（2002）Aggressive Client Reporting：Factors Affecting Auditors Generation of Financial Reporting Alternatives.pdfVIP

AUDITING: A Journal of Practice Theory Vol. 21, No. 1 March 2002 Aggressive Client Reporting: Factors Affecting Auditors’ Generation of Financial Reporting Alternatives Karla M. Johnstone, Jean C. Bedard, and Stanley F. Biggs SUMMARY This paper examines how features of the task environment interact with task knowl- edge to affect auditors’ generation of financial reporting alternatives. We study this issue in a setting in which an audit client proposes an aggressive financial reporting alterna- tive for a complex revenue-recognition issue. Companies’ aggressiveness in financial reporting is an important contemporary topic (e.g., Levitt 1999, 2000). For auditors, aggressive financial reporting increases litigation exposure (e.g., Palmrose and Scholz 2001) and attracts regulatory attention (e.g., Public Oversight Board 2000; Securities and Exchange Commission 1999). By proposing less aggressive financial reporting alternatives, auditors increase the likelihood that clients will report less aggressively, thereby reducing auditors’ risks of litigation and regulatory exposure. We study the effects of two common features of auditors’ task environment (the level of engagement risk and the availability of previously generated alternatives) on financial reporting alter- native generation, investigating whether these effects are contingent on auditors’ task knowledge. Our results support interactive effects for both task environment features. Higher engagement risk enhances generation of alternatives only among higher knowl- edge auditors, while the presence of an inherited alternative inhibits generati