IRQ than those with the lowest IRQ. This evidence
Invest is the sum of research and development, capital, and suggests that IRQ is associated with improved investment decision-
acquisition expenditures minus proceeds from the sale of fixed making.
assets, multiplied by 100 and scaled by lagged total assets, and Model 2 is the multinomial logit regression, which separately
SalesGrowth is change in sales scaled by lagged sales. The control compares the odds of being in the under- or over-investment
variables in equation (2) are based on the investment efficiency group to the odds of being in groups with normal investment
literature (Biddle et al., 2009; Cheng, Dhaliwal, & Zhang, 2013; levels. The first set of results of Model 2 relates to under-
Navissi et al., 2017).25 investment. The coefficient on IRQ_R is negative, which is consis-
To provide evidence on the association between IRQ and over- tent with less under-investment, but it is not significantly so
and under-investment, we rank the signed residuals from (coefficient ¼ 1.133, z-statistic ¼ 1.58). The second set of results
equation (3) into quartiles each year. The highest quartile of re- of Model 2 relates to over-investment. The coefficient on IRQ_R is
siduals represents the over-investment group, the lowest quar- significantly negative (coefficient ¼ 1.062, z-statistic ¼ 1.95),
tile represents the under-investment group, and the middle which indicates that the odds of being in the over-investment
quartiles represent the benchmark group (Biddle et al., 2009; group rather than the normal investment group is 0.346 times
Navissi et al., 2017). We estimate a multinomial logit version of lower for observations with the highest IRQ than those with the
equation (2) based on this grouping that predicts the likelihood lowest IRQ.
that a firm will be in one of the two extreme quartiles. This allows
us to estimate simultaneously the separate likelihood of over-
and under-investment.
26
Because estimating two-way clustered bootstrapped standard errors for or-
25
The controls are sales volatility, operating cash flow volatility, investment dered logit regressions is complex, Table 9 reports t-statistics based on two-way
volatility, operating cycle, assets, equity book-to-market ratio, Altman's Z-Score, clustered standard errors without bootstrapping. Untabulated statistics reveal
tangible assets, operating cash flow-to-sales ratio, firm age, financing slack, cash, that our inferences are unaffected if we use OLS with two-way clustered boot-
leverage, loss, and dividends. In addition, we include controls for governance, CSR strapped standard errors. Lang, Raedy, and Wilson (2006) and Barth, Landsman,
performance, accounting quality, Fog, listing status, and standalone CSR report. See and Lang (2008) also use OLS instead of logit. Greene (1993) shows that logit
Appendix 1 for variable definitions. models are sensitive to the effects of heteroskedasticity.
7. Additional analyses Specifically, we estimate the relation between changes in one-

year-ahead COC and changes in current year IRQ and changes in
7.1. Endogeneity the control variables. Untabulated findings reveal that the coefficient
on DIRQ_R is not significantly different from zero, which is consistent
The findings in Tables 4 through 7 are based on tests of with the findings in Table 6. We do not claim that this analysis fully
contemporaneous associations between IRQ and the four economic resolves the simultaneity concern because recent evidence suggests
consequences we examinedfirm value, liquidity, cost of capital, that the lead-lag approach is not effective in addressing simultaneity
and expected future cash flows. These association tests are not (Bellemare, Masaki, & Pepinsky, 2015; Reed, 2015). However, a
intended to, and do not, permit us to draw causal inferences. failure to find a significant association in the lead-lag cost of capital
However, descriptive research examining interesting institutional tests also could be attributable to low power because of our small
questions could inform future causal research (Chen & Schipper, sample. Regardless, we are unable to rule out completely endoge-
2016; Gow, Larcker, & Reiss, 2016). Given the growing interest in neity concerns.
integrated reporting, providing descriptive evidence on integrated
reporting seems worthwhile. Nonetheless, we consider the extent 7.2. Further tests
to which endogeneity could affect our inferences.
There are three potential sources of endogeneity that could affect Following prior research (e.g., Lesmond, 2005; Leuz &
our inferences, correlated omitted variable bias, selection bias, and Verrecchia, 2000; Levine & Schmukler, 2006), we view bid-ask
simultaneity (Larcker & Rusticus, 2010; Lennox et al., 2012). To address spread as a more direct proxy for liquidity than share turnover.
correlated omitted variable bias, we estimate changes specifications of Nonetheless, we use share turnover as an alternative proxy in the
the equations underlying the findings in Tables 4 through 7. Given that bid-ask spread version of equation (1). Share turnover is the natural
integrated reporting is mandatory in South Africa for primary JSE logarithm of the median of the daily ratio of the number of shares
listed firms, selection bias is less of a concern than when the issuance traded on the JSE to the total number of shares outstanding,
of an integrated report is voluntary (see footnotes 3, 5, 6 and 15). measured from the release date of the prior year's integrated report
We do not believe simultaneity is a concern for our inferences to the release date of the current year's integrated report. We use
for the following reasons. Regarding bid-ask spread, our hypothesis the same control variables as in the bid-ask spread version of
states that IRQ influences liquidity and we predict a negative equation (1). Untabulated findings reveal that the coefficient on
contemporaneous association between IRQ and bid-ask spread. IRQ_R is positive and significantly different from zero in the levels
However, managers can observe the firm's bid-ask spread and alter specification (coefficient ¼ 0.346, t-statistic ¼ 1.93), which is
the quality of the firm's integrated report. In particular, when a consistent with the bid-ask spread findings in Table 5. However,
firm's bid-ask spread is high, its managers may increase IRQ in the untabulated findings also reveal that in the changes specification
current year to reduce bid-ask spread in the next year. However, the coefficient on DIRQ_R is not significantly different from zero,
this reasoning predicts a positive contemporaneous association which is inconsistent with the findings in Table 5.
between bid-ask spread and IRQ. Thus, if bid-ask spread affects IRQ, As an additional test relating to firm value, we employ a modified
current year IRQ would be higher, which would bias upwards our Ohlson (1995) valuation model in levels, i.e., price, and changes i.e.,
IRQ coefficient estimate. Given that we predict and find a negative returns (see Barth & Clinch, 2009). In the levels specification, we
association, any effect of bid-ask spread on IRQ is unlikely to estimate the relation between share price on the current year's in-
explain fully our findings. Similar reasoning could be applied to tegrated report release date and IRQ_R, book value of equity per
Tobin's Q, expected future cash flows, and cost of capital.27 share, income before extraordinary items per share, and other
However, simultaneity could explain why we find an insignificant control variables. In the changes specification, we estimate the
association between IRQ and cost of capital when we predict a relation between return, which is the percentage change in Data-
negative association (see Table 6). This is because the predicted stream Total Return measured from the release date of the prior
negative contemporaneous association could be offset by the posi- year's integrated report to the release date of the current year's
tive association between IRQ and cost of capital for firms with higher integrated report, and DIRQ_R, earnings before extraordinary items
cost of capital improving their current year IRQ to reduce cost of (IB) scaled by lagged market value of equity, change in IB scaled by
capital in the next year. To address this possibility, we re-estimate lagged market value of equity, and other control variables.29 Unta-
our cost of capital changes specification using a lead-lag approach bulated findings reveal that the coefficient on IRQ_R is not signifi-
similar to that in Dhaliwal et al. (2011) and Zhou et al. (2017).28 cantly different from zero in either specification. Taken together
with our Tobin's Q findings in Table 4, the insignificant findings
associated with share prices and returns suggest that IRQ is more
27
For Tobin's Q and expected future cash flows, the effect of these two economic strongly associated with the excess of market value of assets over
consequences on IRQ likely biases downwards our IRQ coefficient estimates, but we
their carrying amounts than with share prices or returns. This excess
predict and find a positive relation. For cost of capital, Dhaliwal et al. (2011, 63) uses
similar reasoning when stating “endogeneity and self-selection issues can arise if
could reflect some IIRC Framework capitals that are not reflected in
we examine a contemporaneous relation between CSR disclosure and the cost of the financial statements, but are reflected in integrated reports.
equity capital. On the one hand, if CSR disclosure is motivated by a firm's desire to
reduce its high cost of equity capital, then we should find a positive relation be-
8. Conclusion
tween CSR disclosure and the cost of the equity capital. On the other hand, if CSR
disclosure leads to a lower cost of equity capital, then we should find a negative
relation between CSR disclosure and the cost of equity capital.” Although reverse Whereas prior research (Lee & Yeo, 2016) establishes that inte-
causality could be a concern in a lead-lag analysis because managers who expect grated report quality (IRQ) is positively related to firm value, the
the firm to perform well in the future might be more forthcoming and increase purpose of our study is to determine how higher IRQ is associated
current period integrated report quality, our tests are based on contemporaneous,
not lead-lag, associations.
28
Although the lead-lag approach is used in the literature to address simultaneity
29
concerns, it assumes the examined economic outcome is slow to react to changes in The other control variables in the levels (changes) specification are Complex,
disclosure quality. Although this may be plausible for a slowly changing outcome CSRPerf, CSR_SA, Fog, Gov, LowAQ, Prime, AtGr, Lev, (DComplex, DCSRPerf, DFog, DGov,
such as cost of capital, it may not be plausible for other economic outcomes that DLowAQ, DAtGr, DLev, indicator variables for CSR_SA) and industry and year fixed
react more quickly to changes in disclosure quality. effects.
with higher firm value. Based on the IIRC Framework, we investigate the future of integrated reporting in their jurisdictions. The IIRC may
two possible channels, i.e., a capital market channel and a real effects find our results encouraging as they promote global adoption of
channel. The capital market channel reflects the quality of infor- integrated reporting. Investors, especially institutional investors
mation provided to capital market participants and the real effects with policies for responsible investment, may find our results
channel reflects the quality of internal decision making. informative in evaluating their resource allocation decisions.
Using data from South Africa where integrated reporting is
mandatory for firms listed on the JSE, we disaggregate firm value Acknowledgments
into three determinantsdliquidity, cost of capital, and expected
future cash flowsdand find evidence that supports both channels. The financial support of the Chartered Institute of Management
Specifically, we find a positive relation between IRQ and liquidity, a Accountants (CIMA) is gratefully acknowledged. The authors would
capital market effect, and between IRQ and expected future cash like to thank EY and the College of Accounting at the University of
flows, which could be a capital market effect, i.e., improved infor- Cape Town for making their data available to us. We appreciate
mation enabling capital market participants to make more accurate research assistance from Casey Cahan and coding advice from Ken
cash flow predictions, or a real effect, i.e., improved internal Li and Dan Taylor. We are grateful for comments from two anony-
decision-making that results in higher realized future operating mous reviewers and the editor, Keryn Chalmers, Charl de Villiers,
cash flows. Our findings reveal evidence consistent with the latter Kurt Gee, Lars Hassel, Jenny Hoobler, Jeong-Bon Kim, Wayne
and not the former, which indicates the expected future cash flow Landsman, Shiva Rajgopal, Katherine Schipper, Ann Tarca, and
results are attributable to improved internal decision making, a real seminar participants at Arizona State University, Australian Na-
effect. We also link IRQ to investment efficiency and find that firms tional University, Bristol University, Exeter University, Ludwig
with higher IRQ have higher investment efficiency. Thus, consistent Maximilians University of Munich, University of Pretoria, University
with the IIRC's dual objective of improving information quality and of Waikato, Umeå University, Global Emerging Scholars Workshop
promoting integrated thinking, our findings suggest that the posi- of the American Accounting Association, paper development
tive association between IRQ and firm value is the result of both workshops of the International Association for Accounting Educa-
capital market and real effects. tion and Research in Florence and East-London, European Ac-
Our results may be of interest to managers, practitioners, counting Association Annual Congress, American Accounting
standard-setters, regulators, and investors as they evaluate the Association Annual Meeting, EMAN Conference, and the annual
merits of integrated reporting. For example, the European Commis- Alliance Manchester Business School/London School of Economics
sion, the SEC, and other regulators have expressed interest in inte- Conference. Steven Cahan and Li Chen appreciate funding from the
grated reporting and our results can inform their deliberations on University of Auckland Business School.
Appendix 1. Variable definitions
Variable Definition (data from Compustat, Datastream and Institutional Brokers' Estimate System (IBES) unless stated otherwise)
Dependent variables: H1 through H3

Bid_Ask Bid-ask spread is the natural logarithm of the median of daily (Ask e Bid)/((Ask þ Bid)/2) measured from the day after the release of the prior year's
integrated report to the release date of the current year's integrated report. Ask and Bid are the daily closing ask and bid prices.
TobinQ Market-to-book ratio of total assets calculated as total assets minus total common equity plus common shares outstanding at year-end multiplied by share
price at the release date of the current year integrated report, divided by total assets.
EFCF Natural logarithm of the mean target price forecasts issued up to 90 days after of the release date of the current year's integrated report.
COC Cost of equity capital measured as the average of the four cost of capital proxies of Claus and Thomas (2001), Gebhardt et al. (2001), Ohlson and Juettner-
Nauroth (2005), and the modified price-earnings growth (PEG) ratio model of Easton (2004). Share prices are measured at the release date of the current
year integrated report. One-year-ahead analyst forecasts issued between the release dates of the integrated reports of the prior and current years are used in
the calculation of COC. If any of the cost of capital measures is missing, we use the average of the remaining measures.
Dependent variables: H4 and H5
CFO Ex post net cash flows from operating activities deflated by beginning-of-period total assets where CFO1, CFO2, and CFOSUM represent one-year-ahead, two-
year-ahead, and the sum of one- and two-year-ahead net cash flows from operating activities.
TPE Target price forecast error is the natural logarithm of the mean of the absolute differences between target price forecasts and share price at the end of the 12-
month forecast period, scaled by share price at the current year's integrated report release date.
Dependent variable: H6
Ineff The annual quartile rank of the absolute value of the residuals from a regression of one-year ahead investment levels on sales growth estimated by Global
Industry Classification Sector and year. Investment, Invest, is the sum of research and development expenditure, capital expenditure, and acquisition
expenditure less proceeds from sale of fixed assets, multiplied by 100 and scaled by lagged total assets.
Test variables
IRQ_R Integrated report quality (IRQ) measured annually based on the EY Excellence in Integrated Reporting awards as: (firm rank e 1)/(number of firms e 1). This
gives the annual percentile rank of integrated report quality ranging between 0 and 1 each year.
SFO_R Strategic focus and future orientation component of IRQ ranked as is IRQ_R.
CONT_R Connectivity of information component of IRQ ranked as is IRQ_R.
STHR_R Stakeholder relationships component of IRQ ranked as is IRQ_R.
MAT_R Materiality component of IRQ ranked as is IRQ_R.
CONS_R Conciseness component of IRQ ranked as is IRQ_R.
OOEE_R Organizational overview and external environment component of IRQ ranked as is IRQ_R.
GOV_R Governance component of IRQ ranked as is IRQ_R.
BMOD_R Business model component of IRQ ranked as is IRQ_R.
RIOPP_R Risks and opportunities component of IRQ ranked as is IRQ_R.
PERF_R Performance component of IRQ ranked as is IRQ_R.
BPP_R Basis of preparation and presentation component of IRQ ranked as is IRQ_R.
OTH_R Other component of IRQ ranked as is IRQ_R.
Control variables
Accr Accruals calculated as the difference between net income before extraordinary items and preference dividends and net cash flow from operating activities,
scaled by total assets.
(continued )
Variable Definition (data from Compustat, Datastream and Institutional Brokers' Estimate System (IBES) unless stated otherwise)
Age Natural logarithm of the difference between the reporting date and the earliest year the firm appears in Compustat Global or Worldscope or the JSE listing
date.
Anafol Analyst following is the natural logarithm of the number of analysts issuing one-year-ahead earnings forecasts for the current year between the release dates
of the integrated reports of the prior and current years.
AtGr Asset growth measured as the one-year change in total assets from the prior financial year to the current financial year, scaled by lagged total assets.
Beta Coefficient from a firm-specific regression of daily stock returns on market returns over the past year. Because our Betas are all between 0 and 4 we do not
winsorize them (Chen et al., 2009).
Bias Analyst earnings forecast bias is the one-year-ahead analyst earnings forecast error, i.e., consensus IBES earnings minus actual IBES earnings per share,
divided by the absolute value of actual IBES earnings per share. Consensus IBES earnings is the median IBES one-year-ahead earnings forecasts for the current
year issued between the release dates of the integrated reports of the prior and current years.
BTM Book-to-market ratio of equity calculated as the book value of common shareholders' equity, divided by the number of common shares outstanding
multiplied by end-of-year share price.
Cash Cash and cash equivalents scaled by average total assets.
CFO_Sales Ratio of cash flow from operations to sales.
CFO_Vol Standard deviation of cash flow from operations scaled by average total assets from years te5 to te1.
Complex Firm complexity measured as the mean of the annual deciles of earnings volatility, number of segments, and return volatility. Earnings volatility is the
natural logarithm of the standard deviation of income before extraordinary items per share from years te5 to te1. Number of segments is the number of
product segments. If the number of product segments is not available, we use the number of geographic segments. We hand-collect data when the number
of segments is missing from Datastream. Return volatility is the standard deviation of daily stock returns over te1. If any component of Complex is missing,
we use the average of the remaining components.
CSRPerf Corporate social responsibility performance score calculated as the average of the environmental, ENVSCORE, and the social performance score, SOCSCORE,
from Asset 4.
CSR_SA Indicator variable that equals one if a firm issued a stand-alone CSR report in addition to its integrated report, and zero otherwise. We hand collect this data
item from Corporate Register (www.corporateregister.com) and firms' websites.
Div Indicator variable that equals one if the firm declares or pays a dividend in the current year, and zero otherwise.
Disp Natural logarithm of the standard deviation of one-year-ahead earnings per share forecast divided by the absolute value of the consensus earnings per share
forecast.
ExpGr Expected future growth measured as the ratio of the mean one-year-ahead analyst target price to the actual price minus one measured on the integrated
reporting release date.
Fog Robert Gunning Fog index, multiplied by minus one, of the press releases a firm announced through the JSE Stock Exchange News Service (SENS) during the
financial year, where the fog index is calculated as 0.4 x (average number of words per sentence þ percentage of complex words)
Gov Corporate governance score calculated as the average of board function, CGBF, board structure, CGBS, compensation policy, CGCP, and shareholder rights,
CGSR, scores from Asset 4.
Inv_Vol Standard deviation of Invest from years te5 to te1.
IRisk Idiosyncratic risk measured as the standard deviation of residuals from a firm-specific regression of daily stock returns on market returns over the past year.
Lev Leverage calculated as the ratio of total debt to the sum of total debt and the book value of common shareholders' equity.
LogAsset Natural logarithm of total assets.
Loss Indicator variable that equals one if income before extraordinary items is negative, and zero otherwise.
LowAQ Low accounting quality measured as the percentage over the prior four years of small earnings surprises, where a small earnings surprise is a difference
between 0 and 0.01 of net income in year t minus net income in year te1, scaled by total assets at the end of year te2. To construct LowAQ, we require at least
two earnings surprises.
LtGr Long-term growth measured as the difference between the two-year-ahead consensus earnings per share forecast and the one-year-ahead consensus
earnings per share forecast scaled by the one-year-ahead consensus forecast.
OpCycle Natural logarithm of the sum of receivables to sales and inventory to cost of goods sold multiplied by 360.
Prime Indicator variable that equals one if a firm's primary listing is on the JSE, and zero otherwise.
ROA Return on assets calculated as the ratio of income before extraordinary items to lagged total assets.
Sales_Vol Standard deviation of sales scaled by average total assets from years te5 to te1.
Size Size measured as the natural logarithm of market capitalization at the beginning of the year.
Slack Ratio of cash to property, plant and equipment.
Tangible Ratio of property, plant and equipment to total assets.
Z_Score Bankruptcy score calculated in accordance with Altman (1968).
Appendix 2. Integrated reporting guidance used in the development of the EY score sheet
2013 Dec: IIRC Final 2013 Apr: IIRC 2012 Nov: IIRC 2012 Jul: IIRC Draft 2011 Sept: IIRC 2011 Jan: IRC of SAa
Framework Consultation Draft of Prototype Framework Framework Outline Discussion Paper Discussion Paper
Framework
EY Score Sheet: 2014 EY Score Sheet: 2013 EY Score Sheet: 2012 EY Score Sheet: 2012 EY Score Sheet: 2011, EY Score Sheet: 2011
2012
Guiding principles Guiding principles Guiding principles Guiding principles Guiding principles Reporting principles
Strategic focus and Strategic focus and Strategic focus and Strategic focus Strategic focus Materiality
future orientation future orientation future orientation
Connectivity of Connectivity of Connectivity of Future orientation Future orientation Comparability and
information information information consistency
Stakeholder Stakeholder Stakeholder Connectivity of Connectivity of Faithful representation
relationships responsiveness responsiveness information information
Materiality Materiality and Materiality and Responsiveness and Responsiveness and Scope and boundary of
conciseness conciseness stakeholder stakeholder report
inclusiveness inclusiveness
(continued on next page)
(continued )
2013 Dec: IIRC Final 2013 Apr: IIRC 2012 Nov: IIRC 2012 Jul: IIRC Draft 2011 Sept: IIRC 2011 Jan: IRC of SAa
Framework Consultation Draft of Prototype Framework Framework Outline Discussion Paper Discussion Paper
Framework
Conciseness Reliability and Reliability Conciseness, reliability Conciseness, reliability

completeness and materiality and materiality
Reliability and Consistency and Comparability and
completeness comparability consistency
Consistency and
comparability
Content elements Content elements Content elements Content elements Content elements Elements to be
addressed in an
integrated report
Organizational Organizational Organizational Organizational Organizational Organizational
overview and overview and external overview and operating overview and business overview and business overview, business
external environment context model model model and governance
environment structure
Business model Business model Business model Operating context, Operating context, Understanding the
including risks and including risks and operating context
opportunities opportunities
Risks and opportunities Opportunities and risks Opportunities and risks Governance and Governance and Remuneration policies
remuneration remuneration
Governance Governance Governance Strategic objectives and Strategic objectives and Strategic objectives,
strategies to achieve strategies to achieve competencies, KPIs and
those objectives those objectives KRIs
Strategy and resource Strategy and resource Strategy and resource Performance Performance Account of the
allocation allocation allocation plans organization's
performance
Performance Performance Performance and Future outlook Future outlook Future performance
outcomes objectives
Outlook Future outlook Future outlook Report profile (scope
and boundary)
Basis of preparation Analytical commentary
and presentation
General reporting
guidance
a
The Integrated Reporting Committee of South Africa.
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The dynamics of (dis)integrated risk management: A comparative field

study
Marika Arena a, Michela Arnaboldi a, Tommaso Palermo b, *
a
Dipartimento di Ingegneria Gestionale, Politecnico di Milano, Italy
b
Department of Accounting, London School of Economics and Political Science, Houghton Street, London, WC2A 2AE, United Kingdom
Article history: Drawing on a comparative case study of enterprise risk management, and building on the literature on
Received 22 November 2012 boundary objects, this study sheds light on the ‘dynamics of (dis)integrated risk management’. Our
Received in revised form analysis of enterprise risk management in two large organisations reveals a set of pressures that un-
10 July 2017
dermine the ideals of enterprise risk management mobilised by practitioners and their promise for
‘integrated’ control practices. While the two cases show how enterprise risk management is shaped in
different forms, in both cases the attempt to create a shared context for the identification and
communication of enterprise-wide risks makes visible and active residual elements that contribute to
Keywords:
Enterprise risk management
generate dissatisfaction and calls for change to integrated risk management. The discussion of the dy-
Risk talk namics of (dis)integrated risk management contributes to extending research that is critical of proce-
Integration dural forms of enterprise risk management, as well as recent work that draws attention to the role of ‘risk
Boundary objects talk’ in enterprise risk management. We also suggest that our study of enterprise risk management sheds
Infrastructure light on some key tensions of infrastructure formation, thus contributing to recent theory-building
research that draws attention to the accretion of processes, roles, and governance structures into an
infrastructure that enables the production of accounts of performance.
1. Introduction 2010; Jordan, Jørgensen, & Mitterhofer, 2013; Kaplan & Mikes,
2016; Mikes & Kaplan, 2013; Mikes, 2009, 2011; Palermo, 2014;
Since the early 2000s, enterprise risk management has attracted Tekathen & Dechow, 2013). In contrast to many normative practi-
increasing attention as an approach to the management of risk that tioner texts, enterprise risk management ‘in action’ is a collection of
is ‘integrated’, providing in aspiration a unitary and holistic view of ideas, processes and tools that can be selectively used and assem-
the risks that an organisation as a whole is facing1 (COSO, 2004; bled by internal organisational agents in search of areas to which
Hayne & Free, 2014; Power, 2007). Normative practitioner texts they may contribute (Hall, Mikes, & Millo, 2015; Kaplan & Mikes,
describe enterprise risk management as a process that is ‘integrated 2016; Mikes & Kaplan, 2013; Mikes, 2016).
with all other aspects of the business’ (COSO, 2016: 4) and con- Building on the contrast between the promise of ‘integration’ of
tributes to ‘a systematic and integrated approach to the manage- enterprise risk management and its multifaceted field-level mani-
ment of the total risks that a company faces’ (Dickinson, 2001: 360). festations, in this paper we seek to examine whether and how a
A growing body of field-based studies challenges this promise of heterogeneous mix of tools, processes and networks of actors can
a unitary and systematic process (Arena, Arnaboldi, & Azzone, give rise to something that, even if only temporarily, becomes a
seemingly stable and coherent working ensemble.
Our analysis draws on, and seeks to develop, the literature on
* Corresponding author. boundary objects (see, for a recent overview, Bowker, Timmermans,
E-mail addresses: marika.arena@polimi.it (M. Arena), michela.arnaboldi@polimi. Clarke, & Balka, 2015). This literature draws attention to the way in
it (M. Arnaboldi), T.Palermo@lse.ac.uk (T. Palermo). which certain physical objects, processes, tools and even theories
1
We use the terms ‘enterprise risk management’ and ‘integrated risk manage-
ment’ synonymously to underscore the link between enterprise risk management
can act as ‘integrating devices’ (Carlile, 2002: 453) across organ-
and the aspiration to achieve a form of integrated risk management. In Sections 5 isational boundaries, contributing to form a ‘shared context’ among
and 6, we will refer to company-specific terms for organisation-specific manifes- dispersed groups of actors. On this basis, the literature on boundary
tations of enterprise risk management.
https://doi.org/10.1016/j.aos.2017.08.006
66 M. Arena et al. / Accounting, Organizations and Society 62 (2017) 65e81
objects encourages the exploration of how such a shared context is enterprise risk management interact and accumulate around
formed via the connecting role of heterogeneous ‘objects’,2 broadly distinct problems that characterise the flow of information and
defined to include processes, tools and ideas that people act toward knowledge sharing across organisational boundaries (Carlile, 2002,
and with (Star, 2010) and which span organisational boundaries. 2004; Spee & Jarzabkowski, 2009). In the two cases, these
Previous work on boundary objects also suggests that the for- ‘knowledge’ boundaries focus the efforts of the champions of en-
mation of a shared context is characterised by tensions that prob- terprise risk management, and facilitate the formation of a shared
lematise the ideal of integration, thereby providing relevant context around the problem of developing a common language for
insights into the analysis of enterprise risk management which risk aggregation (Alpha) or translating different concerns into a
follows. Firstly, boundary objects should be ‘plastic’ enough to common interest with the timely identification of performance
adapt to local contingencies, but also ‘robust’ enough to maintain a variances (Omega). But, in so doing, they also separate what is
common identity across boundaries (Star & Griesemer, 1989). Yet it bound, such as standardised templates (Alpha) and interactive
is far from clear how organisations can strike a balance between practices (Omega), from other possible elements and focuses of
these two features of boundary objects. Secondly, the boundary enterprise risk management, thus generating dissatisfaction with,
spanning function of boundary objects is often contingent on the or calls for reform in, existing work arrangements.
type of problems that they are meant to address. A body of litera- Discussion of these dynamics contributes to extending previous
ture in organisation studies (see Carlile, 2002, 2004; Spee & risk management research in two ways. Firstly, this study shows
Jarzabkowski, 2009) shows how different boundary objects func- how different approaches to realising the integration ideal of en-
tion only in relation to problems that arise at specific ‘knowledge’ terprise risk management, even interaction-rich approaches that
boundaries, which make knowledge sharing and communication have been proposed as an alternative to procedural forms of en-
difficult. Thirdly, boundary objects may ‘scale up’ and form in- terprise risk management (Power, 2009), are inherently unstable
frastructures which comprise stable, routinized and interlinked due to tensions that characterise the accretion of heterogeneous
work arrangements (Bowker & Star, 1999; Power, 2015; Star, 2010). elements into what appears a seemingly coherent and stable set of
In so doing, however, they may lose their flexibility and ability to interlinked tools, processes and organisational arrangements. Sec-
adapt to local needs (Star, 2010). ondly, while recent work draws attention to risk functions that are
Combining our empirical focus on enterprise risk management able to balance compliance activities with a business partnering
with these insights from the literature on boundary objects, we role (Kaplan & Mikes, 2016), this study suggests that these two
focus the analysis on the varied ‘objects’ (i.e. tools, processes, dimensions may not coexist easily, as senior risk champions tend to
organisational arrangements, ideas etc.) that constitute an ‘enter- specialise in a particular niche of risk tasks, in order to consolidate
prise risk management mix’ (Mikes & Kaplan, 2015: 29) and on how or extend their organisational footprint.
these ‘objects’ work across different organisational boundaries. On This study also has implications for work on boundary objects
this basis, we formulate the following research questions: What is and infrastructure formation (Bowker & Star, 1999; Star, 2010). An
the role of the varied ‘objects’ that constitute enterprise risk analysis of enterprise risk management provides the opportunity to
management, and the boundaries within which they lie, in the examine how heterogeneous elements, which can act as boundary
formation of a shared context for risk management? And how do objects on their own, form a seemingly stable and coherent
these varied components of enterprise risk management ‘scale up’ working ensemble that presents infrastructural properties (Star &
to form a set of interlinked work arrangements? Ruhleder, 1996; Star, 1999). Compared to previous accounting
To address questions such as these, the paper is empirically research (Power, 2015), this study goes beyond a view of infra-
based on qualitative data collected between 2004 and 2011 from structure as a technical apparatus that materialises a vague
two large organisations operating in Italy (anonymised as Alpha boundary object. By relating interlinked boundary objects to
and Omega). Drawing on the literature on boundary objects, the distinct problems with information-processing and knowledge
comparative analysis of the case material sheds light on what we sharing, we suggest that an enterprise risk management infra-
call the dynamics of (dis)integrated risk management. By using this structure is animated by a ‘master narrative’ (Star, 1999: 384),
expression, we seek to emphasise how the ideals of integrated risk which contributes to knitting together heterogeneous ‘objects’, as
management, mobilised by practitioners, seem to be subject to well as making visible and active residual elements that may re-
interrelated pressures that almost inevitably undermine their de- impose themselves over time. On this basis, while previous ac-
signers' aspirations. While our case-based analysis cannot offer counting research emphasises the stability and materiality of
comprehensive generalisations, by iterating between the empirical infrastructure (Poon, 2009; Power, 2015), this paper provides in-
material and the boundary objects literature, it is possible to outline sights on how infrastructure might always be ‘becoming or dis-
two specific dynamics that might prove useful in exploring enter- solving’ (Boland, 2015: 236).
prise risk management as a lived organisational practice in other The rest of the paper is organised in the following way: Section
settings. 2 reviews the enterprise risk management literature to identify
Firstly, the case analysis shows the difficulty of balancing the the gaps to be addressed in this study. Section 3 explains how the
‘plastic’ and the ‘robust’ components of enterprise risk manage- boundary objects literature is helpful in the analysis of the case
ment. When the first prevails (as in Omega), the ‘objects’ of enter- study material. Section 4 describes research methods and the two
prise risk management become an indistinguishable part of organisational settings, including a brief overview of their enter-
organisational control processes, undermining the production of prise risk management configurations. Sections 5e6 present the
visible evidence of risks and risk management. When the second analysis of the two case studies. Section 7 discusses key findings
prevails (as in Alpha), the ‘objects’ of enterprise risk management and the implications of the study. Section 8 provides concluding
do not suit local needs, making visible residual risk categories that comments and directions for future research.
require ad hoc management processes. Secondly, the ‘objects’ of
2. Enterprise risk management ‘in action’
2
In the rest of the article we refer to ‘objects’ with inverted commas to under-
Practice articles and prescriptive frameworks suggest that en-
score our specific use of the term as ‘work arrangements that are at once material terprise risk management differs from traditional concepts of risk
and processual’ (Star, 2010: 604). management because different types of risks are addressed in an
M. Arena et al. / Accounting, Organizations and Society 62 (2017) 65e81 67
‘integrated’ way (COSO, 2004; DeLoach, 2004; Dickinson, 2001; consist of different layers of roles and work modes, carried out by
ISO, 2009; Meulbroek, 2002). These aspirations run in parallel to different groups of risk managers. On this basis, some risk functions
the spread of increasingly codified and formalised risk manage- are able to balance compliance and business-oriented activities via
ment processes and roles in any organisation (Hopwood, 2009; a ‘dual risk management’ process.
Miller, Kurunma €ki, & O'Leary, 2008; Power, 2007). One example In order to shed light on how enterprise risk management is
is the COSO (2004) Enterprise Risk Management (ERM) frame- shaped in different forms of assemblies, previous work has focused
work, which represents by means of a, now famous, cube how mainly on the role of organisational change agents in search of
enterprise risk management integrates different activities (from areas which they may contribute to. Less is known on the role of the
objective setting to risk monitoring), includes a variety of risk design features and functionalities of the varied elements that
types (e.g. strategic, operations, reporting, compliance), and is constitute any particular enterprise risk management mix.3 A
affected by people at every level of the organisation (see Hayne & notable exception is the study by Jordan et al. (2013), which shows
Free, 2014). that the ‘format and furniture’ of risk maps help to mediate
The ideal of ‘integration’ through the inclusion of a wide range of different concerns and co-orient the work of different actors
activities, functions and risks under a common umbrella is often involved in inter-organisational project management. However,
related to improvements in organisational ends, such as value this study remains limited to the distinctive qualities of a single tool
creation and targets achievement (Beasley & Frigo, 2007; DeLoach, of enterprise risk management (risk maps) without addressing the
2004; Dickinson, 2001; Meulbroek, 2002). But enterprise risk relational effects of the different components of an enterprise risk
management can also encompass an increased emphasis on risk management ‘mix’, i.e. how the functioning of risk maps is inter-
quantification, the use of tools that allow risk aggregation, and a related with risk identification processes, networks of risk cham-
risk-based view of internal control that encourages the inclusion of pions, risk assessment templates, risk categorisation models etc.
non-quantifiable risks (see, for a review of normative and technical In the analysis which follows we seek to address this gap in our
texts, Mikes, 2009). knowledge about the way in which enterprise risk management is
In the case-based analysis which follows, not only do we show shaped in different ways, extending studies that focus on the role of
how these different aspirations can be related to organisation- internal change agents, as well as previous work focusing on single
specific manifestations of enterprise risk management, but we tools such as risk maps. This requires a discussion of how we can
also seek to explain how enterprise risk management is shaped conceptualise the different components of an enterprise risk
through different assemblies of practices, adding to a growing body management mix, their functioning as a means for achieving
of field-based studies on enterprise risk management ‘in action’ integration and the way in which they may interact and accumulate
(Arena et al., 2010; Jordan et al., 2013; Mikes, 2009; Palermo, 2014; over time to form a seemingly coherent and stable working
Tekathen & Dechow, 2013; Woods, 2009). A common theme across ensemble. To this end, as discussed in the next section, the litera-
these studies is that enterprise risk management is constituted of a ture on boundary objects provides a useful reference point, which
variety of processes, tools and organisational roles and their in- focuses the analysis on the ‘objects’ of enterprise risk management,
terrelations with control practices, such as performance measures, the boundaries within which they lie, and the dynamics of infra-
planning and control cycles and project management (see, for a structure formation.
review, Mikes & Kaplan, 2013).
Previous studies have developed different explanations for the
3. ‘Objects’, boundaries and infrastructure formation
way in which such a varied mix of practices is shaped in different
ways. Studies informed by a contingency perspective (Mikes &
The concept of boundary objects has been developed by Star and
Kaplan, 2013, 2015; Woods, 2009) evoke ideas of a ‘fit’ between
colleagues to explain cooperation in the absence of consensus
the form of enterprise risk management and a number of contex-
among groups of heterogeneous actors (Bowker et al., 2015; Star &
tual variables such as technology, regulatory requirements, and
Griesemer, 1989; Star, 1989, 2010). This notion suggests that certain
types of risks. Other studies (Arena et al., 2010; Mikes, 2009, 2011)
processes, events, physical objects, theories and ideas act as ‘inte-
suggest that risk managers search for areas of contribution and
grating devices’ (Carlile, 2002: 453), creating a shared context
strategically shape the boundaries of their areas of work. Such
among people who have ‘different goals, time horizons, and audi-
strategies, and their outcomes, are contingent upon different views
ences to satisfy’ (Star, 1989: 46).
on the applicability of measurement tools (Mikes, 2009, 2011). For
For the purpose of this study, the boundary objects literature
example, where ‘quantitative enthusiasm’ prevails, risk managers
can be used to focus the analysis on the varied ‘objects’ that act as
have a relatively narrow area of responsibility. Risk measurement
integrating devices and contribute to form a shared context for risk
and modelling are kept separate from strategic decision-making. In
management. Specifically, the analysis that follows focuses on three
contrast, if ‘quantitative scepticism’ prevails, risk managers expand
dimensions. The first refers to the qualities of the objects that
their areas of responsibility, guiding strategic decisions by means of
constitute enterprise risk management. The boundary objects
their experience and intuitive sense of danger.
literature draws attention to those ‘objects’, in Star's sense of work
Recent studies have further developed our understanding of the
arrangements or ‘workstreams’,4 which are plastic yet robust
work of risk experts. Hall et al. (2015) argue that some risk man-
enough to provide a common structure to enterprise risk
agers tend to focus on compliance activities and regulatory re-
quirements, via formalised and standardised tools; others embrace
a more business-oriented role through sustained interaction with 3
For example, the recent study of risk managers' ‘tool-making’ by Hall et al.
front-line personnel, via simple tools rather than sophisticated risk
(2015) sheds light on the development of risk tools, but it is still premised on the
models. Mikes (2016) shows how some senior risk champions tend assumption that experts can develop, adapt and use tools to expand their organ-
to be sceptical about compliance roles and use ‘risk talk’, namely ‘an isational footprint.
4
organizational discourse about risk issues ranging from task- The concept of workstream has been developed in order to emphasise the
related problems and perceived organizational weaknesses to dynamic and most likely unstable flows of organisational activities, that contribute
to defining and addressing new areas of regulatory and managerial intervention,
concerns about resource planning’ (Mikes, 2016: 255), in order to such as the risk cultures of financial sector organisations (Palermo et al., 2017). Like
facilitate risk management as part of day-to-day business activities. Star's notion of ‘objects’, the term workstream emphasises the processual nature of
Finally, Kaplan and Mikes (2016) emphasise how risk functions something that people act toward and with.
management and, at the same time, respect local contingencies and The literature on infrastructure can enrich our analysis of en-
uses. We expect such interplay between the plastic and the robust terprise risk management in two ways. Firstly, it provides an
components of boundary objects to be central to the construction of additional conceptual lens that helps to address a theoretically
a shared context for risk identification, communication and man- interesting (and problematic) aspect of enterprise risk manage-
agement, similar to the findings of previous studies of accounting ment. Enterprise risk management could be theorised as a
practices (see Briers & Chua, 2001; Dechow & Mouritsen, 2005). boundary object that connects the work practices of dispersed
The second dimension refers to the relation between boundary groups of actors. Yet, as discussed in Section 2, enterprise risk
objects and organisational boundaries. A body of literature in management ‘in action’ can also be seen as a collection of hetero-
organisation studies (Bechky, 2003; Carlile, 2002, 2004; Spee & geneous elements, such as risk maps, risk categorisation models
Jarzabkowski, 2009) shows how boundary objects help to over- and risk sheets, which could act as boundary objects on their own.
come different problems that arise in relation to information pro- Studying enterprise risk management as infrastructure, therefore,
cessing and knowledge sharing in organisations. In so doing, this can help to capture how such heterogeneous elements may form
literature draws attention to different ‘knowledge’ boundaries relatively stabilised ‘regimes and networks of boundary objects’
(Spee & Jarzabkowski, 2009: 226). A ‘syntactic’ boundary refers to (Bowker & Star, 1999: 313).
the problem of developing a common language in order to transfer Secondly, the literature on infrastructure sheds light on a key
knowledge across different organisational functions and groups of point of tension that is likely to characterise the formation of en-
people. A ‘semantic’ boundary refers to the problem of developing a terprise risk management as a seemingly stable and coherent set of
common meaning in order to translate domain-specific informa- work arrangements. According to Star (2010) and others (Boland,
tion into a form that is accessible across different parts of an 2015), infrastructure formation can be related to pressure to stan-
organisation. A ‘pragmatic’ boundary refers to the problem of dardise the plastic aspects of boundary objects, in order to obtain
developing a common interest among groups of people with work arrangements that function across different social worlds.
opposing views, transforming existing knowledge in a way that This might mean that the resulting infrastructure loses the ability to
reconciles conflicting perspectives. respect and flexibly adapt to local contingencies. As shown in in-
Caution should be taken with the use of ‘knowledge’ boundaries formation systems research (Star & Ruhleder, 1996; Star, 1999), an
as clear-cut and separate categories in the context of this study. infrastructure tends to embed a ‘master narrative’ that makes active
Previous field studies have shown how enterprise risk management recalcitrant objects and residual categories that do not fit seam-
‘in action’ is not simply a matter of implementing a neutral tech- lessly. This outcome might generate new attempts to seek closure
nique that transfers risk information, but it is also contingent upon via standardisation, leading to the continuous tacking back and
situational politics, professional struggles, and conflicts over forth between more or less ‘robust’ designs.
resource allocation (see Mikes & Kaplan, 2013). On this basis, In turn, our study of enterprise risk management can
problems that arise at so-called syntactic, semantic and pragmatic contribute to recent accounting research that has started to use
boundaries are likely to overlap, at least partially, in the assembling the notion of infrastructure (see Kornberger, Pflueger, &
of enterprise risk management. Mouritsen, 2017; Kurunma €ki & Miller, 2013; Power, 2015). Spe-
Bearing in mind these words of caution, the three categories of cifically, building on Star's work, a recent study by Power (2015)
‘knowledge’ boundaries can be used as a heuristic to track how a on research impact provides further insights on the relation be-
single boundary object or multiple boundary objects are connected tween boundary objects and infrastructure. Power emphasises the
to key problems that the champions of enterprise risk management accretion of managerial roles, organisational processes and tools to
focus on in their work activities. In fact, as illustrated in Section 2, explain how an ambiguous policy object, such as research impact,
previous research (Hall et al., 2015; Mikes, 2009, 2011, 2016) shows gets stabilised across different organisational sites. As stated by
how risk managers tend to focus on certain sets of problems in Power (2015: 50) ‘for stability there needed to be what can be
order to consolidate or extend their organisational footprint. Some provisionally labelled as an “impact infrastructure”’. In line with
focus their work activity mainly on the development of formal earlier accounting research that alluded to infrastructure (Poon,
processes and models for risk categorisation and representation, 2009), the study by Power portrays infrastructure as a technical
thus reflecting concerns with syntactic boundaries. Others focus apparatus, gradually built up via the accumulation of roles, rules,
instead on the translation of risk information into something that is routines and governance structures, which is essential for trans-
easily understood by business managers and develop processes forming ideational boundary objects into ‘a new kind of routinized
through which different actors come together and express their fact about the organization’ (Power, 2015: 50). An analysis of en-
concerns (Mikes, 2016), thus reflecting concerns related mainly to terprise risk management provides the opportunity to extend
semantic and pragmatic boundaries. these insights, by shedding light on how stability may (or may
The third dimension of analysis refers to the dynamics of mul- not) be achieved when infrastructure formation entails the
tiple boundary objects. Star and colleagues suggest that boundary assembling of multiple, ideational and material, boundary objects,
objects may ‘scale up’ into a boundary infrastructure that brings rather than the translation of a single boundary object into a
into play ‘stable regimes of boundary objects’ (Bowker & Star, 1999: technical apparatus.
313). Inspired by their work on classifications and standards, they To conclude, the boundary objects literature directs our inquiry
emphasise how an infrastructure enables multiple sets of users and in three ways. Firstly, it focuses attention on the formation of a
uses and becomes ‘real’ only in relation to organised practices5 (Star shared context via plastic yet robust enough ‘objects’, which span
& Ruhleder, 1996; Star, 1999). But they also outline some key organisational boundaries. Secondly, it helps to track different sets
properties of infrastructure: embeddedness into other structures; of problems that people act toward and with. Thirdly, it draws
visibility only upon breakdown; links with conventions of practice; attention to the dynamics through which heterogeneous elements
and uses that reach beyond a single event or one-site practice. may (or may not) ‘scale up’ into a seemingly stable and coherent
working ensemble. These three themes will inform our case-based
analysis of enterprise risk management. Before moving to the
5
For example, the cook sees the water system as a working infrastructure that
empirics, the following section describes the research methods and
helps prepare a meal, while the city planner considers the water system a variable the two research sites.
in planning processes.
4. Research approach and methods put us in a position of trust, giving us access to internal documents.
We were also able to attend public presentations, given by com-
This study is based on a comparative case-study research pany representatives, and then engage with them informally. Public
approach (Stake, 1994). We use qualitative data collected between presentations of our preliminary findings and informal discussions
2004 and 2011 in two organisational settings, called Alpha and with experts in the field contributed to refining the empirical
Omega for reasons of confidentiality. Alpha (with around 3000 analysis.
employees at the time the study was carried out) is an Italian We operated at three levels in analysing the empirical material.
company operating in the electricity and gas markets, overseen by Firstly, we set the context of the study, identifying influential
an international group and a cluster of government-controlled events, actors and what appeared to be pivotal ‘objects’ in enter-
utilities. Omega (with around 2500 employees) is the Italian sub- prise risk management. Drawing on previous studies (e.g. Mikes,
sidiary of a large international group (hereafter referred to as the 2009), we explored how the design of specific work arrange-
Parent Company), that operates in the fields of energy, transport ments could be related to different ways of conceptualising the
and healthcare, providing a variety of electrical engineering and meaning of ‘integrated’ forms of risk management. Secondly, we
electronics-related products and services. analysed what happens when enterprise risk management designs
are put to work, with a particular focus on how the varied ‘objects’
of an enterprise risk management mix engaged the users. At this
4.1. Data collection and analysis
stage, we also tried to search for evidence of different kinds of
problems that arise at ‘knowledge’ boundaries (Carlile, 2002, 2004;
Data collection took place within a period of significant change
Spee & Jarzabkowski, 2009). Thirdly, we focused on what appeared
in Italian corporate governance requirements. In the early 2000s,
to become stable sets of work arrangements, collecting material on
new regulations and codes of conduct connected internal control
their configuration as well as interviewees' perceptions of their role
and corporate governance to risk assessment and management, as
and use.
had happened in the UK over the preceding decade (Power, 2007).
In 2004, from public documents and discussions between the re-
searchers and senior managers, it appeared that both Alpha and 4.2. The two research sites
Omega attempted to transform their risk management initiatives,
embracing an ‘integrated’ approach. We were able to explore The two case-study settings went through relevant organisa-
further changes to risk management and control processes by tional and institutional transformations over the period of our
carrying out two sets of formal interviews. At Alpha, we met a range study. From the late 1990s onwards, Alpha experienced changes in
of people in 2008 and between 2010 and 2011. Similarly, at Omega, market conditions, business activity and organisational and
we met managers and members of staff from different departments governance structure. The transition from a state monopoly system
and hierarchical levels, between 2006 and 2007 and between 2010 to a liberalised market (under the impetus of European Union
and 2011. legislation), and strategic decisions, such as a greater involvement
Table 1 summarises the number of interviews and their timing in exploration and production (E&P) activity abroad, implied an
over the research period. Each interview took between fifty mi- acceptance of greater volatility in economic results.
nutes and two and a half hours and, when permission was granted, Moreover, in 2005, two entities (a large international company
was recorded and transcribed. Before carrying out the interviews, and a cluster of local government-controlled utility companies)
information on the two organisations was collected from a variety acquired the joint control of Alpha and its organisational structure
of sources, including financial reports, newspapers and practice was re-organised around three top managers (the ‘top three’).
journals. Our long-term involvement with the two organisations Several corporate services functions (e.g. Legal Affairs, Human
Table 1
Interviewees.
Case Interviewees 2004e2005 2006e08 2010e11
Alpha Head of Internal Audit X X

Head of Risk Office X
Risk Manager (responsible for ERM) X X
Senior Manager, Strategy & Planning X
BU Director X
Manager, BU X
Manager, Strategy X
Manager, Business Development X X
Senior Manager, Planning & Control, central staff X X X
Controller, Planning & Control, central staff X
Controller, Planning & Control, central staff X
Controller, BU X
Omega Chief Risk Officer (CRO) X X
Chief Financial Officer (CFO) X X
Controller, Head of Accounting & Finance X X X
BU Director X
Manager, BU X X
Opportunity & Risk (O&R) Manager X
Head of Internal Audit X X
Internal Auditor X
Internal Auditor X
Controller, central staff X X
Controller, central staff X
Controller, BU X
Resources, Regulation) reported directly to the Chief Executive around twenty-five focal points, one for each business unit and
Officer (CEO), who also had management responsibility for the corporate services function. Focal points formally reported to se-
organisation as a whole. Other corporate services, such as Strategy, nior managers (e.g. BU Directors and Heads of corporate services
Planning & Control (P&C) and Information Technology, reported to functions) with a dotted reporting line to the Risk Office.
the Chief Financial Officer (CFO). The operating business units Moving to Omega, as part of the first extensive structural re-
(BUs), which were organised around two ‘business lines’ (produc- organisation, which happened in 2003, the Parent Company
tion and sale of electric power; production and sale of natural gas mandated the appointment of a new person (hereafter: the
and crude oil), reported to the Chief Operating Officer (COO), a Controller), with responsibility for the Accounting Finance & Con-
newly-created role. trol Unit (AFCU). Under the Controller, an annual budgeting process
Similarly, Omega was affected by a dynamic process of mergers became the central tool within the planning and control cycle. A
and acquisitions, an expanding global presence and frequent risk management function, headed by a newly-appointed manager
involvement in large public-private projects. The company also with prior experience in the planning and control area (hereafter:
went through two major re-structures, both of which related to Chief Risk Officer, CRO), was placed under the Controller's re-
corporate scandals. The first was in 2003: in response to a bribery sponsibility. The AFCU became formally responsible for a process
scandal that led to significant media exposure, Omega's Parent known as Opportunity & Risk Management (O&RM). O&RM aimed
Company mandated an extensive re-organisation. Omega, similar to to support BU managers in the identification of the risks affecting
other local subsidiaries worldwide, was re-structured into central the achievement of their objectives. Similar to the case of Alpha,
corporate services functions (e.g. Finance and Control, Supply O&RM was supported by different tools, such as a risk model and
Chain, Logistics, Legal Affairs) and business units (BUs) responsible risk maps, as well as a network of local risk champions called Op-
for key products. In doing so, the Parent Company established portunity and Risk (O&R) managers. O&R managers acted as facil-
greater control over group-wide target settings and evaluation of itators during risk workshops that supported periodic risk reviews
the geographically dispersed subsidiaries. within the business units.
In 2007, Omega's group faced a difficult legal dispute, whereby To summarise, this overview of the two case-study organisa-
the acquisition of new contracts and bidding for public tenders tions suggests that both Alpha and Omega tried to make two forms
became problematic. These problems ran in parallel to a perceived of risk management operable, ERM and O&RM respectively. These
increasing heterogeneity in structures and processes at the sub- can be related to the concept of enterprise risk management,
sidiary level. A new restructuring process was mandated by the although in different ways. The next sections present our detailed
Parent Company. This led to the current matrix configuration, analysis of these two forms of enterprise risk management. In line
composed of three broad business sectors (automation, energy and with our discussion of the boundary objects literature, following an
health), further divided into divisions and market segments, and illustration of the designers' ambitions for a form of integrated risk
geographical clusters, grouping local subsidiaries (e.g. Omega be- management, we focus on the ‘objects’ that constitute ERM and
longs to the South-West Europe cluster). O&RM, the boundaries being spanned by them, and the dynamics
through which these ‘objects’ form an infrastructure for the iden-
4.3. Risk management in the case-study organisations tification and management of key risks.
In 2006, Alpha established a Risk Office, employing 20 people 5. Alpha: a standard process for holistic risk management
and coordinated by a senior manager (hereafter: Head of Risk Of-
fice) reporting to the CFO. The Risk Office had responsibility for two ERM in Alpha can be related to ambitions to achieve a form of
sets of activities. The first, energy risk management, contributed to holistic risk management and a risk-based internal control imper-
centralising a set of activities previously dispersed across different ative (Mikes, 2009). The Risk Manager emphasised the presence of
business units, which aimed to protect economic results from a ‘common framework’ for risk-related communication that en-
fluctuations related to price and exchange rate risks. The second, sures ownership and accountability for a broad range of enterprise
called Enterprise Risk Management (ERM), stemmed from an risks. Drawing on the COSO (2004) framework, which was explicitly
earlier attempt, coordinated by Planning & Control (P&C) and the acknowledged as the key reference point in ERM design, ERM
Internal Audit (IA), to compile an enterprise-wide catalogue of key encompassed ‘all risks to the achievement of corporate objectives’
risks. (corporate presentation), even those elements that could not be
Responsibility for ERM was allocated to a manager with previ- readily quantified and aggregated (e.g. strategic failure, environ-
ous experience in the risk function of another energy company mental risks, reputational risks).
(hereafter this person will be referred to as the Risk Manager).
Under the Risk Manager, a revision of the existing risk identification 5.1. The ‘objects’ of ERM: a ‘library’ of categories
exercise was carried out, leading to a new risk identification and
assessment process, which followed the COSO (2004) framework. The constitutive elements of ERM reflected an ambition to make
Risk identification and assessment was based on an annual process, it comprehensive and increase the number of connections between
formally aligned to the timing and outputs of the financial planning different organisational processes and functions. Corporate docu-
and control cycle (e.g. strategic guidelines, performance targets, ments and interviews reveal four core ‘objects’ of ERM: a group risk
operational and financial plans), and its purpose was to identify and model (hereafter: risk model), risk sheets, risk maps and focal
assess the risks that could prevent the achievement of BU objec- points.
tives. Risk identification and assessment was based on the use of a The risk model provided a broad list of risk categories that, in
range of tools (e.g. a risk categorisation model, risk maps) that re- the view of the Risk Manager and his staff, could affect corporate
flected an overall ambition to be comprehensive and to increase the objectives. In 2010, it included approximately 80 items, ranging
number of connections between different organisational processes from political and regulatory risks to commercial and industrial
and functions. A network of actors at focal points, who had no partnerships, as well as climatic events (see Fig. 1). A corporate
professional qualifications in risk management, were supposed to webpage emphasised the centrality of the risk model in ERM,
act as a conduit between BU managers and Risk Office personnel, in suggesting that ‘the risk model provides a reference framework and
order to support risk identification and assessment. There were a common language for the process of identifying, assessing,
Fig. 1. Alpha's risk model (adapted from corporate documents and simplified for readability).
controlling and reporting priority corporate risks’ (emphasis planning package approved by the Board of Directors. Regardless of
added). the organisational level, the maps were based on the same design.
‘Risk sheets’ were excel spreadsheets that supported the esti- The vertical axis conflated impact and likelihood into a single
mation of the impact, likelihood and level of control (e.g. mitigating dimension called the ‘level of risk’. The horizontal axis represented
actions put in place) for each risk. A separate box specifically sup- the ‘level of control’, which referred to the extent to which miti-
ported the calculation of impact, outlining dimensions such as gating factors had already been put in place (see Fig. 2). The Risk
financial, reputational, environmental, and temporal effects. Each Manager argued that this design helped to capture more informa-
risk sheet contained additional boxes that could be filled in with tion, compared to maps based on impact and likelihood only,
information about the causal mechanisms that might contribute to contributing to the reinforcement of the links between the Risk
the materialisation of a risk, the hypotheses used to define likeli- Office, business units and other staff functions, such as Internal
hood, impact and level of control, the name of the risk owner, a Audit.6
synthetic risk description, and a more detailed explanation of why Finally, a network of focal points assisted senior managers (e.g.
the risk should be identified as a priority. A box on the top right of BU Directors and the Heads of corporate services functions) to fill in
the spreadsheet also asked the respondent to state which category ERM paperwork. Focal points were chosen by the Risk Office, with
of the risk model had been used as a reference point. In so doing, the help of senior managers, among those already acting as refer-
the risk model acts as a communication device that sits in the ents for other processes related to planning, compliance, and health
middle across organisational areas, supporting information- and safety, in order to increase collaboration across different
processing and transferring (Carlile, 2002) via categorisation and organisational areas. Indeed, one focal point mentioned how he
standardisation (Bowker & Star, 1999). liaised with the Risk Office in relation to ERM, but he also acted as
Risk maps summarised key risks, both at the business unit level referent for compliance processes related to anti-fraud legislation
and at the corporate level. The BU risk map was the key output of as well as for the coordination of planning activities at the BU level.
the risk identification and assessment process within business On this basis, he worked with the Risk Office, Internal Audit and the
units, usually showing the 7e8 risks identified as a ‘priority’ by BU
Directors and Heads of corporate services functions. At the corpo-
rate level, two maps synthesised ‘priority’ risks for Alpha in relation 6
A note on internal risk management guidelines outlined how results of audits
to budgetary targets and business plans' strategic objectives performed by the audit department were the main source of information for the
respectively. The corporate risk maps were included in the financial control dimension.
categorise each risk sheet and to use risk maps to filter out non-
relevant risk information:
‘Only those that are part of the top right quadrant are reported
to the executive committee. There is a map, something like a
matrix, which is something like this [sketching a risk map], and
the ones here [pointing to the top right quadrant of the map]
will be reported.’
Local interactions and discussions about specific issues were not

central concerns. One interviewee, with work experience as focal
point, emphasised how they used to spend time on documents'
format and structure to improve readability and comparability:
‘We try to represent our data in the best possible way, even
using colours. You may think this is silly, but it is not. This is
[name BU omitted], shown as light blue. This is the institutional
colour of [name BU omitted]. This helps top management, when
they look at the reports, to have a clear idea of what they are
looking at.’
At the Risk Office level, the Risk Manager also emphasised the
problem of risk aggregation. Their main task consisted of filtering
Fig. 2. Alpha's risk map (adapted from corporate documents): the size of the bubbles BU risk information to delineate a set of ‘priority corporate risks’
represents economic impact, if quantifiable. that could be included in risk maps related to the business plan and
budget. At the time the field work was carried out, Alpha had
around 25 organisational units (including both business units and
central P&C unit.
corporate services functions) involved in the annual risk identifi-
To summarise, drawing on the seminal paper on boundary ob-
cation and assessment process. This meant that the Risk Office
jects (Star & Griesemer, 1989), the ambition to form a shared
received several risk sheets (around 200 in 2010), posing the
context for risk identification and communication in Alpha is sup-
challenge of identifying ‘priority’ risks at the corporate level.7
ported by the design of ‘a complex of objects from which things
To address this problem, central ERM staff benefited from the
necessary for each world can be physically extracted or configured
use of standardised documents. As the templates were the same,
for local purposes, as from a library’ (Star & Griesemer, 1989: 404,
risk maps and risk sheets could be used as ‘syntactical “processing”
emphasis added). The risk model provides a comprehensive ‘li-
tools’ (Carlile, 2002: 453) to transfer BU information in a master
brary’ of categories that should cover many, if not all, aspects of
document that contained all items considered a ‘priority’ by busi-
Alpha's business activity. The risk sheets allow for the inclusion of
ness units.8 In order to select key risk information, the Risk Man-
quantifiable and non-quantifiable risks, and provide a standardised
ager stressed the availability of a set of interlinked documents
template that aims to address the different local needs and con-
containing detailed information about the local risk assessment
tingencies of organisational units. The risk maps can be related to
process. Firstly, thanks to the work of focal points, each risk could
not only business concerns with the level of risk (impact multiplied
be easily related to the unit that flagged it in the risk identification
by likelihood), but also concerns with internal controls, auditing
process. On this basis, the Risk Office could identify and aggregate
and compliance activities. Finally, focal points contribute to
similar issues that affected different business areas. Secondly, since
enhancing the number of connections between ERM and organ-
each risk could be related to a category of the risk model, the Risk
isational functions, thanks to their pre-existing boundary spanning
Office could identify items that referred to the same category. The
roles.
following quote emphasises the importance of the links between
the risk model and risk sheets in addressing the challenges posed
5.2. The boundaries of ERM: filtering and aggregating risks by risk aggregation:
‘When it is time to assess a risk, we always ask to outline the risk
The previous section's description of the design of the risk
model's risk category … and this helps to aggregate data. Since
model, risk sheets, risk maps and a network of focal points suggests
we receive more than 200 risk sheets, and perhaps at a first sight
that different information requirements are specified in advance of
they might look like very different things, it might appear a
the risk identification and assessment process through a ‘library’ of
really complex task to aggregate all these risks. And in fact it is a
categories such as the risk model and standardised templates such
complex task. But [the risk model] provides a key support in
as risk sheets, which should cover local specificities while main-
doing this exercise […] by filtering [risks] according to each
taining a ‘robust’ framework for information-processing (Star &
category of the risk model, I will immediately see the ones that
Griesemer, 1989). On this basis, ERM can be related to concerns
can be potentially aggregated. Then, following further analyses
with syntactic boundaries, whereby the development of a ‘shared
and reclassifications, we obtain the risk map.’ (Risk Manager)
syntax’ helps to transfer risk information across the organisation
(Carlile, 2002, 2004; Spee & Jarzabkowski, 2009).
When asked about the role of ERM, BU managers stressed the
use of standardised templates and an overarching ambition to
aggregate local risk information. One senior manager stated that 7
In 2010, the business plan's corporate risk map included 17 items.
ERM was about answering the Risk Office's questions via risk 8
In 2010, this process was carried out manually, and the Risk Manager
sheets. In doing so, they were reminded to use the risk model to emphasised how it consumed most of his staff's time.
Thirdly, when the drafts of the budget and business plan were were more sceptical about its ‘managerial’ relevance. As put by one
available, the Risk Office could assist top managers (CEO, CFO and senior manager, ERM had little implications for ‘enterprise risk
COO) to select the final list of ‘priority corporate risks’, drawing on management’ (emphasis put by the interviewee). Another manager
the ‘impact’ section of the risk sheets. For example, at this stage, stated that he did not use ERM at all and had nothing to say about
risks with higher short-term financial impact could be selected for the topic.9 In 2010, even the Risk Manager expressed doubts about
the corporate map related to the budget, while items with long the role of ERM in dealing with operational problems at the BU
term and non-readily quantifiable effects could be selected for the level. The Risk Manager juxtaposed the ‘integrative’ nature of ERM
business plan's risk map. with its potential ‘managerial’ use, by stating that ERM was an
This use of the ‘objects’ of ERM suggests a strong focus on the ‘integrative methodology, but not a managerial tool’.
standardisation of the inputs and outputs of the risk identification Similar to one of the case-study organisations analysed by Hall
and assessment process. By processing business knowledge et al. (2015), the volume of required documentation and the focus
through a common set of interlinked templates, local risk infor- on lengthy procedures were central in critiques of ERM. One
mation could be aggregated, becoming part of wider systems of interviewee emphasised how ERM was a long process ‘which does
accountability. For example, since 2008, key risk factors have been not happen overnight’, while another sarcastically referred to ERM
publicly made available in annual reports, using the headings of the and risk maps as the thick documents ‘with the balls’10. Others
risk model: ‘external environment’ risks (e.g. legislative and regu- expressed concerns with ERM outputs. One interviewee suggested
latory risks), ‘process’ risks (e.g. project management, commercial that senior managers might live well without ERM, given that the
activities), and ‘strategy and planning’ risks (e.g. development and ERM's key risks tended to be ‘obvious’:
acquisitions).
‘When [name of Risk Manager] provides this set of information
Moreover, the use of interlinked sources of information
about business units, he says something rather obvious. We
contributed to generating new data for the Risk Office. The Risk
know that [omitted] are about to expire and therefore this is our
Manager emphasised how ‘backstage’ (his words) documents hel-
first risk. It would be strange otherwise, right? [Omitted] is our
ped to create aggregated statistics about ERM. This data provided
second risk … we talk about that all day at the coffee machine.’
an abstract overview of changes in the ERM process rather than
(Senior manager e Strategy & planning, specific risk informa-
information about specific risks, providing reassurance that ERM
tion omitted)
was an ongoing process within the business:
‘For example this [pointing to a slide of a Risk Office's document]
In addition to uncovering these perceived limitations of ERM
shows the trends in risk assessment in the past four years, with
outputs, our final set of interviews provided insights as to how the
114 risks in the first year, then 156, 204, 202, so it looks like the
design features that contributed to make ERM a comprehensive risk
number of risks became stable in the last years. But there is
information processing infrastructure, made of a set of interlinked
always a percentage of new risks while others have been closed
work arrangements, delimited in a narrow way what kind of risks
compared to previous years. There is a reasonable turnover.
could be included in the risk identification and assessment cycle.
Then we have the risks identified by the different business units,
For example, despite their inclusion in the risk model, interviewees
the percentage compared to the [categories of the] risk model,
pointed out how ‘energy risks’ and ‘extreme events’ were managed
the map itself with trends compared to the previous year, and
through specific ad hoc processes and reporting lines. In both cases,
then the detailed risk sheets.’ (Risk Manager)
specific design choices, that contributed to making ERM a
comprehensive process that addressed problems of risk aggrega-
Overall, this discussion of ERM in Alpha suggests that elements tion and communication, contributed to making visible energy
such as risk maps, risk sheets, the risk model, and networks of risks and extreme events into ‘residual categories’ (Star, 2010).
organisational actors such as focal points came to be seen and used Interviewees contrasted the quantifiable nature of energy risks
as a unitary working ensemble. When asked about risk identifica- with the presence in ERM of assessment criteria that were
tion and assessment in his area of responsibility, in 2010, one BU perceived to be based on ‘sentiment’ (BU Director) rather than
manager indicated ERM as the ‘standard process’, which has been measurement. A BU manager also pointed out the contrast between
used for several years to summarise key corporate risks. This type of the need for frequent reporting on energy risks and the lengthy
response is suggestive of a degree of stability and standardisation of ERM reporting cycle. In the case of extreme events, during a dis-
ERM, something that recalls the notion of infrastructure used in cussion of risk map design with the Risk Manager, it was high-
recent accounting research to indicate stable sets of managerial lighted how risk maps conflated impact and likelihood into a single
processes and roles that contribute periodically to the production dimension. This meant that high impact and low likelihood risks
of (performance) data (Power, 2015). As suggested by Star and were treated in a similar way to medium impact and medium
colleagues (Bowker et al., 2015; Star & Ruhleder, 1996; Star, 1999), likelihood risks. Therefore, as put by the Risk Manager, ‘from this
such an infrastructure is relational and generative, being used to map we tend to lose sight of extreme risks’. Despite an aspiration to
account for BU risks, to generate synthetic risk information for achieve a holistic risk management process, he pragmatically rec-
external stakeholders, and also to develop statistics internally used ognised how ‘extreme events’ had to be managed locally via ad hoc
by the Risk Office. However, as explained in the following section, processes:
the formation of such infrastructure runs in parallel with scepticism
‘These phenomena are not managed through ERM's risk map.
about what ERM, as a ‘standard process’, can do for managers and
The company has fairly advanced and sophisticated structures
also makes visible ‘residual categories’ (Star, 2010) that do not fit
and safety operational procedures. These are placed at a more
seamlessly.
local level, for instance within each single plant. These are risks
5.3. The residual in ERM and the problem of managerial relevance
While ERM works as a framework for risk aggregation, 9

E-mail communication, September 2010.
providing a common language to transfer risk information across 10
In Italian, ‘balls’ is used in an expression that could be translated as ‘what a
different functions and levels of the organisation, interviewees bore’ in English.
that, by their nature, need to be managed at the level of The risk model aimed to structure risk workshop discussions by
operations.’ focusing attention on three elements. A risk could be considered a
risk if (1) it led to performance variances; (2) it had an explicit
cause; (3) and it had explicit effects. Corporate guidelines
To conclude, ERM in Alpha contributes to establishing a ‘shared
emphasised the importance of defining the triggering event of the
syntax’ to aggregate risks, and standardising the collection and
risk (cause) and the outcome if the risk materialised (effect).
processing of risk information. Risk tools and local risk champions
Corporate documents provided concrete examples of what could
represent local risk information in a way that can be aggregated and
work or not as a risk description. For instance, ‘global competition’
visually represented at different levels of the organisation and at
had to be specified, indicating where the new competitors might
different stages of the planning and control process. But the way in
come from (e.g. emerging markets), which market they were likely
which the ‘objects’ of ERM are enacted as a set of interlinked ele-
to enter (e.g. lighting), what could make them competitive (e.g.
ments contributed to making visible ‘residual categories’ (Star,
lower price and cost structure) and what the consequences could
2010), that did not fit seamlessly in ERM. The following section il-
be (e.g. loss of market share). This and other examples contributed
lustrates how an enterprise risk management assembly is formed in
to making risk a concrete focus of discussion.
another large company operating in Italy. Despite differences in the
Conversations that took place during risk workshops were
two settings and their specific manifestations of enterprise risk
captured through risk maps, which represented the impact and the
management, it will be shown that, like Alpha, this second case also
likelihood of each risk. The owners of the O&RM process were
shows how attempts to create a shared context for risk identifica-
sceptical about the possibility of producing an accurate snapshot of
tion and communication end with the formation of new
risks in a given moment of time. Corporate documents suggested
boundaries.
that risk map(s) were a means of charting risk trends over time.
Graphically, risk maps had specific inscriptions indicating the
6. Omega: enterprising risk and opportunity management movement of risks from one period to another and capturing the
effects of mitigating actions (see, for one example, Fig. 4).
An internal document (shown to the researchers in 2006) stated A network of O&R managers supported the use of the risk
that O&RM sought to develop a ‘management-oriented’ approach model, risk maps and the running of risk workshops. O&R man-
that addresses both ‘risks and opportunities’ with the ultimate goal agers were considered a part of the wider ‘accounting, finance and
of ‘creating economic value’. The CRO stressed that O&RM was control’ community of practice. Rather than sitting in the middle
shaped around their needs and that ‘risk management starts from between different groups of people (e.g. risk managers, line man-
our processes and problems’. agers), they were ‘plugged’ into the existing network of business
Compared to Alpha's ‘holistic’ ambition, risk management controllers (Mikes & Kaplan, 2013). They were chosen by the CRO
guidelines explicitly excluded certain domains, such as internal (jointly with the Controller) within the staff reporting to the
controls and compliance activities from the enterprise risk man- Controller. Corporate documents showed that they received spe-
agement ‘perimeter’. O&RM revealed a narrow focus on value cific training in order to be able to sustain a conversation about risk
creation and performance measurement, therefore reflecting the management with BU managers. Side notes on a risk management
‘enterprising’ aspect of integrated risk management: a managerial presentation emphasised where they had to dedicate greater
tool that is ‘positive, entrepreneurial and explicitly in the service of attention. For instance, they had to ‘set the scene by giving the
wealth creation’ (Power, 2009: 850). A conceptualisation of risks as interviewee a brief overview of what we mean by risk and risk
performance variances contributed to reinforcing this aspiration of management’ before entering into the details of risk handling
O&RM. The first page of the risk management guidelines for busi- strategies.
ness units started by asking managers about the EBIT they were To summarise, this overview of the ‘objects’ of O&RM suggests
expecting to achieve, and continued by asking how ‘solid’ their that the ambition to form a shared context for risk identification
forecast was to potential variations. and communication is supported ‘via a lowest common denominator
which satisfies the minimal demands of each world by capturing
6.1. The ‘objects’ of O&RM: a ‘common denominator’ for ‘risk talk’ properties that fall within the minimum acceptable range of all
concerned worlds’ (Star & Griesemer, 1989: 404, emphasis added).
Similar to previous studies on enterprise risk management (see In contrast to Alpha's comprehensive ‘library’ of risk categories and
Mikes & Kaplan, 2013), different organisational arrangements, tools, risk champions focus on carving out a space for interaction
processes and tools constituted O&RM. All together, they provided between risk management and business unit managers, by bringing
a basic structure for sustaining organisational conversations that about ‘risk talk’ that focuses on a specific and yet common concern
can be related to the notion of ‘risk talk’, since risk management for managers: performance variance problems (Mikes, 2016).
problems are framed as business problems around performance
variances, through a language that is familiar to BU managers 6.2. The boundaries of O&RM: debating and contextualising risks
(Mikes, 2016). Interviews and corporate documents reveal four core
‘objects’ of O&RM: a risk categorisation model, risk workshops, risk The Controller and the CRO were not concerned about variation
maps and a network of local risk champions. in the tools used locally to collect and store risk information,
The risk model provided a shared format for solving a specific although they emphasised the pivotal role of the concept of risk as
problem: how can business managers identify potential perfor- performance variance. As put by the CRO:
mance variances? The risk model outlined a limited number of
‘Each business unit has its own way to see risks and opportu-
broad areas of possible concern (see Fig. 3), ranging from opera-
nities … this led to a situation in which one enters on the
tions to human resource management. These were used as the basis
intranet and finds different tools. Then it is up to me and them
for discussing factors with a positive or negative effect on expected
[O&R managers] to choose the ones that we prefer. But the
performance during workshops, which took place at least on a
method in theory is the same. All risks should be codified in a
quarterly basis, although additional sessions could be held to
given way based on their impact on profits.’
address specific issues, such as the acquisition of a new client or the
change in scope of an ongoing project.
Fig. 3. Omega's risk categorisation model (adapted from corporate documents).
Fig. 4. Omega's risk maps (adapted from corporate documents).
Like ‘quantitative sceptics’ (Mikes, 2009, 2011), senior risk ‘Risk workshops provide an opportunity for debate. I see them
champions and O&R managers were wary of the limitations of risk as places where we can discuss business threats with other
tools. In their view, simply transferring risk information through people and think about possible mitigating actions. It's more
standardised tools that create a common language would not help like a brainstorming session. […] sometimes, listening to other
to cope with the frequently changing conditions surrounding risk people, you start seeing the problem from a different point of
identification and the potentially conflicting concerns of managers view and you can think about issues that may not have seemed
from different units. Risk trends, highlighted for instance via spe- significant in the beginning.’ (Manager)
cific inscriptions on risk maps, could be understood only through
‘risk talk’ (Mikes, 2016), and the ensuing additional information
Besides flexibility in the input of risk mapping (i.e. issues to be
collected from business units during informal exchanges and
discussed), the rules for defining the output of risk mapping were
formal meetings, such as risk workshops. In other words, the
also applied flexibly. According to one O&R manager, if probability
combination of different work arrangements and tools such as risk
increased to more than 75% or more than 50% with a corresponding
workshops and risk maps contributed to forming new knowledge
‘significant’ impact, then business units were encouraged to insert
about risks, thus reflecting a focus on addressing problems that
that item in their budget forecast to explain possible variations in
arise at semantic and pragmatic ‘knowledge’ boundaries (Carlile,
expected profits. But the insertion of a risk into the budget forecast
2002).
was also based on contextual information about the specific risk,
It is possible to further elaborate this point by focusing on risk
which could be debated during risk workshops:
identification and mapping at both the BU and central office level.
At the BU level, risk mapping via risk workshops provided an op- ‘What I insert into the reporting is not the expected value
portunity to contextualise and specify the meaning of risk infor- [impact x likelihood] … when we might lose an order that is
mation. The combination of risk mapping, risk workshops and worth 100 with 30% probability, if we win [the order] we
templates such as the risk model increased the number of issues have þ100, if we lose it, we have 100. Therefore, the impact
that could be discussed. The risk model and semi-structured helps to define the best and worst scenario and it is more sig-
follow-up interviews were used by O&R managers to support risk nificant in order to think about possible profit variances.’ (O&R
identification and the discussion of risk exposure and mitigating manager)
actions. In this context, the simplicity of the risk model helped O&R
managers to focus discussion on management problems, rather
Such an approach led to constant uncertainty about whether
than on a pre-defined list of risks. The meetings often ended up as
something could turn into a ‘significant’ risk or not. Frequent re-
‘brainstorming’ sessions, where risk knowledge generated in
views of risk information helped to address such uncertainty about
different functional domains could be shared, and even altered:
the output of the risk identification process. Within business units, we do not really believe in all the projects put in place … we
opportunities and risks were reviewed at least monthly with the recognise that these projects can have some risks and will not
support of O&R managers: lead to expected performances.’ (CRO)
‘There is a quarterly reporting of any variation in risks and op-
portunities to the central risk office. This is mandatory […] but To summarise, this discussion of the uses of the ‘objects’ of
then there are all the monthly updates … if there are variations O&RM suggests the formation of a stable working ensemble, which
in the portfolio of risks and opportunities. As mentioned before, extends the functionalities of what its constitutive tools can do
the O&RM process is something porous that can become part of individually. For example, within O&RM, risk maps do not only
the budget forecast and this is the reason why this instrument is represent risks but they also help to make sense of specific business
converging towards budgeting. In fact, risks and opportunities problems, through a process where context is constantly added via
that are in our portfolio but are not significant enough to be the discussion of different information sources. In such a context,
inserted in the forecast can turn during the year into variation in the boundaries between risk identification and assessment and
our expected profits.’ (O&R manager) other control processes blur, as shown in the following quote:
‘O&RM is a budgeting tool. We use it to identify risks related to
At the central office level, risk mapping information was com- the BU targets. We are always required to think about targets
bined with other sources of data in what the Controller and the CRO and risks as two related aspects.’ (BU Director)
called the ‘performance barometer’. This ‘barometer’ consisted of
the illustration of ‘major exposure’ risks, together with information
stemming from performance-related instruments, such as the
quarterly forecasts that are part of the budgeting process, which 6.3. The residual in O&RM and the problem of visibility
were continually (even daily) monitored by the Controller, the CRO
and O&R managers. The barometer contributed to what was The previous section has shown how senior risk champions can
defined as a ‘holistic knowledge basis’ (Controller) that helped to contribute to developing an interactive-rich form of enterprise risk
monitor progress against the performance expectations of the management, by bringing about ‘risk talk’ that focuses on key
Parent Company. managerial concerns, such as resource planning and target
The work of O&R managers fed this ‘barometer’. Daily interac- achievement (Mikes, 2016). O&RM reveals some infrastructural
tion with BU managers helped O&R managers to develop knowl- qualities (Bowker & Star, 1999; Star, 1999). O&RM becomes an
edge of BU processes, which was used to stimulate the discussion almost invisible and taken-for-granted conduit for the discussion of
with and among BU managers and build common knowledge about business problems. It is also generative of new information and
key risks, risk exposure and possible mitigation initiatives. This work practices that serve different goals, as shown by the use of
knowledge served the purpose of ensuring that the central ac- O&RM by the Controller and the CRO as a way to ‘give nice sur-
counting and finance function was able to capture and interpret prises’ to the Parent Company but also to monitor and challenge BU
relevant business dynamics in a timely manner, and then support managers.
decision-making processes at both corporate and BU level. Just as Our final set of interviews in Omega suggested a radical change
reviews of risk mapping at the BU level helped to refine under- in the risk management landscape, with the inclusion of what had
standing of significant events for budget forecasts, the central of- been previously left separate, internal controls and compliance
fice's barometer helped to anticipate expected changes in the activities, in the perimeter of what became known as ‘Risk & In-
feasibility of achieving year-end performance targets. ternal Control’ (RIC). Corporate documents graphically emphasised
At the central office level, the Controller and the CRO used the how RIC housed both enterprise risk management and the internal
information collected by O&R managers to uncover potential op- control system, and that their functioning was mutually interre-
portunities for acquiring additional revenue streams or avoiding lated. As put in a corporate presentation, risk identification via
losses. If successful, additional revenues were placed in a reserve at enterprise risk management can highlight gaps in internal controls
the corporate level and could be used to compensate for organ- and support the identification of control requirements; in turn, the
isational areas where results were not in line with the Parent monitoring of control requirements may help to identify unmiti-
Company's expectations. The use of the management reserve was gated risks.
relevant, as a large part of the managers' incentives was linked to This shift in the focus of risk management happened in parallel
achieving the targets set by the Parent Company. O&RM thus hel- to significant organisational changes that followed a new corporate
ped performance targets to be reached across Omega as a whole, scandal.11 While our case-based analysis does not allow us to ac-
making the ‘enterprising’ ideal of integrated risk management count for all the complex interventions that occurred at the Group
operational (Power, 2009). level following the corporate crisis, two changes can be related to
The management reserve is also indicative of the flexible ra- our specific interest in the dynamics of O&RM within Omega.
tionales for risk identification and mapping (Jordan et al., 2013). In Firstly, the Parent Company started to set up a wide-ranging
the hands of the Controller and the CRO, together with other governance and compliance system, with the explicit aim of mak-
sources of information, risk mapping became a tool for coping with ing the connections between compliance, internal controls and risk
the challenging objectives imposed by the Parent Company (as put management processes more visible for the whole Group and for
by the Controller, ‘we give them “nice” surprises’), but also a means external stakeholders. The effects of this corporate change pro-
of interrogating and challenging business units. Risk mapping gramme can be traced by the appearance, in risk management
became a way to deal with pragmatic boundaries and address the documents, of descriptions of new ‘objects’ such as a ‘Policy &
potentially negative consequences of knowledge generated in one Control Masterbook’ that illustrates the ‘global control re-
domain for another domain (Carlile, 2004): quirements’ that Omega had to comply with.
Secondly, the Parent Company mandated a comprehensive
‘Here we have a tool where we put all our risks. When we do our
planning, we understand that either there are things that not
everybody knows or that business units are telling a lie, or that 11
See Section 4.2.
organisational restructure with the aim of ‘increasing transparency’ extended Risk Categorization Model allows a broader view on
(presentation to financial analysts) within its varied business and potential risk sources.’
geographical areas. As anticipated in Section 4, the structure of the
group was re-organised according to key business areas and
The underlying aspiration to make the monitoring of internal
geographical clusters. Such organisational change had important
control requirements and compliance activities more visible and
implications for the two senior managers who coordinated O&RM
traceable was further reinforced by two key features of the revised
e the Controller and the CRO.
approach to enterprise risk management. The first refers to the
The Controller became responsible for planning and control
design of explicit links between the risk model and the ‘Policy &
activities for the south-west European region. In 2011, he reflected
Control Masterbook’. The use of the same categories as headings
bitterly on the effects of this change for him and his staff (down-
(and sub-headings) in both the risk model and the Policy & Control
sized to two people), suggesting that they became ‘ectoplasms’ who
Masterbook contributed to aligning enterprise risk management
‘do not really exist’ given their limited engagement with business
information with the monitoring of control requirements. The
activities.12 A document illustrating his area of responsibility
second feature refers to the use of standardised questionnaires,
showed clearly how data collection and aggregation took most of
operated by central RIC personnel and made available via the
his time. The Controller and his staff had to keep track and
corporate intranet, as a replacement for the face-to-face interaction
homogenise information relating to different countries, businesses
of risk workshops. The CRO considered this change crucial for
and market segments. In addition, they also had responsibility for
maintaining a visible audit trail of the risks flagged by business
cluster level analyses of market trends and competitors. When
units and related control requirements.
asked about O&RM, the Controller suggested that the only
To conclude, the case of Omega shows a different dynamic
remaining trace was a ‘blank sheet’, included in a monthly perfor-
compared to Alpha, whereby an initial minimal design is extended
mance report, where BU managers could describe factors affecting
and flexibly adapted to the discussion of a variety of performance
performance variances. However, in the absence of a network of
issues. Drawing on the literature on boundary objects (Carlile,
local risk champions and dedicated discussion fora, the Controller
2002, 2004; Spee & Jarzabkowski, 2009), the emphasis on solving
and his staff could not really follow up on the use of these docu-
common concerns and scepticism about the possibility of repre-
ments. He described their role as ‘maieutic’, with the hope of
senting risks accurately are indicative of work done on pragmatic
stimulating reflection without actively engaging with BU managers
rather than syntactic boundaries. But similar to Alpha, the devel-
in ‘risk talk’ (Mikes, 2016).
opment of a specific form of enterprise risk management makes
In contrast, the CRO redefined the boundaries of his professional
visible gaps in the landscape of risk management controls. In the
autonomy and organisational role, becoming the Head of Omega's
case of Omega, internal controls and compliance activities, some-
Risk & Internal Control (RIC) department. This shift suggests that
thing that was initially placed outside the enterprise risk man-
the work of risk experts is interrelated with situational politics and
agement ‘perimeter’, had to be made more visible. On this basis,
the opportunity to ‘plug’ in control gaps left unaddressed (Mikes &
similar to Alpha, the case of Omega suggests that the construction of
Kaplan, 2013). The CRO repositioned himself in a role closer to the
a shared context for enterprise risk management makes visible
‘compliance expert’ illustrated by Mikes and colleagues (Hall et al.,
residual categories that eventually re-impose themselves.
2015; Kaplan & Mikes, 2016), given the emphasis on the stand-
ardisation of risk tools and the acknowledgement that the Parent
Company and external stakeholders were the main beneficiaries of 7. Discussion
aggregated risk information. By using the COSO-ERM framework as
a point of reference, the CRO emphasised the standardisation and This paper began from the tension between integrated risk
external orientation of enterprise risk management as follows: management aspirations for a unitary working ensemble and the
mix of varied elements that constitute enterprise risk management
‘We now have a more standard approach, where the aim is to ‘in action’. To explore this tension, our theoretical background
provide objective assurance over the risks of business processes. draws attention to the way in which heterogeneous elements
In this way, there is an alignment between our internal and contribute to form a shared context for risk management. In this
external risk reporting.’ (Emphasis added) section, we first summarise the dynamics that characterise the
formation of such a shared context. Then, we discuss these dy-
Corporate documents portray the new approach as an namics in relation to our theory-driven focus on ‘objects’, bound-
‘enhanced’ version of enterprise risk management compared to the aries and infrastructure formation. In so doing, we illustrate the
past, and reveal an aspiration to address syntactic boundaries, study's implications for research on risk management ‘in action’
which may prevent the escalation of risk information through the and boundary objects.
organisational hierarchy (Carlile, 2002, 2004; Spee & Jarzabkowski,
2009). For example, as shown in a slide illustrating the revised risk 7.1. Forming a shared context
model, risk identification is now based on a categorisation model
that ‘establishes a common risk language for [Omega]’, and ‘pro- In both cases, we initially observe the design of a form of en-
vides the foundation for risk aggregation’. A side note of the same terprise risk management with specific functionalities and features.
presentation stressed how the new approach replaced O&RM, by In Alpha, ERM provides a shared context as a comprehensive ‘li-
stating that: brary’ of categories (Star & Griesemer, 1989: 404) from which
people in different parts of the organisation can borrow what best
‘The categories of the current [Omega] Risk Categorization
suits their needs. BU managers can relate their own work to some of
Model do not correspond one-to-one to the previous risk cate-
the risks that constitute the risk model, some of the criteria used for
gories of the former Opportunity and Risk Management. The
risk assessment and some of the pre-existing boundary spanning
roles of focal points. In Omega, O&RM provides a ‘lowest common
denominator’ (Star & Griesemer, 1989: 404) across different
organisational functions and levels. Risk workshops, concrete ex-
12
The Controller eventually left the company a few months later. amples and a network of risk champions reinforce a common
concern with performance variances, but also elicit connections arise at syntactic, semantic and pragmatic boundaries may overlap.
with local information and processes. In Alpha, the Risk Manager seems to concede that, despite the
Drawing on the comparative analysis of the two cases, it is ambition to provide a comprehensive ‘library’ of categories for risk
possible to further discuss the qualities of these different ‘objects’ of identification, knowledge about certain risks needs to remain
enterprise risk management and how they work in relation to localised. This suggests that the building up of a common language
different boundaries (Carlile, 2002, 2004). As famously stated by for risk identification and assessment is intertwined with the
Star and colleagues, boundary objects are plastic enough to adapt to pragmatic development of a ‘common interest’ between the Risk
local needs and yet robust enough to maintain a common identity Office and other parts of the organisation: ERM provides a standard
across sites (Bowker & Star, 1999; Star & Griesemer, 1989; Star, language to cater for some risks, while others are managed more
1989). But what does it mean to be robust and plastic enough in operationally. In Omega, the Controller and the CRO explicitly
the two case studies of enterprise risk management? In Omega, we acknowledge that the use of different types of risk identification
observe a central concern with a concept of risk as financial per- and representation tools within the business units is not a major
formance variance, but flexibility in the use of risk identification issue. And yet they still rely on a minimal risk categorisation model
and assessment tools. O&RM provides a (minimal) common ground in order to ensure consistency and comparability in the discussion
that elicits corporate actors to add context to risk conversations. of risks across different areas, thus reflecting, at least partially,
Risk workshops, risk maps, and the possibility of adding sources of concerns with syntactic boundaries.
information from other processes suggest that the context of en- Bearing in mind these words of caution, the use of the categories
terprise risk management is uncharted and needs to be filled in by of ‘knowledge’ boundaries in our analysis is useful in two ways.
O&RM's users. Firstly, it sheds light on different sets of problems, which organ-
In Alpha, there is greater flexibility in conceptualising what isational actors seem to consider their main focus of action when
constitutes risk, with the inclusion of both qualitative and quanti- using the varied ‘objects’ of enterprise risk management, thus
tative elements in ERM. But ERM is premised on people in different reinforcing the view that boundary objects are something that
parts of the organisation filling out the same forms and categorising people act toward and with (Star, 2010) rather than things. Sec-
risks under the same labels. The ‘objects’ of ERM are designed to ondly, the ‘knowledge’ boundaries categories help to reveal how a
reproduce a context that has been mapped by the Risk Manager and focus on different problems that arise at ‘knowledge’ boundaries
his network of focal points. We have a set of pre-defined risk cat- can be related to the accumulation and interaction of ‘objects’ with
egories and a set of pre-defined templates to be used to register similar characteristics. In Alpha, the ambition to develop a ‘common
some of those risk categories as ‘priority’ risks. Compared to Omega, language’ for risk aggregation is made operable via standardised
we observe ‘robustness’ both in terms of how the same templates templates and taxonomies (e.g. the risk model, risk sheets, risk
are used across sites and also how they relate to a context that is maps), which provide comprehensive and ‘robust’ classification
centrally pre-defined by ERM's designers. and categorisation rules. In Omega, the ambition to create new
When such abstract designs are put to work, the original as- cross-functional risk knowledge is realised through concrete ex-
sembly is adjusted over time. In Alpha, a number of residual cate- amples and problem-solving methods that can be used flexibly in
gories (e.g. energy risks, extreme events), which cannot be fitted different parts of the organisation. As shown in both case studies,
into the context envisaged by ERM designers, are made visible and these elements of enterprise risk management are enacted as
active through the enactment of ERM's ‘objects’. In Omega, in interlinked sets of ‘objects’ that organisational actors work with, in
contrast, things are added to make enterprise risk management order to aggregate risk information (Alpha) or identify performance
work, as shown by examples such as the performance barometer at variances (Omega). For instance, in Alpha, the risk model helps to
the central office level. There are efforts to add context to risk in- use risk sheets as a categorisation tool; the combination of infor-
formation so that it acquires a common meaning in relation to mation from the risk model and risk sheets contributes to select a
specific problem areas. These two dynamics of enterprise risk limited number of ‘priority corporate risks’ in corporate risk maps.
management produce counterintuitive outcomes. The narrowing To summarise, this section has shown how empirical material
down of ERM in Alpha can be related to greater visibility in various can be theorised in the light of core concerns in the boundary ob-
parts of the organisation of what is seen (with scepticism by many) jects literature such as the balance between plasticity and robust-
as a ‘standard process’. The expansion of O&RM in Omega can be ness, and the relationship between boundary objects and
related to less visibility of risk identification and assessment spe- organisational boundaries (Carlile, 2002, 2004; Spee &
cifically and the blurring of the boundaries between risk manage- Jarzabkowski, 2009; Star & Griesemer, 1989; Star, 1989, 2010).
ment and budgeting. The sections that follow build on this characterisation of the case
This characterisation of the two case studies draws attention to material to discuss the study's contributions to research on risk
the unfolding of enterprise risk management as an assembly of management ‘in action’, boundary objects and infrastructure
‘objects’ that work jointly to identify and communicate enterprise formation.
risks. But it also provides insights into elements that are excluded
or that do not quite fit seamlessly in O&RM and ERM. In order to 7.2. The dynamics of (dis)integrated risk management
explain what holds the various ‘objects’ of O&RM and ERM
together, our analysis foregrounds the role of ‘knowledge’ bound- Our analysis of the formation of a shared context contributes to
aries (Carlile, 2002, 2004; Spee & Jarzabkowski, 2009). Drawing on previous literature on enterprise risk management. We observe one
Carlile's terminology, we suggest that ERM in Alpha mainly sup- form of integrated risk management which strives to develop an
ports work on syntactic or information-processing boundaries and ambition to develop a ‘standard process’ (Alpha). This reminds us of
the creation of a common language for individuals to represent and attempts to deploy the standardised set of tools and processes that
transfer their domain-specific risk knowledge. O&RM in Omega are commonly regarded as risk management good practices (Miller
instead mainly supports work on semantic and pragmatic bound- et al., 2008; Power, 2007). We also observe another form of inte-
aries and the translation of different concerns into a common grated risk management which strives to connect people and
problem (i.e. understanding risks as performance variances). problems via ‘risk talk’ (Omega). This can be related to recent work
Compared to previous work (Carlile, 2002, 2004; Spee & on risk management as a sustained organisational conversation
Jarzabkowski, 2009), our analysis suggests that problems that (Mikes, 2016). The case of Omega suggests that risk champions can
carve out a space for interaction between risk management and BU an aid to decision-making (Alpha). In contrast, when efforts to
managers, by bringing about inconspicuous ‘risk talk’ that focuses overcome semantic boundaries and accommodate different func-
on task-related problems, organisational weaknesses, resource tional interests are present, the building up of a common language
planning and target achievement (Mikes, 2016). is not a primary concern (Omega). In short, problems that charac-
Previous work shows how these forms of enterprise risk man- terise different ‘knowledge’ boundaries cannot be satisfied simul-
agement can be subject to conceptual critiques and organisational taneously by the same set of interlinked ‘objects’.
challenges. A procedural focus in risk management has been This observation suggests that the boundaries of enterprise risk
heavily criticised for being disconnected from the ‘real’ manage- management play an ambivalent role. While they facilitate the
ment of risk (Hopwood, 2009; Power, 2009). Recent work on ‘risk formation of a shared context, they also create competing visibil-
talk’ shows how this approach requires a specific type of mentality, ities that cannot be satisfied simultaneously, potentially generating
open to experimentation and failure (Mikes, 2016). Our theoretical dissatisfaction or calls for reform within the current set of work
background helps to further extend the discussion of the workings arrangements. In Alpha, this outcome is exemplified by scepticism
and challenges of enterprise risk management, shedding light on about the ‘managerial’ relevance of ERM; in Omega this can be seen
what we call the dynamics of (dis)integrated risk management. By in the shift towards a new configuration, where the link with
using this expression, we seek to emphasise how the two ideals of compliance and internal control is made more visible. On this basis,
integrated risk management, mobilised by practitioners in Alpha the boundaries of enterprise risk management constitute a second
and Omega, are both subject to self-undermining pressures. While a source of pressure towards (dis)integrated risk management. They
case-based analysis cannot offer comprehensive generalisations, by separate what is bound, such as shared taxonomies and interactive
iterating between the comparative case analysis and insights from practices in Alpha and Omega respectively, from other elements and
the literature on boundary objects, it is possible to outline two possible focuses of enterprise risk management.
dynamics that might explain the workings of enterprise risk It is possible to outline two implications for risk management
management as a lived organisational practice in other settings. research of these two (dis)integration dynamics. The first refers to
Firstly, both cases provide evidence of the difficulty in balancing critical commentaries of standardised blueprints for enterprise risk
‘plasticity’ and ‘robustness’ in enterprise risk management (Star & management, such as COSO-ERM (Hopwood, 2009; Miller et al.,
Griesemer, 1989; Star, 1989). Alpha shows a predominance of the 2008; Power, 2009). This body of literature highlights the inher-
‘robust’ component of a boundary object. The different work ar- ently failing nature of procedural forms of risk management that
rangements are kept relatively rigid so that they maintain a com- emphasise the production of auditable evidence, limiting instead
mon identity across organisational functions and the aggregation of more conversational approaches to the management of risk
local risk information might become possible. However, this in- (Palermo, Power, & Ashby, 2017; Power, 2007). This critique echoes
creases resistance and criticism from the users of ERM as the rigid managers' scepticism about a ‘lengthy bandwagon’ with scarce
risk assessment templates and processes do not suit their local ‘managerial relevance’ in Alpha. However, this study suggests that
needs. Omega shows instead a predominance of the ‘plastic’ more interactive approaches such as O&RM in Omega are also
component of a boundary object, at the level of single tools (e.g. inherently unstable due to tensions that characterise the accretion
flexible application of risk mapping rules), in the building up of the of heterogeneous work arrangements into a seemingly coherent
whole assembly of practices (e.g. things are added to O&RM) and and stable working ensemble. Regardless of their underlying
their relation to a context that is unchartered. But this makes risk management styles (e.g. procedural vs. interactive), both Alpha's
assessment indistinguishable from other control practices. The lack ERM and Omega's O&RM make visible and active residual cate-
of visibility in risk identification and assessment processes, a key gories and practices that contribute to generating dissatisfaction
feature of O&RM that facilitates unobtrusive ‘risk talk’, becomes with, or calls for change in, integrated risk management. In other
something that needs to be fixed as a new scandal hits the words, the source of ‘success’ in creating a relatively stable and
company. coherent set of work arrangements ends up being a source of
These observations suggest that the enactment of enterprise risk instability. Failure attributed to over-reliance on procedures, which
management in the two organisations can be related to a central may end up in the ‘risk management of nothing’ (Power, 2009),
problem in the boundary objects literature, namely the balance might well be one manifestation of a more general pattern,
between the ‘robust’ and the ‘plastic’ aspects of work arrangements whereby any form of integrated control practices is inevitably
that enable cooperation (Star, 2010). If the ‘robust’ component subject to (dis)integration pressures.
prevails, local users tend to recognise the relevance of ad hoc The second implication refers to recent work that shows evi-
processes that better suit their needs, as occurred in Alpha for en- dence of ‘dual risk management’ processes (Kaplan & Mikes, 2016),
ergy risks and extreme events. If the ‘plastic’ component prevails, whereby a risk function is able to balance compliance activities
enterprise risk management tends to become indistinguishable with a business partnering role, by deploying groups of risk man-
from other control processes, making it difficult to produce visible agers who advise business decision-makers about their risk expo-
evidence of risk identification and assessment, something that sures, and other groups of risk managers who provide independent
became a problem towards the end of our research engagement scrutiny on compliance activities. While the notion and practices of
with Omega. In both cases, regardless of the original design ‘dual risk management’ deserve further scrutiny and empirical
emphasis on ‘robustness’ or ‘plasticity’, the ideals of integrated risk investigation, our analysis suggests that the two dimensions may
management mobilised by practitioners become subject to a self- not coexist so easily. This is because senior risk champions tend to
undermining pressure towards (dis)integration. specialise in a particular niche of risk management-related tasks in
Secondly, our case analysis reveals how an enterprise risk order to maintain or consolidate their organisational footprint. An
management assembly is formed around different kinds of prob- indicative example is the radical shift made by the CRO in Omega as
lems that arise at ‘knowledge’ boundaries (Carlile, 2002, 2004; Spee Head of RIC, at the expense of the Controller and his remaining
& Jarzabkowski, 2009). The comparative analysis of the two cases staff. As outlined in Section 6, the Controller bluntly stated that they
sheds light on the problematic relation between these different became ‘ectoplasms’.
focuses. For example, an emphasis on building a common language So far, we have discussed enterprise risk management as an
and standardised approaches to risk identification and assessment assembly of processes, tools and networks of people. This paper's
is related to shortcomings in making enterprise risk management theoretical background suggests examining more closely whether
such assemblies have unique properties. As put by Star, the issue at in relation to work practices that seek to address problems that
stake is how ‘multiple boundary objects and systems of boundary arise at ‘knowledge’ boundaries, we suggest that caution should be
objects grow to become what we called “boundary infrastructures”’ taken in treating an infrastructure as a technical apparatus that
(Star, 2010: 602, emphasis added). The section that follows illus- materialises ideational (boundary) objects such as research impact.
trates the implications of our study of enterprise risk management We show how O&RM and ERM depend on the accretion of organ-
for our understanding of infrastructure formation. isational processes, risk tools and managerial roles. But they are
also animated by a ‘master narrative’ that becomes the primary
7.3. Boundary objects and infrastructure source for organising abstraction (e.g. what is a risk) and defining
patterns of action (e.g. what should be included or excluded in risk
Our analysis of enterprise risk management ‘in action’ suggests identification and management).
that O&RM and ERM are more than a single (boundary) object, i.e. a The second concerns infrastructure and stability. While infra-
process, a map, a risk register, a network of risk champions, which structure goes hand in hand with ‘practice stabilisation’ in Power's
may support cross-functional communication on enterprise risks. (2015) work, we provide insights as to how ‘neither boundary ob-
O&RM and ERM are rather two assemblies of work arrangements, jects nor infrastructures are ever stable, and are always becoming
which contribute to redefining the functionalities and properties of or dissolving’ (Boland, 2015: 236). While the two case studies show
their constitutive components. For example, in Alpha, the combi- different dynamics, they also reveal a common pattern in relation
nation of risk model's categories with risk sheets and the work of to what happens once an infrastructure for enterprise risk man-
focal points contribute to enriching the information conveyed agement is established. A stable shared context itself becomes a
through risk sheets only, and increase visibility on how risks can be boundary, which makes visible and active residual categories (e.g.
aggregated. In Omega, when risk maps are combined with risk energy risks or extreme events in Alpha; internal controls and
workshops and information from the performance barometer, they compliance activities in Omega). Such residual categories over time
offer a platform for the discussion of task-related problems, challenge the existing infrastructure, which is considered as having
organisational weaknesses and concerns with target achievement. little managerial relevance (Alpha) or lacking in terms of evidence
O&RM and ERM present some of the features that Star and of how risks are addressed (Omega).
colleagues ascribe to infrastructure (Bowker & Star, 1999; Star &
Ruhleder, 1996; Star, 1999, 2010). ERM in Alpha is built on and 8. Conclusions and further directions for research
aligned to the financial planning process; it embodies world-level
standards such as the COSO framework; it reaches beyond a sin- In this paper, we have combined the literature on enterprise risk
gle site or event, being repeated annually across different organ- management with research on boundary objects in order to
isational functions. O&RM in Omega is embedded in social examine how heterogeneous tools, processes and networks of
arrangements and aspirations that go beyond specific risk identi- organisational actors can give rise to a seemingly coherent and
fication and assessment processes. We observe a web of actions, stable working ensemble, which provides a shared context for risk
and talk about actions, oriented towards the identification of ex- identification and management in two large organisations.
pected performance variations in which various actors (senior risk Drawing on the comparative analysis of the two cases, we shed
champions, BU managers) became enmeshed. light on what we call the dynamics of (dis)integrated risk manage-
Moreover, the literature on infrastructure helps to highlight key ment to stress how the ideals of integrated risk management,
dynamics that characterise the formation of enterprise risk man- mobilised by practitioners in the two case-study organisations, are
agement as a seemingly stable and coherent working ensemble. As both subject to self-undermining pressures. By uncovering these
stressed by Star and colleagues, an infrastructure is not a thing dynamics, we extend previous work that is critical of standardised
stripped of use. Something becomes an infrastructure only in forms of enterprise risk management (Hopwood, 2009; Miller et al.,
relation to work practices that can be connected to a more or less 2008; Power, 2007), as well as more recent work on ‘risk talk’
visible ‘master narrative’ (Star, 1999). Our discussion of O&RM and (Mikes, 2016) and ‘dual risk management’ processes (Kaplan &
ERM in relation to work done to address problems that arise at Mikes, 2016). We also contribute to recent studies in the account-
different ‘knowledge’ boundaries helps to uncover two distinct ing literature that use the notion of infrastructure to explain how
narratives, namely risk aggregation (Alpha) and performance vari- vague policy objects become tractable across different organisa-
ation (Omega), which contribute to knitting together different tional sites and institutional arenas (Power, 2015).
‘objects’. We also show how such ‘master narratives’ are inherently This paper offers a theoretically-informed analysis of the
problematic. Star's work warns against ‘incompatible platforms, context-specific development of enterprise risk management in
recalcitrant local computing centres, and bottlenecked resources’ two large organisations. In doing so, this paper may prompt further
that do not fit comprehensive and standardised information sys- academic research in at least two areas. Firstly, further work might
tems (Star, 1999: 380). In our study, we observe how the enactment explore the conditions under which ‘risk talk’ can be sustained over
of ERM and O&RM in specific kinds of interlinked work arrange- time as an unobtrusive form of risk management that is seamlessly
ments for risk identification and assessment makes visible ele- linked to the work of business managers. Compared to previous
ments that are excluded (e.g. compliance and internal control in work (Mikes, 2016), we document potential sources of instability
O&RM) or ‘residual categories’ that do not fit (e.g. extreme events for ‘risk talk’. The commonalities and points of contrast between
and energy risks in ERM). this study and previous research could help future work to produce
This discussion of the case material, in the light of previous work cumulative and generalisable insights into the functioning of
on boundary objects and infrastructure, has implications for recent interactive-rich forms of risk management in different settings.
accounting literature. For example, in the work by Power (2015) on Secondly, further work could be done to examine the dynamics of
research impact, infrastructure formation is linked to practice infrastructure formation. While recent accounting research seems
routinization, repetition and the ‘stabilisation’ of ambiguous to emphasise the enabling, generative role of infrastructure
boundary objects in material organisational arrangements. This (Kornberger et al., 2017; Power, 2015), this study suggests that
study provides two points of contrast, which may elicit further infrastructure is more ambivalent, serving as both an engine and a
work in accounting research. The first refers to the materiality of barrier to integrated control practices. Future work might further
infrastructure. By stressing how infrastructures can be understood explore this apparent tension in the functioning of infrastructure.
This study also has implications for the ways in which integrated Dickinson, G. (2001). Enterprise risk management: Its origins and conceptual
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Mikes, A. (2009). Risk management and calculative cultures. Management Ac-
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The helpful comments from Andrea Mennicken, Dane Pflueger, Mikes, A. (2011). From counting risk to making risk count: Boundary-work in risk
Wim Van der Stede and the participants in seminars held at the management. Accounting, Organizations and Society, 36(4e5), 226e245.
London School of Economics, University of Exeter, ESSEC and HEC Mikes, A. (2016). The triumph of the humble chief risk officer. In M. Power (Ed.),
Riskwork: Essays on the organizational life of risk management (pp. 253e273).
Paris are gratefully acknowledged. The corresponding author Oxford: Oxford University Press.
would particularly like to thank Mike Power for his numerous Mikes, A., & Kaplan, R. S. (2013). Towards a contingency theory of enterprise risk
comments on prior versions of the paper. The data that informs this management (HBS working paper No. 13e063). Retrieved from www.hbs.edu/
faculty/Publication Files/13-063_5e67dffe-aa5e-4fac-a746-7b3c07902520.pdf.
paper has been collected while the corresponding author was Mikes, A., & Kaplan, R. S. (2015). When one size doesn't fit all: Evolving directions in
affiliated with the Dipartimento di Ingegneria Gestionale at the the research and practice of enterprise risk management. Journal of Applied
Politecnico di Milano. Corporate Finance, 27(1), 27e30.
Miller, P., Kurunm€ aki, L., & O'Leary, T. (2008). Accounting, hybrids and the man-
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Money, honour and duty: Global professional service firms in

comparative perspective
Crawford Spence a, *, Jingqi Zhu b, Takahiro Endo c, Saori Matsubara d
a
King's College London, UK
b
Newcastle University, UK
c
Kobe University, Japan
d
Tokai University, Japan
Article history: Research on professional service firms describes these organizations as having been increasingly colo-
Received 15 July 2016 nized by commercial imperatives over the last 30 years. Extant studies contrast this now dominant
Received in revised form ‘commercial logic’ e which privileges revenue generation - with a ‘professional logic’ e which privileges
1 September 2017
public service. There are two problems with this commercialization thesis. Firstly, it focuses almost
Accepted 6 September 2017
exclusively on Western European and North American empirical contexts in order to draw conclusions
about ostensibly ‘global’ firms, thereby universalizing a particular. Secondly, professionalism and
commercialism are conceived of in essentialized fashion, with meanings ascribed to each a priori. In the
present study, we seek to move beyond these problems by drawing on a comparative empirical study of
partners in professional service firms in China and Japan. The results show that firms in each context
demand quite different forms of capital and dispositions from firm members. This implies that literature
on global professional service firms need to take cognizance of the extent to which certain ‘rules of the
game’ are applicable beyond Western countries. Conceptually, the study both outlines a framework for
understanding professional service firms in comparative perspective, and proffers a theorization of
professionalism as a de-essentialized form of symbolic capital whose meaning is culturally contingent.
1. Introduction understanding of ‘global’ PSFs (GPSFs) is built upon a largely occi-

dental empirical base.
Professional service firms (PSFs) have come to be seen as How PSFs operate in different contexts can be explored by
important actors in the global economy over the last 30 years and charting the various forms of capital that PSFs and their members
are studied as an area of academic enquiry in their own right accumulate in the course of professional work and careers (Spence
(Morris & Malhotra, 2009). Additionally, studies of PSFs are et al., 2016). This focus on different species of capital takes an
increasingly used as exemplars for organizational theory building explicitly Bourdieusian stance (Bourdieu & Wacquant, 1992) in
more broadly (Greenwood, Li., Prakash., & Deephouse, 2005; contrast to the conceptual framing of institutional logics, which has
Greenwood & Suddaby, 2006; Faulconbridge & Muzio 2016). It is dominated PSF research in recent years (see, for example, Smets,
therefore of crucial importance that these firms are understood in Morris & Greenwood, 2012). The dominant thesis in such
all their complexity. One key theme emerging in literature on PSFs research is that commercial logics, or in Bourdieusian terms the
in recent years is the ‘global’ or ‘transnational’ nature of their ser- colonization of professional fields by the laws of the market
vices and governance arrangements (Boussebaa, Morgan, & Sturdy, (Bourdieu, 1996), have come to dominate professional activity
2012; Muzio & Faulconbridge, 2013; Suddaby, Cooper., & (Malsch & Gendron, 2013).
Greenwood, 2007). This paper is situated within this latter stream We show that this thesis does not hold universally. Reporting
of research and contends that our current conceptual the findings of a comparative study into how Big 4 PSFs operate in
China and Japan, it is revealed that organizational imperatives are
not always understood strictly in terms of the accumulation of
* Corresponding author.
economic capital. The corollary is, global PSFs cannot be said to
E-mail address: Crawford.Spence@kcl.ac.uk (C. Spence). follow global ‘rules of the game’. These findings have implications
C. Spence et al. / Accounting, Organizations and Society 62 (2017) 82e97 83
for how we theorize PSFs and multinational enterprises (MNEs) age where ‘professional’ labour was somehow untainted by com-
more broadly. Specifically, we suggest that we need to move mercial concerns. This ‘lament for the lost professional’ needs to be
beyond a view of professionalism and commercialism as discrete tempered by findings from historical studies on the professions
logics and embrace a logic of discrete professionalisms and that suggest this ‘golden age’ probably never existed (see, for
commercialisms. example, Spence & Brivot, 2011; Walker, 2004). Indeed, the ‘pro-
The remainder of the paper is structured as follows. The fession’ moniker itself warrants attention as a “folk concept which
following section outlines key themes from literature on PSFs, has been smuggled uncritically into scientific language” (Bourdieu
organized thematically in line with the Bourdieusian framework & Wacquant, 1992, p. 242).
employed in the study. The paper's three principal research ques- In the interests of avoiding essentialism, we conceive in this
tions are also articulated in this section. The research methods paper of professionalism as a form of symbolic capital (Schinkel &
employed in the study are then discussed in a following section, Noordegraaf, 2011). Viewing professionalism as a form of symbolic
before proceeding to a discussion of the findings. The findings then capital is quite different from the way in which much extant liter-
form the basis of a concluding section which outlines the purported ature approaches professionalism, which it tends to define along
theoretical contributions of the study to existing research. various public interest lines such as ‘independence and autonomy’
(Suddaby et al., 2009), ‘quality of service provision’ (Sweeney &
2. Theorizing ‘global’ firms McGarry, 2011) or ‘integrity, rigour and public service’ (Picard,
Durocher, & Gendron, 2014). Such definitions, while in one sense
Much research into PSFs takes - either as a backdrop or indeed useful in that they draw attention to what a heightened focus on
as its principal concern - the increasingly commercialized context revenue generation occludes, in another sense are problematic in
within which these firms are supposed to operate. For example, that they cling onto essentialized notions of what a profession is,
Greenwood et al. (2005) describe the transformation of very large was or perhaps should be. Symbolic capital, which is a “transub-
accounting firms into “multidisciplinary practices” (MDPs) char- stantiated” asset or resource that confers prestige and status within
acterised by a proliferation of non-audit services that are delivered a specific social space (Bourdieu, 1985; Schinkel & Noordegraaf,
in cross-sold bundles. In turn, this more ‘commercial’ orientation is 2011, p. 78), takes on different forms in different arena; it there-
juxtaposed with that of a more ‘professional’ orientation, which is fore follows that there can be no a priori definition of what pro-
perceived to have been eroded and displaced as a result. The fessionalism is. Rather, the meaning attached to professionalism is
various ways in which ‘commercialism’ is juxtaposed with ‘pro- a stake in the struggle for a dominant position in any particular
fessionalism’ in extant literature is encapsulated in Table 1 below: social space. According to this line of argumentation, the task for
As Table 1 shows, the twin pillars of ‘commercialism’ and ‘pro- social scientists lies in revealing what constitutes symbolic capital
fessionalism’ are conceptually juxtaposed in different parlances as in each social space e in this case, national context - under study.
two: competing identities (Carnegie & Napier, 2010; Gendron & This gives rise to our first, and principal, research question:
Spira, 2010), competing logics (Lander, Heugens, & van RQ1. What forms does symbolic capital take in PSFs in different
Oosterhout, 2017; Malsch & Gendron, 2013; Smets et al., 2012; national contexts?
Suddaby, Gendron, & Lam, 2009) or competing objectives
(Sweeney & McGarry, 2011; Wyatt, 2004). As an illustration, Malsch Another key feature of the commercialization thesis advanced
and Gendron (2013) look at the relationship between commercial by extant literature is that it emanates overwhelmingly from
and professional ‘logics’ in some detail, arguing that the two co- Western countries. North America and the UK loom large in the
exist in a kind of zero-sum struggle for supremacy, characterised empirical background of our conceptual knowledge of PSFs. This is
by mutual dependence but that has, in recent decades, “resulted in perhaps understandable, given the Anglo-Saxon origins of the firms
the consolidation of commercial over professional logics” (881). in question. However, it is increasingly recognised that PSFs are
Many commentators are vexed by this dominance of commercial ‘global’ in nature (Boussebaa et al., 2012) and that they now occupy
over public interest concerns; indeed, some have explicitly called transnational spaces (Greenwood, Morris, Fairclough, & Boussebaa,
for a re-establishment of professionalism (Wyatt, 2004). 2010; Suddaby et al., 2007). Yet there has been very little consid-
This reification of ‘commercialism’ and ‘professionalism’ as eration in PSF research of the societal dimensions that have been
discrete identities, logics or objectives is, in our view, problematic. shown in other literature to be important determinants in shaping
It is predicated upon a somewhat unreflexive nostalgia for a golden organizational behaviour (Lam, 2000, p. 488). By not taking
Table 1
Extant Literature's juxtaposition of the ‘professional’ with the ‘commercial’.
Study Juxtaposition of the ‘commercial’

with the ‘professional’
Covaleski et al. (1998) Transformation of partner identities “from being professionals to businesspeople” (p.1998)
Kornberger et al. (2011) Career success in a Big 4 firm is predicated on transforming oneself into an “entrepreneurially minded agent” (p.154)
Anderson-Gough et al. (2000) Dominant discourse of ‘client as king’ leaves little room for consideration of independence or public service
Picard et al. (2014) Image of accountant has shifted from that of ‘meticulous professional’ to ‘superhero of the business world’ over time
Wyatt (2004) Transition from “a central emphasis on delivering professional services in a professional manner to an emphasis on growing revenues
and profitability” (49)
Gendron and Spira (2010) and Heightened emphasis on revenue generation responsible for the demise of Arthur Andersen and audit failure at Enron.
Carnegie and Napier (2010)
Sweeney and McGarry (2011) Roots of commercialism can be traced back to the 1960s
Suddaby et al. (2009) The erosion of professional ethics in accounting firms is most pronounced in the Big 4
Smets et al. (2012) Increasing displacement of professional by commercial concerns in German law firms
Muzio and Faulconbridge (2013) The embedding of Anglo-Saxon commercial norms into Italian law firms e a clash of different professionalisms
Greenwood and Suddaby (2006) Replacement of “professional services as a craft” with “professional services as a business” (p.36)
Cooper and Robson (2006) The dominance of cross-selling and client service over public interest concerns
Malsch and Gendron (2013) Professional logics hybridize with, but are ultimately dominated by, commercial logics
84 C. Spence et al. / Accounting, Organizations and Society 62 (2017) 82e97
cognizance of how even very similar types of organization can tacitly agreed upon and correspond closely to what Bourdieu refers
behave very differently in different national contexts (Maurice, to as doxa, being the taken for granted beliefs over what is right,
Sorge, & Warner, 1980), PSF research can therefore be accused of proper and worth doing within a specific milieu (Bourdieu &
universalizing a particular. Even the limited cross-national Wacquant, 1992, p. 98). The concept of ‘field’, irrespective of theo-
comparative work in this area has largely restricted itself to retical persuasion, tends to denote a meso-level social order that
Western contexts (see, for example, Boussebaa et al., 2012; allows for the reproduction of both actors and their social positions
Faulconbridge & Muzio, 2014, 2016; Muzio & Faulconbridge, over time (Klutz & Fligstein, 2016). However, institutional con-
2013; Smets et al., 2012; Spence, Dambrin, Carter, Archel, & ceptions of fields tend towards a view of actors that are riven by
Husillos, 2015). There is virtually no research exploring how PSFs habit and conformity, or who are the ‘cultural dopes’ of sur-
operate in Asia. This is particularly problematic as it has been rounding institutional arrangements (Lawrence, Suddaby, & Leca,
shown in business systems research that “[c]ompared with the 2009, p. 1). In contrast, the Bourdieusian conception of field
differences between the West and Asia, the variations inside the adopted in this paper emphasises power, domination and the
West seem minor” (Witt & Redding, 2014b, p. 684). In general ability of well-positioned, reflexive actors to impose their under-
terms, this privileging of the West as an exemplar of what counts as standing of what constitutes legitimate behaviour onto others.1
‘global’ reflects both a longstanding Anglo-American domination in Fields, in turn, are structured according to different forms and
organization journals (Murphy & Zhu, 2012) and a generalized amounts of capital (Bourdieu & Wacquant, 1992), primarily eco-
ethnocentrism in the sociology of the professions (Johnson, 1973). nomic, social, cultural and e the form of capital that crowns all
In specific terms, methodological privileging of the ‘West’ implies others (Harvey & Maclean, 2008) - symbolic. In order to understand
that our conceptual understanding of GPSFs has yet to fully adapt to how fields are structured and, crucially, how one field might be
the putatively ‘global’ environments within which they are pre- different from another, it is therefore imperative to identify the
sumed to operate. different values accorded to different species of capital therein. This
One notable exception to this elision of national and global gives rise to our second research question:
contexts is offered by Mennicken (2008), who shows how a Russian
RQ2. Which forms of capital are more highly valued by PSFs in
auditing firm's insertion into the network of a global PSF did not
different national contexts?
lead to the eradication of local cultural or institutional factors, but
to a persistent hybridization of global and local practices (see also Economic capital refers to money or liquid assets (Bourdieu,
Barrett, Cooper & Jamal, 2005). This stemmed in large part from 1986). In the context of the present study, which is concerned
Russian auditors, regulators and managers being less than fully with cross-national differences, it is important to establish the
comfortable with an identity that they felt was being imposed upon extent to which a particular field has been colonized by the laws of
them by the West. Mennicken’s (2008) study implies that processes the market. In other words, is the main objective of the field's
of international “standardisation can hardly be closed or finalised” reproduction the accumulation of economic capital a la the
(p.410). This conclusion is echoed in studies of professional regu- commercialization thesis above, or does it follow a logic of
lation, such as that of Halliday and Carruthers (2009), who show restricted cultural production (Bourdieu, 1996) in which profes-
how transnational fields exhibit significant disjunctures between sional accounting work is undertaken for some extra-economic
standards and norms elaborated globally on the one hand, and the reason? Accounting has, of course, always been associated with
implementation of these at the level of the nation-state on the commercial activity, but accounting practices have been shown to
other. Similarly, in a study looking at accounting regulation in be influenced to varying degrees by economics depending on the
China, Ezzamel and Xiao (2015) show how local actors manage to country under study (Zambon, 1996). The successful accumulation
“retain some measure of independence from global networks” of economic capital is underpinned by the ability to operate
(p.60). These various studies all suggest that differences between effectively in commercial spheres, or to wield what Bourdieu
organizations cross-nationally should be expected, particularly (2005) refers to as commercial capital. In PSF research, the
when looking outside of the West. possession of commercial capital can be seen in the “entrepre-
We seek to build upon the insights of these studies and, in so neurially minded agents” (Kornberger, Justesen, & Mouritsen, 2011,
doing, contribute towards redressing the ethnocentrism that p. 514) that Big 4 members need to become in order to progress up
characterises extant PSF research. We do so by exploring the ac- organizational hierarchies (see also Covaleski, Dirsmith, Heian, &
tivities of GPSFs in China and Japan. We focus on these two coun- Samuel, 1998). Commercial capital manifests itself in the cross-
tries for two broad reasons. Firstly, because there has been very selling of non-audit services (Cooper & Robson, 2006; Greenwood
little research devoted to how PSFs operate in China or Japan et al., 2005), which in most Western countries now constitute the
(although see, for example, Ezzamel & Xiao, 2015; Ezzamel, Xiao, & vast majority of their revenues. For example, it has been noted that
Pan, 2007; Gillis, 2014; on China and Matsubara & Endo, 2016, audit as a source of revenue has stabilised at 25e30% in Western
Tsunogaya, 2016; Karube & Fukukawa, 2013 on Japan). As, respec- countries for the Big 4 in recent years (Loxton, 2015) and that all of
tively, the second and third largest economies in the world, they are the major growth strategies of firms are now once again firmly
national contexts that warrant attention. Secondly, because Asian focused on non-audit services, following a brief hiatus in the wake
business systems have been shown to be structured quite differ- of Andersen's demise in 2001 (see also Crump, 2015).
ently from those in the West in terms of, inter alia, the prevalence of Extant literature on PSFs in China and Japan offers little guid-
informal norms, the role of the state in regulating economic ac- ance in terms of what values are placed upon the accumulation of
tivity, social relationships in the economic sphere and established
ways of doing business more generally (Whitley, 2014; Witt &
Redding, 2013). This implies that Asia is likely to provide sources 1
Klutz and Fligstein (2016) identify, in addition to institutional and Bourdieusian
of heterogeneity for global firms to grapple with. approaches, a third approach to understanding fields, that of ‘Strategic Action
The Big 4 in China and Japan, respectively, are viewed here as Fields’ as articulated by Fligstein and McAdam (2011). The Strategic Action Fields
constituting two distinct ‘fields’ of social action, each characterised approach is particularly apt for explaining situations where fields are in constant
flux or change. As we describe in this paper fields that have reached a relative level
potentially by different ‘rules of the game’ (Bourdieu & Wacquant, or maturity, we opt instead for the Bourdieusian approach, believing that it pre-
1992). ‘Rules of the game’ essentially comprise what is considered sents a more adequate frame for understanding relations of domination and field
legitimate in the eyes of the field's actors. Such rules are often reproduction.
economic and commercial capital. However, wider analyses of is a very important form of capital in PSFs in the West, we would
these business systems suggest that one might anticipate differ- expect it also to be in China and Japan, but for its specific form to
ences in these respects. Chinese ideals, for example, have always differ in each context.
positioned the private drive to accumulate wealth as not only Cultural capital itself takes a variety of forms and is a key aspect
legitimate, but in many ways inextricably linked with the preser- of how actors position themselves within fields (Bourdieu, 1986).
vation of social order (Witt & Redding, 2014a, p. 26). In the modern Professional and University credentials, for example, constitute
Chinese variety of capitalism, these twin ideals are evident in the institutionalized cultural capital (Carter & Spence, 2014) although it
way in which both private sector and public sector executives are has been shown that even in Western contexts there is variation in
rewarded with generous bonuses for achieving strong economic the value placed upon degrees from specific educational in-
performance. Concomitantly, official rhetoric equates market ac- stitutions, with French Big 4 firms being much more elitist than
tivity with the long-run goals of the socialist State (Peck & Zhang, their Spanish, British or Canadian counterparts (Spence et al., 2015).
2013). In contrast, in Japan, the pursuit of private wealth is tradi- It is unclear to what extent educational credentials are more or less
tionally subordinate to the collective interests of employees or valued by Big 4 firms in Asia, although wider literature on the
society (Redding, Harris Bond & Witt, 2014, p.361; Whiting, 2014). educational systems in Japan and China suggests that institution-
Performance-based pay, for example, has failed to gain a significant alized cultural capital is highly valued in those contexts (Hendry,
foothold in Japan (Whitley, 2014). Indeed, in traditional Japanese 2013; Hsu, 2007). Embodied cultural capital refers to the way in
society, those at the top of the social scale, the warrior class, placed which individuals behave and is most closely resonant of the
very little value on material wealth and prided themselves on their habitus, being the historically constituted dispositions of an actor
frugality (Hendry, 2013, p. 95). (Bourdieu, 1980). Are Asian members of global PSFs disposed to
In contrast to economic and commercial capital, social capital embody the same entrepreneurial and commercial dispositions
denotes the possession of ‘a durable network of more or less that their Western counterparts have, in terms of thinking obses-
institutionalized relationships of mutual acquaintance and recog- sively about how to please the client (Anderson-Gough, Grey, &
nition’ (Bourdieu & Wacquant, 1992, p. 119). Social capital has been Robson, 2000; Covaleski et al., 1998), how to cross-sell services
shown to be tremendously important for career advancement in (Greenwood et al., 2005) and, ultimately, bolster profit per partner
PSFs in the West. For example, it has been shown that internal metrics (Carter & Spence, 2014; Galanter & Henderson, 2008)?
networking, or the accumulation of internal social capital, is a Technical capital e in the form of specific and detailed audit or
prerequisite for being seen to be a team player (Anderson-Gough, accounting expertise - has been shown to yield negative returns for
Grey, & Robson, 2006). Furthermore, given the high importance those who invest in it beyond a certain level in PSFs in Western
accorded to revenue generation in PSFs in Western countries countries (Spence et al., 2015), but Japan has been described as a
(Wyatt, 2004), external social capital in the form of developing and “technomeritocratic system” (Hendry, 2013, p. 83), implying again
maintaining client relationships has also been shown to be of that capital values might vary across borders. Table 2 summarises
paramount importance (Carter & Spence, 2014; Cooper & Robson, the different forms of capital that have been identified from
2006). existing literature on Western countries as being valuable to those
However, research has shown that professionals in Chinese or- pursuing careers in GPSFs.
ganizations are less transactional than their Western counterparts Beyond paying attention to the values accorded in the Chinese
and generally have greater incentives to co-operate with network and Japanese PSF fields to different forms of capital, field analysis
members, implying that social capital operates differently in the also requires that attention be paid to the institutional conditions
Chinese context (Peck & Zhang, 2013; Xiao and Tsui 2007). that give rise to those values. Agents in any field possess a habitus,
Furthermore, in various Asian countries it has been shown that tacit or suite of dispositions that are profoundly influenced by both
relationship norms can be very important (Witt & Redding, 2013) history and context (Bourdieu, 1979). Therefore, in order to more
and that professionals tend to be more successful in raising their fully understand why actors in the fields under study here behave
status when they have embedded relationships, i.e. social capital, in the ways that the field demands of them, it will be of value to
with individuals in the State apparatus (Dezalay and Garth 2010). consider the way in which the fields themselves have been formed
Variations have also been observed in how social capital operates and developed over time. While China has undergone a remarkable
across different Asian countries. Whereas in China, social capital, or economic transformation over the last 30 years, possibly the most
guanxi, refers to a prevalence of strong interpersonal ties in the dramatic in history (Peck & Zhang, 2013), it has been observed that
absence of trust in formal institutions, in Japan trust in formal in- institutional change in Japan over the same period has been the
stitutions remains high (Li & Redding, 2014) and great reliance is least pronounced of all business systems in East Asia, and that even
placed upon collaborative forms of decision making (Whitley, those changes that have taken place “may be more formal than
2014). The collaborative process underpinning this is known as realized in practice” (Whitley, 2014, p. 647). Taking cognizance of
nemawashi and involves obtaining consensus among group mem- these differing historical backdrops permits consideration of how
bers, often outside of formal decision making fora (Hendry, 2013, p. Big 4 fields might develop differentially in conditions of, respec-
211). Although China and Japan have shared histories, the way in tively, change and continuity. Such cognizance is particularly
which trust is formed in each context is quite different, with China important given the concerns raised above about extant literature's
being described as a “tray of loose sand” and Japan as a “piece of universalization of what is potentially a culturally specific partic-
solid granite” (Li & Redding, 2014, p. 526, echoing the observations ular. Our third research question, which will complement and
of Sun Yat Sen 100 years before). This metaphor captures the permit greater understanding of the answers provided to research
salience of interpersonal relationships in both contexts on the one questions 1 and 2, is therefore expressed as follows:
hand, and the greater levels of trust in formalized systems and the
RQ3. What are the historical and contextual factors that explain why
rule of law that have been shown to be prevalent in Japan rather
certain forms of capital are more highly valued than others in the
than China on the other (Witt and Redding (2014b). In other words,
Chinese and Japanese PSF fields?
whereas in China ‘strong’ ties serve as a precursor to more cli-
entelist (Xin & Pearce, 1996) business relationships, in Japan both Answering this question will permit greater emphasis to be
‘strong’ and ‘weak’ ties are important (Granovetter, 2017). In placed upon the reasons underlying the results.
summary, while we know from previous research that social capital
Table 2
Species of Capital identified as valuable for Big 4 partners in Western contexts.
Species of Capital Manifested in Value Accorded at top levels
Economic Pursuit of Profit Per Partner High: Raison d'etre of firms

Institutionalized Cultural Capital Professional and Educational Credentials Varies according to country, but generally not educationally elitist
Embodied Cultural Capital Technical capital (expertise) and commercial capital Technical (low/negative); Commercial (high)
(business development skills)
Social Capital Client relationships and internal reputation High in both cases
Symbolic Capital Commercial Capital Of paramount importance in all countries
3. Methods: sample, data collection, analysis project. Interviewee participants in Japan were recruited initially
via personal contacts, with more individuals being enrolled in the
3.1. Sample and research setting study via purposive snowballing techniques. The majority of in-
terviews were undertaken in Japanese by a native speaker. 10 in-
As the present research is driven by concerns that our concep- terviews in Japan involved an Anglophone member of the research
tual knowledge of GPSFs is culturally specific, the two Asian team: 3 of these were undertaken in English with occasional
countries included in the study were chosen on the basis of their recourse to simultaneous translation; 7 were undertaken with
corresponding to quite different historical legacies, stages of in- heavy recourse to simultaneous translation. The Chinese interviews
dustrial development and integration into world markets. Japan is started in London in early 2015 with PSF members who had pre-
an OECD country, the world's third largest economy and associated viously spent significant time in China, before snowballing and
with a collectivist orientation and a more stakeholder model of other personal contacts led to additional individuals being enrolled
capitalism than is generally considered to be the case in ‘the West’ in the study during three field visits to China later in 2015. The
(Endo, Delbridge, & Morris, 2015; Whiting, 2014; Yoshikawa, Tsui- Chinese interviews were undertaken overwhelmingly with ethnic
Auch., & McGuire, 2007). China is a non-OECD country but is Chinese participants and were carried out in English where an
rapidly industrialising, the world's second largest economy and Anglophone member of the research team was present. Where a
governed by a single political entity which has sought to maintain Chinese member of the research team solely carried out the inter-
the vestiges of a communist regime while embracing market forces view, the interview was carried out in Chinese.
and engaging global capital by encouraging inward and outward The interviews were semi-structured and explicitly designed to
foreign direct investment (Zhang & Peck, 2016; Breznitz and identify the different forms of capital and habitus that were salient
Murphree 2011). in each context. To that end, questions were asked specifically
We conducted 65 interviews across the two countries between about interviewees’ family background, education and professional
2014 and 2016: 31 in China and (C1-C31) 34 in Japan (J1-J34). The credentials (institutionalized cultural capital), intra, extra and inter-
majority of participants worked for Big 4 PSFs, although the sample organizational relationships (social capital), remuneration and firm
also includes 5 interviews with non-Big 4 firms, one academic and revenue information (economic capital). Interviewees were asked
one client of a Big 4 firm. Our sampling privileged more senior to outline their career histories and explain in detail the processes
members of firms such as Partners and Directors. Such individuals whereby they were promoted into senior positions. This invariably
were targeted on the assumption that they would be those who involved discussion about performance measurement and formal
were most heavily invested in their surrounding fields and, by and informal partnership admission processes. GPSFs have global
extension, those who had most successfully accumulated and templates and procedures for these processes, but previous studies
converted the forms of capital that are most highly valued by their have shown that the formal promotion procedures within firms are
surrounding fields. ‘Partner’ itself is a symbolic category, denoting often followed only in a symbolic fashion. Therefore, particular
those who possess symbolic capital. These individuals are therefore attention was paid to probing how these processes were actually
better placed to help us explore our central research questions. The implemented in practice (Spence et al., 2015). This permitted more
breakdown of interviewees by country and position are included in focused discussion on what distinctions might plausibly exist be-
Table 3. tween a hypothetical individual who had partner potential and a
hypothetical individual who was not perceived to have partner
potential. Discussion in this regard successfully drew out some of
3.2. Data collection
the more behavioural and dispositional elements of professional
behaviour that constitute embodied cultural capital (Bourdieu,
A team-based approach to data collection was followed in order
1986).
to harness a diverse set of culturally specific expertise that could,
There are arguably challenges in relying upon actors’ repre-
ultimately, lead to more comprehensive understanding (Barley,
sentations of their own career success rather than observing the
1996; Jarzabkowski, Bednarek., & Cabantous, 2015). As such, na-
practices that they undertake first-hand e the logic of represen-
tives of each country under study formed part of the research team
tation versus the logic of practice (Czarniawska, 2001) e although
along with the lead author who played the role of ‘conduit’
to some extent these can be overcome by theoretical sensitivity to
(Jarzabkowski et al., 2015, p. 18) between different branches of the
Table 3
Breakdown of interviewees by country and position.
Country Total Interviewees Partners/Directors Senior Managers/Managers/ Other (Juniors/HR/Non-Big 4)

Associates
Japan 34 30 4 0
China 31 13 10 8
Totals 65 43 14 8
such issues from the outset which promotes an interrogation of the of the transcript in order to verify themes and check for in-
representations as they are articulated by organizational partici- consistencies. This combined coding methodology was productive
pants. Conversely, it could be argued that practitioner representa- because it encouraged ongoing conversations about the cultural
tions are part of practice, a key component of their own sense- nuances evident in the transcripts between the principal author (an
making and that there is, therefore, not such a sharp distinction Anglophone Westerner) and other members of the research team
between representation and reality after all. To the extent that such who were natives of the various countries being studied. Secondary
problems do exist, comparative work can mitigate these to a sig- coding of the transcripts was undertaken in order to establish
nificant degree by way of the contrasts that can be drawn between processes of capital conversion and to further refine existing cate-
representations from different contexts, each throwing the other gories and emerging themes. Throughout this process, regular
into relief. discussions took place between various members of the research
team. The conduit (Jarzabkowski et al., 2015), or boundary span-
3.3. Data analysis ning role of the lead author here was very important in ensuring
that a shared understanding developed among different members
All interviews were recorded and subsequently transcribed into of the research team.
their original language with the exception of two individuals in In addition to interviews, documentary analysis was undertaken
China who preferred not to be recorded. Translation of transcripts via the websites of professional associations, the firms themselves,
into English was undertaken for a selection of those that were trade and financial press, a review of relevant academic literature
conducted in Chinese or Japanese, in order to establish coding on the development of the accounting profession generally, and the
templates. Not all transcripts were translated into English out of a Big 4 specifically, and also wider literature on the economic
concern that linguistic and cultural nuances be lost in the process. development of each country. This wider reading supplemented
Summaries of each interview were provided immediately following interviews by helping to chart the parameters and historical
the interview. These summaries were discussed during regular emergence of the Big 4 field and providing important context for
skype or face to face meetings with members of the research team, making sense of the emerging conceptual story.
during which accounts and themes emerging across interviews
were explored (Miles & Huberman, 1994). Formal coding of the 4. Field formation and development
transcripts was undertaken with a view to identifying which forms
of capital were perceived as necessary to accumulate for career The Big 4 first gained a foothold in Japan in the late 1980s/early
advancement in each specific context. 1990s. This was curiously late for an OECD country. The various Big
During coding, sensitivity to any potential local specificities in 4 firms merged with local firms following what was a period of
forms of capital was facilitated by reference to wider literature on mergers and acquisitions in the Japanese audit market going back
Asian business systems and varieties of capitalism. For example, as to the early 1980s. The ethnic make-up of the Big 4 then, as now,
regards social capital, attention was paid to how interviewees went was overwhelmingly Japanese and the introduction of the Big 4
about cultivating the types of relationship that they cited as into Japan did little to alter established field dynamics (Karube &
important for career advancement, bearing in mind that studies on Fukukawa, 2013). Essentially, the Big 4 entered into what was
both China and Japan have shown the importance of strong inter- already a mature market and revenue growth has been steady since
personal ties (Li & Redding, 2014; Whitley, 2014). Likewise, coding that time before plateauing in 2008 following the global financial
for economic and commercial capital involved consideration of crisis (see Table 4).
whether interviewees emphasised entrepreneurial flair in their In the 1990s, the Japanese economy suffered from bad debts,
work activities or, alternatively, a more sober adherence to the in- which were partly caused by overly generous screening of mort-
terests of the organizational collective. Previous research suggests gage applications during the land price bubble of the 1980s (Fukao,
that the former might prevail in China (Peck & Zhang, 2013), while 2003). Although the economy had been associated with a ‘convoy
the latter might prevail in Japan (Hendry, 2013). However, it has system’ - denoting the role that the State played in applying strict
been shown in previous PSF research, in some instances, that the regulation to business - the Japanese government launched finan-
power of global firms is such that they are able to transcend the cial reforms that putatively heralded a less boilerplate, but more
cultural particularities of local contexts (Spence et al., 2015). In this focused, approach to business regulation. These reforms, inter alia,
respect, any potential tension or disjuncture between the local problematized the role of auditors, who the State had hitherto
‘variety of capitalism’ (Hall & Soskice, 2001) and the strategic im- expected to contribute to the ‘convoy system’ via the generous
peratives of ‘global’ firms, was also paid attention to. auditing of Japanese businesses (Hoshi, 2002; Matsubara & Endo,
Throughout the coding and analysis process, Bourdieu was used 2018). In order to enhance the auditing function, several amend-
as a theorist who was ‘good to think with’ (Lamont, 2012, p. 228), ments were made to the Certified Public Accountants Act. These
rather than one who provided ready-made interpretations of the included the nomination of ‘designated partners’, introduced in
data. Indeed, Bourdieu has been criticised for, not just Western- 2003, who assumed unlimited responsibility to auditees and third
centrism, but an even more narrow franco-centrism, which mani- parties, while non-designated partners were only responsible for
fests itself in an exaggeration of the importance of cultural capital third parties.2
and an underestimation of the importance of moral criteria when PwC Arata significantly differs from the other Big 3 in terms of
considering the composition of high status social groups (Lamont, its size and orientation. At the time of writing, the largest three
1992). Following Lamont (1992, 2012), it was therefore perceived firms employed approximately 4000 CPAs, while PwC Arata
as important to potentially go beyond the forms of capital that are employed approximately 2000. Although PwC Arata's legal status
consistently outlined in Bourdieu's oeuvre and pay attention to any as an ‘unlimited partnership’ did not oblige them to produce
unique insights that might emerge from the data, particularly the financial statements, there was a general perception that the Big 3's
evocation of moral arguments. revenues are far larger than those of PwC Arata. In addition to size
The coding was co-ordinated by the principal author on the
English version of the transcript and carried out in conjunction
with the team member carrying out the interview. The team 2
This was further amended in 2008 and non-designated partners' re-
member would make regular recourse to original language versions sponsibilities in relation to third party were limited to the amount of contribution.
Table 4
Revenue of big 4 Japan 2005e2014
Shin-nihon(EY) Azusa (KPMG) Tohmatsu (Deloitte) Arata(PwC) Chuo-Aoyama (06)/Misuzu(06e07)
2005 49.4 46.1 53.2 N/A 52.4

2006 56 48.5 57.5 N/A(established in 2006) 54.2
2007 65.9 55.3 64.4 8.6 N/A
2008 98.8 64.7 81 22.7
2009 104.3 87.2 86.3 24.1
2010 98.4 85.3 80.1 N/A
2011 95.9 88 81.6 N/A
2012 92.9 82.8 82.4 27.1
2013 96.4 80 83.8 27.1
2014 99.1 80.7 86.5 27.6
Source: Annual report, Nikkei Shimbun Newspaper (JPY in billions)
differences, PwC Arata's strategic orientation also significantly respective joint venture licenses. Moreover, the firms could have up
differs from that of the other Big 3 (see below). This is partly to 40% of foreign qualified partners when the partnership was
because PwC played a leading part in the establishment and initially formed. This 40% ceiling needed to be lowered to 35%, 25%,
operation of PwC Arata, whereas the other Big 3 maintained much and 20% by the ends of 2012, 2016, and 2017, respectively.
more ‘equal’ partnerships with their Japanese acquisitions. Sum- Furthermore, each of the Big 4's respective chief partners is now
marily, informants from PwC Arata told a different story about required to be both a Chinese national and a Chinese-qualified
promotion criteria and placed a greater emphasis upon non-audit accountant. This requirement instructs the Big 4 accounting firms
services, which was broadly similar to Western and Chinese Big 4 to hand over control of their Chinese operations to local partners
firms.3 gradually.
The history of the Big 4 in China is, perhaps surprisingly, no In terms of regulation, the Big 4 entered into a regulatory terra
shorter than it is in Japan. The Big 4 first opened offices in Shanghai nullis in China whereby they were, to a large extent, free to operate
and Beijing in the early 1990s. At that time, they were not full as they saw fit. In fact, given the immaturity of the accounting
‘members’ of the global firms but fledgling ‘representative offices’. profession at that time, the Chinese State relied heavily on the Big 4
Some of the initial staff of those offices now find themselves in very to promote a rapid expansion of accounting services, permitting
senior positions today.4 In China at that time, there was no estab- the Big 4 to play active roles in drafting and implementing ac-
lished audit market or accounting profession to speak of (Gillis, counting regulations in China. This effectively facilitated the
2014); audits were undertaken by the Ministry of Finance who, ‘westernization’ of the Chinese accounting profession (Gillis, 2014).
over time, have played a stronger role in regulating accounting It was explained to us by more than one interviewee that a
firms (Deng and MacVe, 2015; Hao, 1999; Yee, 2012). In the early certain degree of freedom was given to the Big 4 from the outset
1990s, the then Big 6 entered into a series of joint ventures with because they were seen as indispensable to attracting foreign
nascent local firms. The early offices that were established were investment:
very small and have been built up organically since. During this
You see all the Big Four sort of like entered China like in early
initial phase, Big 4 offices were run primarily by Hong Kongese
90s, 1990. Like PwC was 1993 and at the time a lot of companies
partners who, we were told, “were not interested in building up the
at that time is going why the Big Four is here is because a lot of
business in the long term and so were gradually displaced by
Chinese companies is doing financing, they want foreign money.
partners from Britain or the US” (C28).
They need to get Big Four in otherwise no foreign investor will
It is only recently that mainland Chinese constitute a majority of
trust, will want to put money in so at that time we did a lot of
Big 4 partners in China. An Act, known as the ‘Notice on Issuing the
work on those Chinese companies raising money from the
Scheme on the localized restructuring of Sino-Foreign cooperative
overseas markets. (C17)
accounting firms’, was issued by the government to this effect in
2012, when the joint ventures of KPMG, Deloitte and Ernst & Young
expired. According to the Act, the Big 4 was required to restructure Since this time, the Big 4 have grown exponentially, enjoying
into limited liability partnerships upon the expiration of their annual revenue growth routinely in the region of 30e40% on
average, before falling down to more modest levels following the
global financial crisis of 2008 (see Table 5). The corresponding
3
A longue dur ee perspective here might trace modern accounting practice in
growth in CPA holders in the Big 4 similarly reflects this boom in
Japan back to the drafting of the commercial code in 1890. Since that legislation was the market for accounting services in China, going from 865 in 2002
drafted by a German scholar, Herman Roesler based on the German system, pre- to 3412 in 2014.
war accounting practice was heavily influenced German traditions, which may be In summary, the experiences of the Big 4 were quite different in
best characterised by an emphasis on technical accounting. However, after the
each country. In Japan, the firms entered a well-established field
second world war, the US-led Supreme Commander for the Allied Powers signifi-
cantly reformed the economic structures of the country. This restructuring included whose rules were firmly embedded. In China, the firms entered an
the dismantling of Zaibatsu corporate groups and the introduction of new disclo- environment where the market for accounting services was very
sure practices. It would be interesting to historically trace how German 'anteced- immature and there was no auditing profession to speak of, thereby
ents' interacted with American colonial influences in the formation of the Japanese leaving the Big 4, to a significant extent, to shape the field in
accounting field, although such an endeavour is beyond the scope of this article (see
McKinnon, 1994 for some discussion of this). For the purposes of this article, it is
thier own image. In Bourdieusian terms, the Japanese Big 4 entered
interesting to note how indigenous cultures persist in spite of historical colonial into a pre-established field in which the ‘rules of the game’ re-
and global influences. flected historically constituted practices; in China, the Big 4 were
4
For example, we interviewed one senior partner in Shanghai who proudly pivotal in establishing a field per se and, from the outset, looked
presented to us his staff card with #2 emblazoned upon it, indicating that he was
West for guidance on which practices to implement and how (Gillis,
only the 2nd employee ever to work for his firm in the whole country. This indi-
vidual was in his mid 40 s at the time of the interview.
2014).
Table 5 More generally, compensation norms in Japan are such that

Big 4 revenue in China 2002e2014 senior executives in the corporate world are paid much less than
Year PwC Deloitte E&Y KPMG Total Growth they are in many other advanced economies. Furthermore, it is
2002 766 292 246 334 1638
considered inappropriate to have wide salary differentials between
2003 902 376 329 431 2038 24% organizational members. This is perceived to reflect, not only cul-
2004 1247 658 628 716 3249 59% tural norms, but attitudes towards risk and professional behaviour
2005 1803 908 972 915 4598 42% as well, as the following partner illustrates when comparing Japan
2006 2038 1286 1598 1237 6159 34%
with the US:
2007 2625 2124 2316 1945 9010 46%
2008 2755 2499 2700 2435 10,389 15% I came to learn that there is a big increase from a senior manager
2009 2578 2370 1961 2221 9130 12%
2010 2961 2600 2094 1862 9517 4%
to a partner, like doubling the pay in the US. But in Japan, the
2011 2956 2928 2277 1928 10,089 6% increase is modest, say 20% more only. I think the US partners
2012 3266 3045 2236 2136 10,683 6% are riskier though. So, I think in the US, high risk, high return; in
2013 3351 2881 2364 2347 10,943 2% Japan, low risk, moderate return. (J14)
2014 3713 3131 2833 2351 12,028 10%
Source: CICPA (RMB in millions)

The reference to ‘risk’ here is an essentially moral judgement on
the character of US auditors, who are perceived to be motivated
5. Capital values in comparison
primarily by individual financial concerns. This contrasts with what
Japanese partners state their motivations to be. For example, the
5.1. Japan: honour, worth and duty
following partner draws a contrast between Japan and Germany in
order to express clearly what motivates partners in Japan:
It was clear from analysis of our interviews that the primary
motivation of Japanese partners was to achieve a particular level Let's make it very simple. In Germany, the number one priority
within their organization, a level from which they would be is profit sharing. But Japan, the number one priority is the sur-
perceived as performing an essentially honourable role. In this vival of the firm. (J31)
respect, key signifiers from the Japanese interviews were ‘ongaeshi’
(repayment or returning a kindness), ‘giri’ (obligations or duty) and
The two quotes above indicate a perception that Western Big 4
‘hokori’ (pride). In summary terms, this coveting of symbolic rather
partners pursue individualist strategies to accumulate economic
than material rewards, was evident from two major themes that
capital whereas Japanese partners pursue collectivist strategies to
emerged from the data analysis: the eschewing of economic capital
ensure the overall health of the organization. This difference in
and the desire to leave a legacy behind them once partners retire.
overarching objectives equally manifests itself in differing feelings
The earnings of Japanese partners are very modest compared to
of ownership that prevail in each context. In Western countries, it is
Big 4 partners in other OECD countries,5 something that some of
a common refrain in Big 4 firms to refer to the organization as
our interviewees were aware of but did not necessarily lament.
owned and run on behalf of its partners. In Japan, although legally
Indeed, in some cases they were critical of how much money
the partners own the organization, they consistently pointed out
partners made in other countries, particularly the US, emphasising
that they felt more as if they belonged to the organization rather
the need to have team players rather than superstars:
than the organization belonged to them:
Individual performance is important. But, if you are doing
Partners make an investment, but the firm does not belong to us.
auditing, you cannot really identify an individual's contribution.
It is more like the firm is for everybody in the firm. Partners just
I mean superstars in auditing? Who will they be? In my opinion,
happen to be making the investment. (J12)
an auditing superstar is somebody who can negotiate quite well
with a client that does not want to disclose information properly
(J7) In short, Japanese partners do not seem themselves as entre-
preneurial deal makers, as their Western counterparts tend to.
Rather, they self-identify as ‘salarymen’, a cultural archetype that
The majority of a Japanese partner's earnings is made up of a
evokes loyalty, constancy and duty to a wider cause than oneself
fixed salary component. Bonuses are paid, but we were told by a
(Dasgupta, 2000). Our Japanese partners were therefore not, it
number of interviewees that these are overwhelmingly calculated
seemed, motivated overly by pecuniary concerns, instead routinely
on the basis of ‘firm’ rather than ‘individual’ performance. Such an
emphasising their desire to leave a legacy in terms of cultivating the
approach to profit distribution is a far cry from the ‘eat what you
next generation of partners coming through:
kill’ systems generally followed in Western countries, where Profit-
Per-Partner is an omnipresent signifier (Spence et al., 2015). Indeed, There is certainly a generation gap between me as a partner and
‘Profit-Per-Partner’ was not a salient signifier in the Japanese in- youngest staff, like 20 years or so. So, I do understand their
terviews, with the majority of interviewees not mentioning it at all, notion of some things are very different from mine. But, I do
never mind as the raison d’e ^tre of their firm. Indeed, it has been understand they try their best. And I would like to support them
pointed out that Japanese organizations in general tend to eschew a until they fully blossom. (J26)
performance culture in favour of the reproduction of elaborate,
I do auditing and there are still many things that I struggle with
ritualised routines e results being less important than conforming
… in the future I would ultimately like to do them by myself and
to the set way of doing things (Whiting, 2014, p. 689).
then to teach my subordinates. I was raised in the firm and I do
have a vision to improve. I really want to train my subordinates
in a better way than I was raised (J24)
5
Official figures are not available for this, but according to our interviews partner
earnings ranged from $135 k to $360 k. Compared with starting salaries for asso-
ciates of approximately $65 k or the salaries of senior managers at approximately Thus, symbolic capital in this sense needs to be understood in a
$105 k, the gaps between those at the top of the pyramid and those at the bottom
specifically organizational context, where the individuals
and middle are much smaller than they are in Western countries.
concerned are to be remembered for having shaped the organiza- partners, right? And they strongly believe, in their judgement,
tion in their own image, putting in place processes that allow this their candidates are qualified as new partners. So, in a sense, it is
image to endure even after they are gone. In this sense, ongaeshi quite important who your promoter is.
means giving back to the organization that has taken care of you.
The ongaeshi observed in the Big 4 in Japan reflects a more gener-
This patronage is common practice in Japan, where “status
alized high level of commitment to one's employer that sets Japa-
comes eventually to those who serve long and well” (Hendry, 2013,
nese employees apart from, not only their Western counterparts,
p. 111). Patronage has also been shown to be important in the Big 4
but employees in many other Asian countries as well (Whitley,
in Western contexts although this tends to be coupled with
2014). In Japan, organizations supplant the role of the family for
commercially oriented performance imperatives (Covaleski et al.,
many employees, to the extent that “a company superior could
1998). In Japan, being patronised by a senior partner in Japan
expect total loyalty from his subordinates, and the individual's real
generally depends on a number of other forms of capital or dis-
family should come second” (Hendry, 2013, p. 38). What is of in-
positions. One set of behaviours in this respect refers simply to hard
terest is to understand what forms of capital underpin this obliging,
work and time served. Working hours in Japan are gruelling in the
duty driven habitus.
Big 4 context, with interviewees routinely describing having to
work from 7am to 11pm, often on weekends as well. Although long
5.2. Japan: the ‘rules of the game’ working hours have been recognised as being a feature of PSF en-
vironments in Western contexts as well (Lupu & Empson, 2015),
This coveting of honour is also evident from analysing more Japan does appear to represent an extreme case of this.
comprehensively the various forms of capital that are perceived as
used to
You can say we are a black kigyo [black firm e a cliche
legitimate in the Japanese Big 4 field or, otherwise put, in exploring
refer to firms that exploit employees to extreme levels] … We
how different species of capital are accumulated in order to ulti-
want to shorten working hours. We have come up with various
mately be converted into the perception of an honourable and
ideas, for example, we set a ‘no overtime’ day, but nobody
worthy individual. The importance of institutionalized cultural
actually follows it (J1)
capital is important in the form of university and professional
credentials. Unlike in many other countries, the Japanese Big 4
recruit those who have already passed the CPA exam. For this In a culture where working long hours is one way of demon-
purpose, those willing to work for the Big 4 have to attend ‘cram strating organizational commitment, precluding overtime can
school’ while they study at university. Since the ‘art of cramming’ actually be a cause of stress for employees who feel that they are
matters in entering elite Japanese universities, those who pass the deprived of opportunities to show how dedicated they are to the
CPA exam tend to be from those elite universities. This approach to firm. This had led, we were told, to many instances of employees
the training of personnel is reflective of a tight coupling between working overtime anyway, but not charging their time to the firm.
the educational system and the perceived needs of the economy in This situation benefits the employee in another way by allowing
Japan, unlike in some Western countries like France or the UK them to complete their assignments in (officially) much less time
where general rather than vocational skills have historically been than it actually took them. In this context, one can see that time is a
emphasised in educational institutions (Lane, 1989). This system social construction (Clark, 1985; Das, 1993); aspirant employees
also affords the Japanese State the opportunity to control the have to more or less skilfully manage impressions of how they
supply of CPAs into the accounting labour force, which they have spend their time so that they able to demonstrate the ongaeshi and
done periodically by altering the difficulty of the final qualification giri that are so essential to career progression in the Japanese Big 4.
exam in response to overarching policy concerns.6 Ongaeshi and giri have deep historical roots in the Japanese
The most readily convertible form of capital - in terms of con- psyche (Noda, 1976) and evoke more readily a form of moral
version into symbolic capital - is internal social capital. We were resource rather than what Bourdieu would recognise as a sub-
told time and again that in order to make it to partner in the Jap- species of capital as such. Alternatively, enduring the hard work
anese Big 4, a candidate needed to have the strong support of most and working hours that characterise life in a Japanese Big 4 firm, as
likely one key senior partner within the firm. This is reflective of well as sustaining this commitment over a long period of time, have
hierarchical structures in Japanese companies, where very close very strong temporal dimensions and could thus be conceived of as
oyabun/kobun (parent-part/child-part) relationships develop a chronologically-based form of capital that sits outside of the usual
(Hendry, 2013, p. 105). This reliance on one key individual can make cultural-social-economic triad of capitals that are readily deployed
the whole partner promotion process rather opaque: in field analysis.
That time and age were distinguishing features of candidates for
You know, when you get promoted to a partner, you never know
promotion, marks Japan out as distinct from what is known about
what exactly enabled you to be a partner. Nobody, really, nobody
partner promotions in other countries. Without the valorization of
would tell you the exact reason. Of course, the criteria are set,
these, a much-coveted organizational harmony would be dis-
but in a way, they are very ambiguous. Partners make new
rupted. The following exchange taken from one interview illus-
trates this:
6
In the early 2000s, the State aimed to increase the number of ‘professionals’ by “It is very very important. You cannot really destroy the
establishing new graduate schools in the existing university system. To this end, seniority pyramid.
accounting schools, known as Kaikei Senmonshoku Daigakuin, were started. Atten-
dance at these schools afforded attendees exemptions from certain elements of the -So, if there is an extremely good performer, do you think he/she
CPA exam. Furthermore, the State made the CPA exam far less difficult in the mid could get promoted much faster than his/her seniors?
2000s, which was intended to increase the number of CPAs by qualifying those
graduating from accounting schools. However, many of those who passed the exam “No. It will do damage to harmony in the firm. We need to make
during this ‘easy’ period struggled to find employment in accounting firms. The sure that douki competition (competition among those who
JICPA, representing interests of CPAs in Japan, lobbied the State to reduce the
‘excessive supply’ of CPAs and, consequently, the exam became more difficult again
joined the firm at the same time) is ok, but it cannot be across
since the 2010s. This is reflected in Fig. 1, which shows the pass rate of the CPA different years of entry.” (J1)
exam over the last 20 years.
Internal social capital, bestowed primarily by a strong patron in habitus is underpinned by a variety of different forms of capital e
the form of a senior partner, is also dependent upon the accumu- institutionalized, embodied in the form of technical capital
lation of external social capital. As service organizations, working and various forms of social capital - each of which is convertible
with clients is, for most people working in senior positions in the in the overall process of being seen as a worthy and honourable
firm, a key aspect of what they do. In this respect, skilfully main- individual. This sequence of capital conversion, and the ultimate
taining good client relationships is something that partners are privileging of moral worth, is not replicated in the Chinese context.
expected to be capable of doing, although the expectations at PwC
Arata were often somewhat more akin to those in the West:
5.3. China e money talks
In Japan in general, if you have experience of maintaining a
relationship with a big client, then that would definitely benefit
The most highly valued form of capital in the context of Chinese
your promotion prospects. However, as we are a bit different
PSFs emerged very saliently from interviews as economic capital.
from the other Big 3, we sometimes see winning new clients for
The key signifiers littered throughout the discourse of Chinese in-
auditing as something that is worthy of reward. (J2, emphasis
terviewees related to ‘revenue generation’, ‘growing the business’,
original)
‘profit per partner’ and ‘fee income’. For many interviewees,
^tre for partners:
bringing in revenue was a self-evident raison d’e
‘Maintenance’ of relationships is the key word here, as ‘winning’
Obviously, you've got a pie here and every partner has a share of
new clients is rarely possible in the Japanese accounting field. In
it. If the new partner does not bring in new clients and make the
most countries, regulation stipulates that companies mandatorily
pie bigger, the other partners would have to give their shares to
rotate their auditors every few years. In Japan, this mandatory
you. So what is your value? Of course, the other partners would
rotation takes the idiosyncratic form of rotating an ‘audit team’
not want you to be promoted … you can be directors if you don't
within a firm rather than an audit firm per se. As such, Japanese
want to devote yourself to marketing but have other skills, say
companies tend to have decades-long relationships with audit
technical skills, project management skills … But for partners
firms. In this respect, managing client relationships does not
who have shares, revenue is absolutely the key. (C9)
denote, as it might in other countries, convincing clients to commit
to more services, but the delivery of a competent and rigorously
managed brief. This is evident in the relatively low percentage of The above quote is particularly noteworthy for the emphasis
revenue coming from non-audit fees, which have never exceeded placed upon ‘partners who have shares’. This denotes a shared
20% for the Big 3 firms in Japan. These figures are captured in Fig. 2. belief that partners are the owners and principal beneficiaries of
This denotes a privileging of technical expertise over business the firm, rather than employees of it. This belief stands in sharp
development skills. Seeking to exercise commercial capital when contrast to the ‘salaryman’ mentality observed in Japan, placing
they really should be doing technically rigorous audits is “consid- Chinese partners much closer to their counterparts in the West vis-
ered something shameful” (J19). Shame is an important mechanism
a-vis the valorization of economic capital. That economic capital is
of self-discipline in Japan (Whiting, 2014). accorded so high a value in China is also evident, both from the way
In summary, Japanese partners embody an honorific habitus in which performance is measured, and from the main criteria for
that is closely related to notions of ongaeshi (repayment), giri (duty) promotion to senior positions within firms there. Interviewees
and a collective sense of belonging to an enterprise bigger than described the process of promotion as ‘transparent’ and ‘straight-
oneself. This suggests, at first glance, that symbolic capital in the forward’, predominantly focusing on the ‘numbers’. Take the
Japanese context is more closely related to moral criteria that es- following quote from an interviewee:
chews economic motivations than it is to do with any specific
For [the promotion of] partners, it is all about how much reve-
form of capital. However, it can equally be seen that the honorific
nue you can bring to the firm in the future; how many
30,000 25
Applicants
(no.)
25,000
20
Pass (no.)
20,000
15
15,000 Pass rate
10
10,000
Female rate
5
5,000
Accounting
0 0 School rate
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Fig. 1. CPA Pass rate in Japan 1995e2015. Number (left axis, number) and profile (right, per cent) of applicants that passed CPA exam.
Source: FSA's website
1,20,000 86
84
1,00,000
82
Tohmatsu
80,000 80
Azusa
78
60,000 ShinNihon
76
Tohmatsu
40,000 74 Azusa
72 ShinNihon
20,000
70
0 68
2008 2009 2010 2011 2012 2013 2014
Fig. 2. Percentage of audit fees for Big 3 firms in Japan. Sales (left axis, million JPY) and Audit percentage (right, per cent) of largest accounting firms in Japan.
NB: Until recently, it was not legally mandatory for Arata (PwC) to disclose sales related information and thus the figures above relate to Tohmatsu (Deloitte), Azusa (KPMG) and
ShinNihon (EY).
Source: Annual Reports (2009e2015) (Tohmatsu, Azusa, ShinNihon)
employees you can pay for in your team; what's your sales developing new clients on a continuous basis. This was, in part,
number in the past and what resource you have to grow in the because of the need for senior managers and partners to transfer
future … (C10) some of their business to their subordinates:
So for senior one the panel will force the senior manager or
That accumulating economic capital was more important to experienced managers to transfer some of your routine services
career progression in China than Japan can be explained in part by to your managers … every partner will [show] more and more
the fact that there is more of it available to ‘high performing’ in- self-initiative because each year, you know, you cannot guar-
dividuals. Profit per partner figures in China are comparable to antee a bottom line of revenue … you're always looking for a
North American partner earnings and are among the highest in the new win so that's the kind of the pressure we put on ourselves
world, dwarfing the average earnings of their counterparts in Japan. to go to the market. (C14)
Additionally, there are real differences in terms of internal wealth
distribution. China has very high ‘leverage’, or partner to staff ratios
Chinese participants spoke more brazenly about ‘making deals’
e in the region of 1:20.7 In order to maintain Western levels of
and ‘winning work’ in a way that is more resonant of how these
partner earnings, those at the bottom of the pyramid are paid much
firms have been shown to operate in Western economies (Cooper &
less, in the region of $15 k to $18 k per year, which is derisory by
Robson, 2006). Indeed, although Big 4 firms in China still derive the
both Western and Japanese standards. This differential between the
majority of their revenue from audit e on average 65% from audit,
lowest paid workers and the highest paid workers would be
15% from Tax and 20% from advisory we were told by interviewees
considered socially unacceptable in Japan where the GINI co-
from different firms e the future growth potential is seen to be in
efficient is 32.1, but not in China where the GINI co-efficient is
advisory services, a service line that Japanese firms (with the
42.1.8 The great emphasis on individual performance reflects an
exception of Arata) feel rather uncomfortable with. Indeed, this
increased individualism and more pervasive culture of meritocracy
upward trajectory in non-audit services is corroborated by official
in Chinese society and organizations. These are associated with
data released by the CICPA. In their ‘Report on the Accounting
increasing ‘Western’ (Warner & Goodall, 2009) and ‘global’ (Knight,
Profession in China’ in 2015, the CICPA note that the percentage of
2006) influences on Chinese business practices. As scholars have
revenues that Big 4 firms derive from non-audit services was 18% in
pointed out, economic reform in China and the promotion of
2009, but 30% in 2015. Interestingly, growth in non-audit services is
modern e typically Western e management methods often un-
actively encouraged by the CICPA as a way of diversifying revenue
dermine traditional Chinese cultural values, which are premised on
streams, thereby producing what the CICPA see as a more sus-
respect for age and hierarchy, harmony and group orientations
tainable business model for large accounting firms.
(Lockett, 1988; Whyte, 2009).
Overall, it was very clear from our Chinese interviews that
Interviewees from different firms indicated similar numbers in
accumulating economic capital was the main function of partners
terms of expected annual revenue targets: $300-450 k for senior
there and that exercising commercial capital e in the form of
managers and $1.2 m to $1.5 m for first-year partners. Several in-
business development skills - was the way in which to achieve that.
terviewees stressed that meeting these targets required not only
In this respect, although economic capital is the clear end game, it is
‘maintaining existing clients’ but more importantly, required
really commercial capital that is the most highly prized resource in
the Chinese Big 4 and that therefore constitutes symbolic capital in
that milieu. However, as with the Japanese pursuit of honour, the
7
High partner:staff ratios can in part be explained by the nature of financial year successful accumulation of commercial capital is also predicated on
ends in China all falling on December 31st, leading to the need to employ a lot of the complicated and skilful (Fligstein, 2013) accumulation and
people for the busy months of JanuaryeFebruary, although there is then a lot of
‘idle time’ outside of this time period for junior employees.
conversion of other forms of capital. It is to these processes that we
8
http://data.worldbank.org/indicator/SI.POV.GINI?page¼1, last accessed 16th now turn.
December 2015.
5.4. China: the ‘rules of the game’ example during every of one your visits to the [Tax Bureau]. You
know, you prepare for it, you get to know more people and it's
We only care about the results, whether you perform or not and easier when you have problems. [C9]
how well (C11)
The above quote is interesting because it is indicative of how open
The above quote is from an HR manager and exemplifies her participants were about the need to cultivate strong, long-term re-
firm's clear focus on commercial capital, although this is not to lationships with government officials. Beyond government officials,
suggest that its exercise or accumulation is straightforward. For the importance of guanxi with SOEs was not lost on the Big 4, who
example, we were told that being able to grow the business and bring accord it increasing attention. Historically, the Big 4 grew their busi-
in more revenue required excellent communication skills - people ness in China mainly with MNE clients, although as SOEs have now
who had personality rather than merely technical ability. Indeed, grown in size and are increasingly listed on overseas stock exchanges,
networking through informal personal connections (guanxi) remains they now ‘represent the future direction of market growth’ (C31) for
important and prevalent in business practices in China (Luo, 2000). the Big 4 in China. However, this should be tempered by the views -
These were the same skills that we were told were necessary in order shared by a number of interviewees - that the Big 4 lacked good guanxi
to generate the external social capital that is, crucially, a pre-requisite with the SOEs, unlike local accounting firms, many of whom were
for growing fee income. Specifically, whilst there was consensus initially established by the Ministry of Finance. The Big 4 in China are
among interviewees on the importance of trust building with trying to overcome this limitation by establishing departments to
existing clients, particular emphasis was given to the ability of in- specialise in relationship building with SOEs and government min-
dividuals to build as wide a personal network as possible in order to istries and, more directly, via buying in guanxi (converting economic
win new business. This was revealed in the following conversation: capital into social capital) by hiring ex-government officials, some-
times as partners, who have good connections in the SOE sector.
- What type of people make partner?
Former state cadres defecting into the private sphere are seen as
- Well, those who do marketing … those who like marketing, ‘brokers’ who convert political privilege into economic wealth,
sales, having wide connections. They like to ‘dig into’ their exploiting opportunities in the ‘symbiotic exchange’ between market
existing connections. They utilise their college mates, former and State (Liu, 2011). Although it is too early to tell how successful
colleagues, colleagues' colleagues, everyone they know to make these strategies will be for the Big 4, it is clear that external social
new friends, to grow their networks … Not everyone enjoys this, capital plays a direct role in bringing in economic capital.
socializing, making friends and meeting new people all day and Internal social capital is also important in China, but mainly in a
all night, but partners are those who enjoy this. Some people way that serves the purpose of income generation. Many in-
struggle to make connections with ten people, but partners can terviewees said they were given business opportunities by their
meet with 100 people (C10) mentors or colleagues. Unlike in Japan, where employees enter into
a rigid master/apprentice relationship that demanded many years
of loyalty in exchange for the vague but unguaranteed hope of
This networking also extends into the State apparatus. One clear
eventually taking the master's place once he/she retired, we were
contrast between China and ‘the West’ vis-a -vis the accounting
told, by more than one interviewee in China, that it was much more
profession concerns State clientelism. This is reflected in the ne-
important to perform well than to build long-term relationships
cessity for accounting firms to accumulate a particular form of
with senior organizational members. For example, one interviewee
external social capital associated with the State, especially with
explained that the high turnover among even senior staff meant
governmental officials and decision-makers in state owned enter-
that it was often worthless to seek long-term relationships:
prises (SOEs). In comparison to the largely laissez-faire history of
the Anglo-American professions, the Chinese State not only directly I used to work for two managers, Director S and Manager M.
gave birth to the accounting profession, but also constantly in- Director S was experienced and in charge of annual appraisal of
tervenes in the accounting field through, for example, permitting our department. Therefore, lots of my colleagues paid particular
market entry and providing policy support (Gillis, 2014). In attention to the work assigned by Director S while just
particular, ‘guanxi’ was mentioned a lot in this context as a means of ‘completing’ the work by Manager M. However, Director S left a
circumventing formal processes and regulations (Luo, 2000; Xin & couple of years later and Manager M was promoted. Those
Pearce, 1996). More than one interviewee explained that the exis- colleagues then found themselves in an awkward position … I
tence of many ‘grey areas’ in the formal regulatory system in China mean, it is tiring and pointless to spend time doing this. It often
had made guanxi with government officials crucial in order to get brings in negative effects. It is more useful and valuable to get
things approved and expedited. This is consistent with Michelson’s things done and let your performance speak for itself. (C9)
(2007) observation of Chinese lawyers who rely on political con-
nections with the State in tackling everyday difficulties, or with
Thus, whereas in Japan internal social capital is accumulated via
Peck and Zhang (2013) who go as far to describe China's socio-
a linear process of loyalty, dedication and (often) simply growing
economic system as “guanxi capitalism” (p.382). Indeed, willing-
older, in China these explanations give way to a more naked ability
ness and ability to establish connections with government officials
to accumulate and exercise commercial capital.
such as those in the Tax Bureau and the Ministry of Finance were
In terms of institutionalized cultural capital, CPA qualifications
expected from an early stage of one's career:
are not required at the recruitment phase in China, nor were they a
To give you an example, we sometimes have certain documents pre-requisite for partnership admission until very recently .9 We
suspended in the Tax Bureau and they [people in the Tax Bu-
reau] don't bother to explain anything to us. In such circum-
stances, you can wait or you can try to solve the problem … You 9
It was not until 2012 that CPA qualification became the pre-requisite for part-
can call your connections in the Tax Bureau and ask them to help ners in the Big 4 in China. This is regulated by the Chinese government in an Act,
you to find out what is going wrong … well, these connections known as the ‘Notice on Issuing the Scheme on the localized restructuring of Sino-
Foreign cooperative accounting firms’, in which all partners are required to hold a
don't come over night; you cultivate them throughout, for
CPA qualification.
were told by a number of interviewees that one could be promoted productive relationships beyond the firm (with clients and gov-
to partner without a CPA qualification as long as he/she brought in ernment officials) is more privileged, in many instances, than in-
clients and revenue. To the partners in the Big 4, the CPA qualifi- ternal harmony. Technical capital was regularly discussed and
cation is, while important and increasingly a means of making the extolled in Japan and, although this is surely important to firms in
business more ‘Chinese’, in many senses a perfunctory form of China, was evoked much less in comparison to commercial capital,
capital. as was evidenced by the widespread concern with the cultivation of
In summary, senior members of the Big 4 in China need to business development skills in the Chinese context. In Japan, we
possess excellent relationship skills and the ability to nurture also identified chronological capital as a key means of dis-
guanxi connections. Once they have established trust with MNEs, tinguishing oneself from one's peers. Again, in China, time served
SOEs and government departments, they are then in a position to and hours clocked are also important, but the greater degree to
exercise their commercial capital by providing additional services which individuals change jobs there suggests that pursuit of a
to their clients, which in turn leads to the accumulation of eco- successful career is predicated more on commercial capacity than it
nomic capital, for both their firms and themselves. is on knowing one's place within organizational succession plans.
The contrasting values accorded to these forms of capital are
6. Discussion and conclusion summarised in Table 6. Overall, Table 6 clearly shows that there are
stark differences between the two countries studied in terms of
This study has sought to answer three principal research ques- what types of behaviour and resources need to be adopted and
tions. Firstly, it was asked: what constitutes symbolic capital in the accumulated by PSF actors who ascend to the heights of their
Big 4 in both China and Japan? Answering this question demands organizations.
an understanding of what it means to be a partner and, by exten- Our third research question posed was: what are the historical
sion, identifying that form of capital which crowns all others and contextual factors that explain why certain forms of capital are
(Harvey & Maclean, 2008) in each context. In other words, not all more highly valued than others in the Chinese and Japanese PSF
forms of capital are equal and those identified above tend to un- fields? In order to explore this question, consideration was given to
derpin one form of capital in particular and also a specific form of the emergence and subsequent development of the Big 4 field in
habitus in each context. In Japan, our results suggest that symbolic either country. Interestingly, the Big 4 entered both China and Japan
capital constitutes a set of dispositions that privilege ongaeshi at roughly the same time point in the early 1990s. However, in
(repayment) and giri (duty). Interestingly, and here we have to Japan, the Big 4 built up their business through a series of mergers
move beyond Bourdieu, these signifiers connote a set of moral with already well established Japanese firms and, as such, have
boundaries or criteria (Lamont, 1992) much more readily than they maintained a Japanese identity throughout, one manifestation of
do a particular form of capital. Bourdieu's notion of habitus, how- which is the absence of a large non-audit services market. These
ever, remains crucially important and helps to explain the essen- field level dynamics in many ways explain why the habitus iden-
tially honorific set of dispositions that Japanese partners embody. tified among Japanese partners was a very Japanese one - with
In contrast, in China, the partners and other senior members of PSFs Japanese participants routinely outlining the appropriate way of
interviewed there embodied a much more commercially focused doing things in contradistinction to ‘the West’, the United States in
set of dispositions, constituting what we denote here an entre- particular. In contrast, the Big 4 developed their business in China
preneurial habitus. Although underpinned by various forms of from a more or less terra nullis situation, driven by the strategies of
capital, this habitus is readily synonymous with the behaviours partners flown in from Hong Kong and various Western countries.
required in order to accumulate and exercise commercial capital. That the habitus encountered among senior members of PSFs in
Commercial capital clearly crowns all other forms of capital in the China was much more entrepreneurial and consistent with the
Chinese context. habitus of Big 4 partners in Western countries, appears to be
Our second research question explored more broadly whether explicable by reference to the large degree to which the Big 4 in
different forms of capital were accorded different values by GPSFs China looked to the West for guidance on how to develop its
in different Asian countries? We show here that different forms of business models in the 1990s. This coincided with China's eco-
capital are accorded different values in Japan than they are in China. nomic and social reforms of the time, which embraced ‘Western’
In Japan, actors in PSFs have an uncomfortable relationship to and ‘global’ influences. However, this is not to suggest that the Big 4
economic capital, unlike in China where economic capital is glori- in China adopt Western templates wholesale. As we have shown,
fied as an end in itself. Social capital is also differentially valued and the Chinese State remains an important gatekeeper, exercising a
accumulated by successful organizational actors: in Japan, good monopoly over the channelling of global norms and institutions
relationships with colleagues and oyabun/kobun patronage systems into the Chinese accounting field. The effective ‘Westernization’ of
imply that internal social capital is of paramount importance; in the Big 4 in China needs to be understood as a conscious decision by
China, in contrast, the greater emphasis on individual performance the State, a means to quickly institutionalize an accounting pro-
measurement means that external social capital in the form of fession in order to attract foreign investors. So ‘Westernization’
Table 6
Species of Capital identified as valuable for Big 4 partners in Japan and China.
Species of Capital Value Accorded in Japan and form taken Value Accorded in China and form taken
Economic Means of ensuring firm survival but stable revenues valued over Raison d'etre of firms; main partner motivation
growth; open pursuit of personal material gain seen as shameful
Institutionalized Good university degree and difficult CPA exam entry requirements Good university degree entry requirement; difficult CPA exam
Cultural Capital pursued during early years; CPA credential means of ensuring
majority of Chinese partners going forward
Embodied Cultural Technical capital; moral dispositions; chronological capital all very Commercial capital (business development) most important;
Capital important
Social Capital Internal relationships most valued; master/apprentice External, economically valuable relationships most important
Symbolic Capital Duty and obligation/honorific habitus Commercial capital/entrepreneurial habitus
exists only insofar as it suits the interests of the Chinese State. dispositions, of individuals, the tension that plays out when global
Furthermore, the ingrained nature of State clientelism in China has and local ‘rules of the game’ are juxtaposed (Mennicken, 2008) can
pushed, and will continue to push, the Big 4 to ‘localise’ their be observed and described. In Japan, the focus on ongaeshi, giri and
practices in order to accumulate the highly valuable social capital being seen to be an honourable individual demonstrate the
that is associated with government actors. importance of traditional Japanese values and, by extension, the
These findings permit us to make a number of conceptual con- rather limited extent to which global firms have succeeded in
tributions to literature on GPSFs. Firstly, by advancing the view of instituting global ways of doing things. In contrast, in China, the
accounting as a ‘field’ rather than a ‘profession’, we offer a way out more entrepreneurial habitus is reflective of a more active embrace
of enchantment by the research object, a way to “wrench scientific of ‘Western’ norms and practices. In turn, this results from the more
reason from practical reason, to prevent the latter from contami- recent Chinese establishment of an accounting field, but also it
nating the former” (Bourdieu & Wacquant, 1992, p. 247). By reflects the greater consonance between Chinese ideals of personal
extension, this has implications for our conceptual understanding enrichment and the main tenets of global neoliberal wealth accu-
of PSFs which has long been caught up in the dualistic logics of mulation. In both cases, habitus is shown to be a productive way of
commercialism and professionalism. The perspective advanced bringing the encounter between historical dispositions and
here effectively replaces a view of ‘commercialism and profes- contemporary imperatives to the fore. Paying attention to the way
sionalism as discrete logics’ with a ‘logic of discrete commercial- in which different forms of capital are accumulated within specific
isms and professionalisms’. The separation of professionalism from fields also goes some way towards illustrating this encounter, but
commercialism enacted by the institutional logics perspective is more fine-grained attention to the embodied habitus of individuals
problematic, especially as the former tends to be lionised in overly adds a further dimension by drawing attention to those aspects of
sentimental terms. We suggest here that it is conceptually more society which are deeply embedded within individuals, and those
fruitful to leave the terms ‘professional’ and ‘professionalism’ open, which are more susceptible to change.
more akin to floating signifiers (Laclau, 2005) than pre-fabricated
logics. A ‘professionalism as symbolic capital’ perspective permits Acknowledgements
such a de-essentialized understanding (see also Mueller & Carter,
2007). Following this line of thinking, we can also contemplate British Academy grant SG150354 partially funded this research.
the possibility of professionalism at times becoming completely The authors would like to thank David Cooper, Laura Empson,
equated with commercialism, something that a strict institutional Mahmoud Ezzamel, Sida Liu and participants at research work-
logics perspective precludes. In practical terms, this also suggests a shops at Cass Business School and Newcastle University for com-
need to understand the strategies of ‘high status occupational ments on earlier drafts of this paper. The Editor, Mike Power, and
groups’ rather than ‘professionals’. At the very least, researchers two anonymous reviewers, should also be thanked for their thor-
should think twice before imposing the latter label onto the former. ough and constructive engagement with the paper, which resulted
Secondly, that signifiers such as ‘professionalism’ and in its improvement and refinement. Any remaining errors are our
‘commercialism’ have context specific meanings is suggestive of the own.
need for a new framework for understanding PSFs in comparative
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© 2016 Elsevier Ltd.

Contents lists available at ScienceDirect

Accounting, Organizations and Society

Neutral and presumptive doubt perspectives of professional

1. Introduction standards concerning fraud (e.g., Nelson, 2009; Quadackers et al.,

Fig. 1. Hypothesized model of auditors' professional skepticism.

H4b. Neutral PS will have a positive indirect effect on perceived Table 1

turnover intentions. Gender Firm Type

Variable n Mean Std. Dev.

Neutral PSa 176 4.69 0.46

Fig. 2. Model results.

Panel A: Direct Effects

Predictor Variable Dependent Variable Prediction Coefﬁcient Conclusion

Panel B: Indirect Effects

Predictor Variable Dependent Variable Prediction Coefﬁcient Conclusion

Panel C: Total Effects

Predictor Variable Dependent Variable Coefﬁcient Conclusion

Self-Determining 0.08 0.21** 0.08 0.10

Fig. 3. Robustness results.

% Slightly Agree or Strongly Agree

Perceived Partner Support for PS

J.R. Cohen et al. / Accounting, Organizations and Society 62 (2017) 1e20

Fig. 4. Additional analysis.

Scale Items (“R” ¼ reversed item) Item Reference Factor

Neutral PS (1 ¼ strongly disagree and 6 ¼ strongly agree)

Scale Items (“R” ¼ reversed item) Item Reference Factor

Appendix B. Robustness results

Panel A: Direct Effects

Predictor Variable Dependent Variable Prediction Coefﬁcient Conclusion

Panel B: Indirect Effects

Predictor Variable Dependent Variable Prediction Coefﬁcient Conclusion

Panel C: Total Effects

Predictor Variable Dependent Variable Coefﬁcient Conclusion

Appendix C. Replication of main analysis using the

Panel A: Direct Effects

Predictor Variable Dependent Variable Prediction Coefﬁcient Conclusion

Panel B: Indirect Effects

Predictor Variable Dependent Variable Prediction Coefﬁcient Conclusion

Panel C: Total Effects

Predictor Variable Dependent Variable Coefﬁcient Conclusion

Panel C: Total Effects

Predictor Variable Dependent Variable Coefﬁcient Conclusion

Neutral PS Perceived Partner Support for PS 0.14 Signiﬁcant at p < 0.10

References Chapman Hall.

Contents lists available at ScienceDirect

Accounting, Organizations and Society

An error management perspective on audit quality: Toward a multi-

1. Introduction (Francis, 2011; Hopwood, 1996). Thus, the speciﬁc mechanisms

IRQ_R (+) 0.350 1.89 DIRQ_R (+) 0.117 1.74

TobinQ 0.303* 0.305 0.223 0.362* 0.302 0.272

IRQ_R () 0.192* 2.54 DIRQ_R () 0.184* 4.48

Bid_Ask 0.197* 0.172* 0.186* 0.140 0.166* 0.135

Bid_Ask 0.118 0.131* 0.151 0.195* 0.180* 0.156***

EFCF 0.233 0.413* 0.508 0.550 0.508** 0.302

IRQ_R (+) 0.047* 1.42 0.049 1.91 0.124 1.97