THE IMPACT OF CLIENT INTIMIDATION ON AUDITOR INDEPENDENCE IN AN AUDIT CONFLICT SITUATION

Damai Nasution *, Ralf stermark School of Business & Economics bo Akademi University Finland

A DRAFT VERSION 18 OCTOBER 2012 Please Do Not Quote without Permission

Corresponding author; email: damai.nasution@abo.fi

Abstract An audit conflict situation is argued may impair auditor independence; especially when a client exerts pressures to an auditor in order to get favored results. Client pressures can manifest into several forms, one of these is intimidation in which a client threatens to replace the auditor if the auditor does not tend to the clients position. This study aims to investigate the impact of client intimidation on auditor independence in an audit conflict situation. It also attempts to investigate the impact of auditors perceived pressure on auditor independence. Finally, this study also explores the moderating roles of auditors professional commitment dimensions in the relationship between auditors perceived pressure and auditor independence. An instrument based case was administered to 119 auditors from mid-sized auditing firms in Indonesia. The subjects were divided into two groups with the presence or absence of client intimidation in an audit conflict situation. Auditor independence is measured through the net equipment balance signed-off by auditors for equipment in question. The higher the net equipment balanced signed by the auditor, the more likely the auditor compromised independence. ANOVA and regression analyses were used to test the studys hypotheses. The results show that: (i) auditors who experience client intimidation in the audit conflict situation will more likely to compromise independence than those who are in a similar situation but do not experience the intimidation; (ii) auditors who experience the client intimidation perceive higher pressure than those who do not experience it; (iii) auditors affective and continuance professional commitment dimensions moderate the relationship between auditors perceived pressure and auditor independence. The results indicate that the negative impact of client intimidation on auditor independence; however, high auditors professional commitment can hamper that negative impact. Keywords: Auditing, auditor independence, audit conflict, client intimidation, perceived pressure, professional commitment

INTRODUCTION The public and regulators have expressed concerns regarding auditor independence for a long time. However, these concerns culminated after a series of corporate failures that failed to be faulted by auditors and restatements to audited accounts, e.g. the HIH Insurance (March, 2001) and One.Tel (July, 2001) in Australia; Enron (October, 2001) and WorldCom (June, 2002) in the U.S.; Vivendi (July 2002) in France; Ahold (February, 2003) in the Netherlands; Parmalat (February, 2003) in Italy; and Kanebo (2006) and Olympus (2011) in Japan. These corporate failures caused public to doubt the independence of auditors and raise serious concerns to auditors ability to resist client management pressures, especially in an audit conflict situation, and the overall value of auditing (Lin and Frazer, 2008; Ye, Carson, and Roger, 2011). The public places trust to auditor to conduct their duty in independent ways. By benign the independence, auditor could increase the reliability and credibility of financial statements. Thereby, the public can rely to the audited financial statements as a basis for their decision; especially investment and loan decisions. Meanwhile, regulators concerns to auditor independence are more likely to avoid any shock to the stability of capital markets caused by audit failures. An audit conflict situation is one of situations that may impair auditor independence. Accordingly, Knapp (1985) stated that audit conflict is potentially a serious threat to auditor independence. It is a situation in which there is disagreement between an auditor and a client over some accounting issues. In the presence of audit conflict, the auditor commonly is in a weak position when dealing with the client because of an imbalance of power between the auditor and the client; hence the auditor is tending to be lenient to the clients position. Moreover, the client, in order to get favored results, can also exert pressures on the auditor. These pressures can be materialized into threats; one of them is intimidation threat. The international Federation of Accountants (IFAC, 2012) also categorizes this threat as one of five threats to auditor independence. Intimidation threat occurs when a member of an auditing team may be deterred from acting objectively and exercising professional skepticism by threats, actual or perceived from directors, officers or employees of an audit client (IFAC, 2012). Accordingly, Bennett and Hatfield (2012) stated that client management may use explicit or implicit intimidation tactics on auditors in order to achieve their goal. In the survey that Bannet and Hatfield conducted, they found that auditors, especially staff-level auditors often experience intimidation by audit clients. A common form of intimidation threat is the threat of replacement of an auditor. For instance, as the Olympus scandal revealed in 2011, it also revealed that Olympus replaced its auditor in 2009 as an outcome of a disagreement over accounting issues (Layne and Ridley, 2011). In addition, Cheung and Hay (2004) found that shareholders believe that 3

intimidation threat affects auditor independence. Astonishingly, according to Fearnley, Beattie, and Richard (2005), intimidation threat is the threat that has the least prohibition and safeguards in the auditor independence frameworks. Prior studies have examined the impact of audit conflict on auditor independence and found important evidences. Yet, to our knowledge, there are no studies that directly examine the impact of client pressures in the form of explicit client intimidation to replace the auditor on auditor independence in an audit conflict situation. The lack of literature is motivating this study. Moreover, DeZoort and Lord (1997) develop a pressures model described several variables that may affect how auditors will behave in the presence of pressures. Hence, based on that model, this study includes auditors perceived pressure and auditors professional commitment that might affect and moderate auditor independence in the presence of client intimidation. Moreover, the present study advances upon prior studies by using a multidimensional measure of professional commitment. Auditor independence is measured through the value of the net equipment balance signed-off by the auditor. The higher the net equipment balance signed-off by the auditor indicates the more likely the auditor will compromise independence. This study contributes to existing auditing literature in several ways. First, this study examines the impact of explicit client intimidation on auditor independence in an audit conflict situation. Second, this study provides empirical evidence of a pressure model that was developed by DeZoort and Lord (1997) in two respects, by examining: 1. The impact of auditors perceived pressure in the presence of client intimidation on auditor independence, 2. The moderating role of auditors multidimensional professional commitment on the relation between auditors perceived pressure and auditor independence in the presence of client intimidation. Overall, the study contributes to our understanding of how explicit client intimidation may deteriorate auditor independence and affect auditors perceived pressure. It also contributes to our understanding about the moderating role of each auditors professional commitment on auditor independence.

THEORETICAL FRAMEWORK AND HYPOTHESES DEVELOPMENT Audit Conflict and Client Intimidation Independence is the most valuable asset of the auditing profession and has been discussed by practitioners and academics for a long time. However, until nowadays the definition of auditor independence is still inconclusive. According to prior studies, there are several definitions of auditor independence. For example, Knapp (1985) define independence as an auditors ability to resist client pressure. McKinley, Pany, and Reckners (1985) define independence as the auditors ability to act with integrity and objectivity. Bartlett (1993) defines independence as an unbiased mental attitude in making decision about audit work and financial reporting. Additionally, Nouri and Lombardi (2009) define independence as freedom from the control of those whose records are being reviewed. From the perspective of aforementioned definitions indicate that there are some challenges that may affect auditor independence. One of these is an audit conflict situation that occurs in the auditing assignment between an auditor and a client. Audit conflict between the auditor and the client usually emerges when there is a disagreement between the auditors and the client over some accounting issues, including the need to make adjustments to the financial statements, the appropriate of clients applied accounting principles, or the adequacy of financial statements disclosure (Knapp, 1985). The audit conflict situation has urged the interest of both regulators and researchers because it is potentially a serious threat to auditor independence (Knapp, 1985). Moreover, an audit conflict situation that occurs in the auditing process should be resolved before the auditor can provide an opinion on the financial statements. Goldman and Barlev (1974) argue that in an audit conflict situation, a client has a strong incentive and power to get more favorable audited financial statements. This incentive aligns with shareholders interests: both, although based on different motives, want the audited financial statements to provide a good impression on third party. The good impression would assure potential investors to invest in the firm as well as creditors to grant the loans. In the presence of audit conflict, Auditors are commonly in a weak position because of an asymmetrical power relationship between the auditor and the client in which the client selects the auditors, determine scope of auditing, and terminate or replace auditors. The client also provides the auditor with the facilities and information needed to perform the audit work; even when the auditor is selected by audit committee, there are no specific enforcement mechanisms ensure that the client does not become involved, directly or indirectly, in selecting the auditor or determining the audit fee and the scope of the audit (Windsor, 5

2005; Baker, 2005). Consequently, the auditor tends to favor to the clients position (Kadaous, Kennedy, and Peecher, 2003; Moore et al., 2006). Furthermore, besides the asymmetrical power relationship between the auditor and the client, the client may also exert pressures on the auditor in order to assure favored results. Accordingly, prior studies reveal that there are at least two pressures that faced by auditors and can deteriorate auditor independence (Knapp, 1985; Gul, 1991; Tsui and Gul, 1996; Lord and DeZoort, 2001; Lin and Fraser, 2008; Nasution and stermark, 2012). The first is pressures within the auditing firm, named social influence pressures, consisting of obedience pressure that exerted by managers or partners and conformity pressure that exerted by peers. The second is pressures exerted by a client. Lee (1995) stresses the public doubt regarding the ability of an auditor to resist client pressures to misreport. In addition, Lord (1992) states that even though auditors face several forms of pressures in the audit assignment, research into auditor decisions or judgments has seldom incorporated these pressures into their research design. Pressures from a client can be directly or indirectly, explicitly or implicitly exerted by the client, and can also manifest into several forms (Lord, 1992). Accordingly, Knapp (1985) examine how certain contextual factors will affect of the audited financial statements users perception on auditor independence. The contextual factors are: the nature of conflict issues, the clients financial condition, the provision of client management accounting system (hereafter MAS), and the degree of competition in the external audit market. The findings supports that the contextual factors in auditor-client conflicts affect users perception on auditor independence. In line with Knapps study, Gul (1988) examines bankers perception on contextual factors that will affect auditor independence. The contextual factors consist of audit committee, clients financial condition, provision of MAS, level of competition in the external audit market, and audit-firm size. Using experimental method, this study finds that MAS, level of competition, and audit-firm size are perceived to affect auditor independence. Furthermore, extending his prior study, Gul (1991) examines the effect of audit fee size, MAS, audit firm size, and competition on audit independence. Subjects, forty-nine bankers, were asked to make a subjective judgment regarding auditor independence in the case of materially unrecorded liabilities. The results support the hypotheses that audit fee size, MAS, audit firm size, and competition affect bankers perception of auditor independence. Both Knapp (1985) and Gul (1988, 1991) focus only to the perception of financial statements users and not to auditors directly. Felix et al. (2005) argue that focusing to users of

audited financial statements rather than on auditors might be due of difficulty in creating realistic pressures or intimidation treatments in an experimental setting. However, some further studies have tried to improve Knapp and Gul Studies through focusing on auditors and treating pressure in their research designs. Felix, Gramling, and Maletta (2005) study the influence of client pressure on auditor independence in term of auditors decisions to rely on internal audit. They measure client pressure through auditors assessment on how intensively their clients encourage them to use internal audit work. A survey was conducted to collect the data. The finding shows that auditors appear to be less concerned with internal audit quality and coordination in making internal audit reliance decisions when they face more intensive client pressure. Hatfield, Jackson, and Vandervelde (2011) investigate auditor independence in term of auditors proposed audit adjustment in the presence of a client pressure. A client pressure was materialized into two components: client importance and client opposition to adopt the adjustment. They believe that these two components together will create a strong manipulated treatment of the client pressure. Using 149 auditors responses, they find that client pressure significantly affects auditor independence. It indicates that auditors who face client pressure will propose audit adjustment to a lower amount than those who do not face the client pressure. Besides asymmetrical power relationship between the auditor and the client and also the possible pressures exerted by the client, auditor independence may be impaired through an incitement to ensure and retain consecutive audit assignments from the client. Chang and Hwang (2003) show retention motivation or incentive will affect auditor independence; at the same time, the auditor will also consider the clients business risks. In addition, Blay (2005) argues that the fear of losing the client will let auditors to compromise their independence. Moreover, Goodwin and Trotman (1995) show that auditors will compromise their independence when the risk of losing the client is high. And indeed, their study reveals that when the risk of losing the client is high then it appears to dominate the risk of litigation. This means that auditors will weigh the risk of losing the client more than the risk of litigations that may arise from audit failures. Taken together, the literature suggests that when audit conflict occurs between the client and the auditor, commonly, the auditor is in a weak position, especially in the presence of client pressures. This is because of an asymmetrical power relationship between them. It also shows that the risk of losing the client or reward for retaining the client will induce auditors consideration to favor the clients position. Indeed, the risk of losing the client will dominate other risks that possibly exist. 7

Moreover, pressures from the client can be manifested into a variety of forms; one of them is intimidation threat. Intimidation threat is one of independence threats in the auditor independence frameworks (e.g. IFAC, 2012) as well. There are no studies that directly and explicitly examine the influence of intimidation threat on auditor independence. Intimidation threat erupts when a member of auditing team may be deterred from acting objectively and exercising professional skepticism by threats, actual or perceived from directors, officers or employees of an audit client (IFAC, 2012). Regarding intimidation threat, Bennett and Hatfield (2012) state that clients may use explicit or implicit intimidation tactics on auditors. Their survey also reveals that auditors, especially staff level auditors, often experience this condition. Cheung and Hay (2004) find that shareholders believe that intimidation threat affects auditor independence. Astonishingly, according to Fearnley, Beattie, and Richard (2005), intimidation threat is the threat that has the least prohibition and safeguards in the auditor independence frameworks. In addition, a common form of intimidation threat is the threat of replacement of an auditor (IFAC, 2012). The present study argues that when the auditor experience an audit conflict situation that is accompanied by client intimidation to replace the auditor then the auditor will compromise their independence in order to avoid of losing the client; regardless of any contingency factors. The level of compromise differs when auditors only experience auditor conflict without any client intimidation. In the present study, auditor independence is measured in a monetary response, in term of the auditor signs-off on the net equipment account balance for the equipment in question. The higher the net equipment balance signed-off by the auditor, the more likely the auditor will compromise independence. Based on the argument above, the first hypothesis is stated as follows: H 1 : Auditors in an audit conflict situation that is accompanied by client intimidation will sign-off higher on the net equipment account balance for the equipment in question than those who experience a similar situation but without client intimidation. Perceived Pressure DeZoort and Lord (1997) generate a general model of pressure in the accounting and auditing field. The model focuses on professional pressures that can be applied to a specific accounting situation and potentially tested in an experimental setting. DeZoort and Lord develop this model grounded on a general pressure model in the organizational stress literature. There are three important constructs in this model. The first is job pressures (x), defined as an objective stimulus constructs referring to individual characteristics or a combination of 8

characteristics and events that impose on the perceptual and cognitive processes of individual. The second is a stress response (y), defined as how auditors perceive individual pressures at a specific point in time as well as a cumulative effects of pressure over time . The last is strain outcomes, defined as the behavioral or attitudinal consequences related to pressures stimuli (x) and stress response (y). In the behavioral consequences, pressures that are experienced by auditors may affect their judgment and decision. Based on this model, the present study expects that client intimidation in an audit conflict situation will have an impact on auditors stress outcome, namely perceived pressure. Subsequently, the level of auditors perceived pressure will affect auditor independence (i.e. auditors sign-off on the net equipment account balance for the equipment in question). The higher pressure perceived by the auditor thus the higher the auditor will sign-off on the net equipment balance. Hence, the next hypotheses are constructed as follows: H2: H3: Auditors in an audit conflict situation that is accompanied by client intimidation will perceive higher pressure than those who experience a similar situation but without client intimidation. Auditors perceived pressure will positively relate to the net equipment balance for equipment in question signed-off by auditor in the presence of client intimidation. Professional Commitment The pressures model also shows that some individual variables could moderate the relationship between pressures and stress-outcomes. Thereby, it is possible that a similar pressure that is experienced by two or more auditors can produce different stress outcomes because of differences in individual characteristics. The present study incorporates auditors professional commitment as an individual variable that will moderate the relationship between pressures and stress-outcomes. Professional commitment has been a concept of interest for researchers and practitioners in accounting for more than 20 years (Hall, Smith, and Langfield-Smith, 2005). Professional commitment refers to the attachment of individuals in the profession or, in other words, to the strength of an individuals identification with a profession. Individuals with high professional commitment are characterized as having a strong belief in and acceptance of professional goals, a willingness to use their efforts to advance the profession, and having a strong desire to maintain membership in the profession. Prior studies showed that the strength of professional commitment has consequences on performance improvement, turnover intentions, the level of satisfaction on the profession, and ethical judgment (e.g. Jeffrey, Weatherholt, and Lo, 1996; Lord and DeZoort, 2001; and Hall et al., 9

2005). However, thus far, prior studies usually used a single-dimensional construct to measure professional commitment, namely affective professional commitment. Focusing on a single dimension of professional commitment only provides a partial understanding of the auditors profession (Hall et al., 2005). By examining professional commitment in multiple dimensions, a complete understanding of individual commitment to the profession will be provided (Meyer, Allen, and Smith, 1993). Meyer et al. (1993) develop a multidimensional construct of professional commitment and it was adapted to the accounting field by Hall et al. (2005). Hall et al. (2005) argue that because multidimensional professional commitment has found support in every profession and occupation; hence, the unique characteristics of the public accounting profession will have a significant impact on all dimensions of professional commitment as well. However, to date, there are no empirical studies that investigating the role of all dimension of professional commitment on auditor independence. The multidimensional of professional commitment consists of affective professional commitment (APC), continuance professional commitment (CPC), and normative professional commitment (NPC) dimensions. APC is the extent to which individuals "want to stay" in the profession because they identify themselves with the goals of the profession and want to help the profession to achieve those goals. NPC refers to the extent to which individuals feel they "ought to stay" in the profession as an obligation. Finally, CPC is the extent to which individuals feel they "have to stay" in the profession because of the accumulated investment that they have made (e.g. in study effort, training, etc.) and also because of the lack of other alternatives. According to Hall et al. (2005), auditors who have high levels of APC and NPC may feel a moral obligation to engage in behaviors that are beneficial to the profession in order to maintain the profession reputation. On the other hand, auditors who have high levels of CPC tend to be pragmatic and engage in behaviors that are beneficial to themselves. The present study predicts that auditors professional commitment dimensions will moderate the relationship between auditors perceived pressure and auditor independence (i.e. auditors sign-off on the net equipment balance for the equipment in question). High levels of APC and NPC will moderate to enhance auditor independence in case of audit conflict accompanied by client intimidation. Meanwhile, a high level of CPC will moderate to induce the auditor to compromise his or her independence. Therefore, the hypothesis 4, 5, and 6 can be constructed as follow: H4: The levels of auditors APC moderate the relationship between auditors perceived pressure and auditor signs-off on the net equipment account balance for the equipment in question.

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H5: H6:

The levels of auditors NPC moderate the relationship between auditors perceived pressure and auditor signs-off on the net equipment account balance for the equipment in question. The levels of auditors CPC moderate the relationship between auditors perceived pressure and auditor signs-off on the net equipment account balance for the equipment in question. METHOD

Subjects Subjects were practicing auditors from national public accounting firms in Indonesia. Contact persons in the public accounting firms were approached and asked for their willingness to administer the research instrument within their firm. After that, a research instrument was handed in to the contact persons. They then distributed the instrument to the subjects of their choosing. Two weeks after that, the contact persons collected the completed instruments. We received responses from our contact persons for 126 auditors - providing a response rate of approximately 60 percent, of which 119 (88 responses under audit conflict that is accompanied by client intimidation and 31 without client intimidation) had the data necessary for testing our hypotheses. A demographic profile of subjects is provided in Table 1. The representative subjects were staff and senior auditors with approximately 46.8 months experience on the average. Fifty-one percent of the subjects were male and forty-nine percent were female; hence indicating a balanced gender in the data. Seventy-three percent of the subjects had bachelor and 20 percent had diploma education. The average age of the subjects was 27 years old. Insert Table 1 about here Procedure Data used to test the hypotheses were collected using a research case instrument in which subjects responded to one of two manipulated treatments, i.e. audit conflict accompanied by client intimidation and that without client intimidation. The case was randomly assigned to the subjects. The research instrument consists of four parts. In the beginning, a short introductory letter is provided which introduced the researchers and assures subjects of their anonymity and right to refuse to participate without any consequences. Next, subjects are asked to read the assigned case regarding a hypothetical public accounting firm that was auditing a hypothetical firm. In the case description, an audit conflict is included, as explained below. After reading the case, subjects are asked to decide how much they will sign-off on the net equipment account balance for the 11

equipment in question based on information in the case. The second part relates to subjects perceived pressure. The third part relates to a multidimensional professional commitment. The instrument ends with questions regarding subjects demographic data. Case An auditor-client conflict case is applied as a research instrument. The case was adapted from Lord and DeZoort (2001); however, the case has been adjusted and rephrased in order to make it fit-in with the purpose of this study. In the case, subjects were asked to hypothesize themselves as the responsible auditor, whose the team has been assigned to a new client. In the auditing process, the subject cannot verify the existence and valuation of 2.5 billion Rupiah of equipment (approximately equal to 2.5 million USD). Based on this finding, the subject proposes the clients CFO to write-off the equipment. In the audit conflict situation that is accompanied by client intimidation (treatment A), the clients CFO strongly disagrees with the subjects proposal. The CFO also attacks the competence of the subject and the subjects staff and threatens to replace the subjects audit firm as the client auditor. The CFO insists that the equipment is in the plant but cannot be separately identified. The CFO also suggests keeping the equipment as recorded and begins depreciating the equipment from 2011 to 2015 using the straight line method. On the other hand, in the audit conflict situation without client intimidation (treatment B), the clients CFO only disagrees with the subjects proposal. The CFO said that the equipment is in the plant but cannot be separately identified. The CFO suggests keeping the equipment as recorded and begins depreciating the equipment from this year using the straight line method. The case was reviewed by audit partners as well as pilot tested in the study by Lord and DeZoort (2001). We applied similar procedures to revalidate it. First, after having been adjusted and rephrased, the case was assessed by two auditor partners. In doing so, the realism of the case is guaranteed. The partners suggested that the case is realistic enough. Second, the case was pilot tested by ten auditors, in order to assess the instrument clarity. Some minor adjustments were made based on the pilot test. Dependent variable Auditor independence is the dependent variable. Prior studies are usually asked the participants to respond in the probability or likelihood estimation forms. Borrowing Solomons argument (1994), using these response forms will produce a mixed response variable and it is not clear what reliably can be discerned from such measures. The present study measures auditor independence through subjects sign-off on the net equipment account balance for the equipment in question. The subjects 12

are asked to determine the value of net equipment account balance that they will sign-off within the range from 0 to 2 million Rupiah. The higher the net equipment balance signed-off by the subjects the more likely the subjects compromise independence. Independent variables We have both manipulated and measured independent variables. Our manipulated variable is client intimidation that manipulated using a case. The case consists of two types of manipulated treatments; the first is manipulated into audit conflict accompanied by client intimidation to the auditor and the second is manipulated into audit conflict but without client intimidation. The measured independent variables are perceived pressure and professional commitment. The perceived pressure is measured by asking the subjects to indicate the extent to which they perceive pressure from the client in the case. The eleven-point Likert scales anchored by 0 (does not perceive pressure at all) and 10 (fully perceives pressure) are utilized. The professional commitment is measured using a multidimensional instrument developed by Meyer et al. (1993) and adapted for the accounting profession by Hall et al. (2005). The instrument separated among APC, CPC, and NPC dimensions in which each dimension is measured by six question items. Subjects are asked to indicate the extent to which they disagree or agree with the presented statements. For each item, seven-point Likert scales anchored by 1 (strongly disagree) to 7 (strongly agree) are utilized. Prior studies show that multidimensional of professional commitment has good validity and reliability (Meyer et al., 1993; Smith and Hall, 2008; Somers, 2009). To test the instruments validity this study correlated each item question score with the total score in each dimension. The results show that each item question score is significantly correlated with the total score. The score ranges from 0.681 to 0.774 for APC, 0.771 to 0.847 for NPC, and from 0.518 to 0.772 for CPC. Moreover, all correlations are statistically significant ( < 0.01). The alpha coefficients of APC, NPC, and CPC are 0.807, 0.889, and 0.755, respectively. For hypotheses testing purpose, each dimension of professional commitment is measured through single index by averaging the item scores. Additionally, the subjects were asked whether they have had experience facing client intimidation in the auditing assignments. The result showed that 48% of subjects responded that they have had the experience and 52% have not.

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RESULTS Manipulation check and Descriptive Statistics To test the effectiveness of manipulated-treatment, we compare subjects perceived pressure both the groups with and without client intimidation. Subjects were asked to respond how far they perceive pressure when facing audit conflict based-on the assigned case. An eleven-point Likert-type scale is used as a response scale, ranging from not perceiving any pressure at all (0) to fully perceiving pressure (10). On average, the subjects under client intimidation perceive higher pressure (4.77) than the others (3.52). The results indicate that the manipulated treatment was effective. Second, subjects were asked to respond whether the case is realistic enough or not. A seven point Likert-type scale is used as a response scale from completely realistic (1) to completely unrealistic (7). In average, the subjects suggest that the case was realistic enough, with mean value 2. Analysis of variance (ANOVA) and regression analyses are used to test whether demographic variables have possible effects on subject responses. ANOVA analysis shows that neither gender, rank, nor education affected subject responses. Regression analysis shows neither experience nor age affected subject responses. Hence, demographic variables are excluded from further analysis. The dependent variable is auditor independence, proxied by the subjects sign-off on the net balance of the equipment in question. The higher the net equipment balance signed-off by the subjects, the more likely the subjects compromise independence. The independent variables are manipulated treatments (i.e. audit conflict with or without client intimidation), perceived pressure and professional commitment (consisted of APC, NPC, and CPC). Table 2 presents the descriptive statistics for both the dependent and independent variables. Insert Table 2 about here Tests of Hypotheses The main focus in this study is to test whether auditors will compromise their independence when facing the audit conflict situation that is accompanied by client intimidation. The H 1 predicts that auditors under client intimidation will sign-off higher on the net equipment account balance for the equipment in question than those who are in similar situation but without client intimidation. The higher the net equipment balance signed-off by the auditors, the more likely the auditors compromise independence. The manipulated independent variable is divided into two treatments: the presence and absence of client intimidation in the audit conflict situation. The mean responses of 14

the net equipment balance signed-off by the subjects under the audit conflict with and without the client intimidation are 726,704,545.5 and 366,129,032.2 Rupiah, respectively. To test the H 1 , ANOVA analysis is used and the results show that the manipulated variable is difference and statistically significant (F = 5.032; p < 0.05). The result indicates that auditors under audit conflict that is accompanied by client intimidation will compromise their independence compared to those who experience the similar situation but without client intimidation. Thereby H 1 is supported. H 2 predicts that auditors under audit conflict that is accompanied by client intimidation will perceive a higher pressure than will those who face similar conflict but without client intimidation. The mean values of perceived pressure of auditors in audit conflict with and without client intimidation are 4.77 and 3.52 on the eleven-point scale, respectively. To test this hypothesis, ANOVA is used and the result showed that these two means are significantly different (F = 4.329; p < 0.05); hence H 2 is supported. H 3 to H 6 relate to the impact of auditors perceived pressure on auditor independence and the moderating role of multidimensional professional commitment on that relationship. To test such hypotheses, including the interaction component, prior studies have usually utilized ANOVA analysis using the median value of non-categorical variables to create a categorical proxy. The median provides a cut-off point for dividing the data into two subgroups (e.g. high and low levels). However, according to West, Aiken, and Krull (1996), this approach tends to reduce statistical power and yield vague results. Therefore, a regression approach that is common in management accounting literature (e.g. Dunk, 1991; Lau and Tan, 1998; Tsui, 2001; and Fellix, Gramling, and Maletta, 2005) is used. To facilitate interpretation, in accordance to the suggestions of Jaccard and Turissi (2003) and Aiken and Wests (1991), the data of multidimensional professional commitment is mean centered. Mean centered reduces the multicollinearity between main effects and the interaction terms. The regression model is run only for the data of the group under client intimidation. The regression model is stated as follows: = 0 + 1 1 + 2 2 + 3 3 + 4 4 + 4 1 2 + 5 1 3 + 6 1 4
where: Y = the net equipment balance signed by the subjects; X 1 = perceived pressure; X 2 = affective professional commitment; X 3 = normative professional commitment;

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X 4 = continuance professional commitment.

Table 3 presents the regression results of the regression model.

Insert Table 3 about here

H 3 predicts that the pressure perceived by the subjects is positively related to the net equipment balance signed by them. Table 3 shows that the regression coefficient of perceived pressure (t = 0.41; p = 0.523) has a positive sign as predicted; however, it is not statistically significant. Hence, we find no support for H 3. Finally, to consider H 4 to H 6 , this study investigates whether the dimensions of professional commitment moderate the forms of relationship between auditors perceived pressure and auditors willingness to sign-off on the net equipment balance. As depicted in Table 3, the regression results show that there are marginally significant interactions between auditors APC and perceived pressure (t = -1.919; p-value < 0.1) and significant interaction between auditors CPC and auditors perceived pressure (t = 2.710; p-value < 0.05). The interaction between auditors NPC and perceived pressure are not statistically significant, however. Hence, we found support for H 4 and H 6 , but not for H 5 . To assist the interpretation of the moderation results, this study plots the high and low levels of auditors APC and CPC respectively on the relationship between auditors perceived pressure and auditors willingness to sign-off the net balance (figures 1 and 2). As showed in Figure 1, the relationship between auditors perceived pressure and auditors willingness to sign-off on the net balance is more negative when auditors APC is high and positive when auditors APC is low. On the contrary, Figure 2 shows that there is a positive relationship between auditors perceived pressure and auditors willingness to sign-off on the net equipment balance when auditors CPC is high. Meanwhile, when auditors CPC is low, there is a negative relationship between auditors perceived pressure and auditors willingness to sign-off on the net equipment balance. Figure 1 about here Figure 2 about here

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CONCLUSIONS The present study provides evidence on how auditors will compromise their independence in the audit conflict that is accompanied by client intimidation. Client intimidation in this research is materialized into a threat by the client to replace an auditor if the auditor does not adopt clients position in the questioned equipment. Moreover, auditor independence is proxied by the net equipment balance signed-off by the auditors for the equipment in question. Specifically, this study found that auditors will compromise their independence when the audit conflict is accompanied by client intimidation. The finding indicates that an auditor has a weak bargaining position with a client, especially in an audit conflict situation that is accompanied by client intimidation. It might also indicate that motivation to retain the client is very important for auditors and the risk of losing the client would deteriorate auditor independence, irrespective of any contingent factors. The finding raises issues about mechanisms that can avoid an auditor from impairing his or her independence caused by the risk of losing a client. One possible mechanism that can be considered is a mandatory retention regime as discussed in the few accounting literature (Dopuch, King, and Schwartz, 2001; and Comunale and Sexton, 2005). The mandatory retention requires a client to retain an auditor at a specified number of years. This mechanism can possibly protect an auditor from risk of losing the client and thereby avoiding the auditor from intimidation induced by the clients threat to replace the auditor. However, the possible negative side effects of this mechanism should be taken into account before implementing it as well. Further study should address this issue and combine it with the client intimidation issue. Regarding auditors perceived pressure, this study finds that auditors under audit conflict that is accompanied by client intimidation will perceive more pressure than those who under similar conflict but without client intimidation. However, the relationship between the levels of auditors perceived pressure on auditor independence - though the regression coefficient shows a positive sign - is not statistically significant. This study also finds that the relationship between auditors perceived pressure and the net equipment balance signed-off by the auditors is moderated by the auditors APC and CPC levels. As predicted by the theory, the higher the levels of APC the more likely auditors will engage in behaviors that are beneficial to the profession. Otherwise, the higher the levels of CPC the more likely auditors tend to be pragmatic and engage in behaviors that are beneficial to themselves. These findings are consistent with the predictions that the relationship between auditors perceived pressure and the net equipment balance signed by the auditors is more negative when the level of auditors APC is high and more positive when the levels of auditors APC 17

is low. Correspondingly, the relationship between auditors perceived pressure and the net equipment balance signed by the auditors is more positive when the level of auditors CPC is high and more negative when the level of auditors CPC is low. The interpretations of these results are subject to several limitations; accordingly, the results should be interpreted cautiously. First, our research instrument was completed by the subjects at their convenient time. On the one hand, this may involve in some loss of control, but on the other hand, it also stimulates the real conditions in which auditors commonly make decisions. Second, Bennet and Hatfield (2012) stated that client management may use explicit or implicit intimidation tactics to auditors in order to achieve their goal. This study focuses only to the explicit intimidation tactic, materializing to a threat by the client to replace the auditor. It is possible that auditors will respond to explicit and implicit intimidation differently. Third, subjects in this paper were Indonesian auditors that work in national audit firms. Factors specific to these subjects may limit the extent to which the results could be generalized to auditors from other countries and international audit firms.

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Table 1 Profile of Subjects N = 119 Gender (%) Female Male Rank (%) Staff Senior Manager Partner Education (%) Diploma Bachelor Master Experience (months) Mean Min Max Std Deviation Age (years) Mean Min Max Std Deviation Table 2 Descriptive Statistics
Variable Auditors sign-off Perceived pressure Affective Professional Commitment Normative Professional Commitment Continuance Professional Commitment Mean 632,773,109.2 4,45 29.96 26.90 23.92 SD 782,689,760.8 2,93 4.64 5.63 4.66 Observed range 0 2 billion Rp 0 - 10 19 - 42 15 - 42 9 - 42 Theoretical range 0 2 billion Rp 0 - 10 6 42 6 42 6 42

Percent 49 51 56 36 8 0 20% 73 7 46.8 6 235 (48.4) 27 20 59 (6.3)

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Table 3 Regression Results a

Unstandardized Coefficients B (Constant) Perceived pressure APC NPC CPC Perceived pressure x APC Perceived pressure x NPC Perceived pressure x CPC
a

Standardized Coefficients Beta

Sig.

591,522,442.497 2,083,262.755 502,945,722.485 -170,759,166.452 -601,024,337.535 -8,796,966.796 4,966,883.848 11,937,390.718 .072 .507 -.205 -.568 -.409 .264 .473

3.286 .641 2.106 -.887 -3.267 -1.919 1.251 2.710

.002

.523 .038
*

.378 .002 .059

* **

.214 .008
2
*

Note: Dependent Variable: the net equipment balance signed-off by the subjects; N = 88; Adj R =8.5%; F = 2.157; p-value < 0.05; * Significant at p < 0.05; **Significant at p < 0.1.

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Figure 1 Interaction between Auditors Perceived Pressure and Auditors APC

Figure 2 Interaction between Auditors Perceived Pressure and Auditors CPC

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