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Dysfunctional
Auditor acceptance of behaviour
dysfunctional behaviour
An explanatory model using individual factors
Halil Paino 37
Faculty of Accountancy, Universiti Teknologi Mara, Pahang, Malaysia, and
Malcolm Smith and Zubaidah Ismail
School of Accounting, Finance & Economics, Edith Cowan University,
Joondalup, Australia

Abstract
Purpose – The purpose of this paper is to investigate individual or personal factors contributing to
individual auditor differences in acceptance of dysfunctional audit behaviour (DAB). Dysfunctional
behaviour and staff turnover are associated with decreased audit quality, and is characterised as
premature sign-off, gathering of insufficient evidence, accepting of weak client explanation, altering or
replacing the audit procedures, and under-reporting of time, and have negative effects on the auditing
profession. In this study the organizational behaviour and industrial psychology literatures provide
the basis for the development and testing of an individual factors’ model of DAB.
Design/methodology/approach – Using path analysis for direct and indirect effects, survey results
from registered Audit Managers are used to provide support for an explanatory model.
Findings – Overall, results indicate that auditors who are more accepting of dysfunctional behaviour
tend to possess an external locus of control and exhibit higher turnover intentions.
Originality/value – These results suggest that individual factors play a role in identifying those who are
more accepting of dysfunctional behaviour. The results can be useful in the operational and management
control mechanism of human and social developments relating to dysfunctional behaviour issues.
Keywords Malaysia, Auditing, Auditors, Individual behaviour, Dysfunctional audit behaviour,
Locus of control, Turnover intentions, Organization commitment, Employee performance
Paper type Research paper

1. Introduction
The panel on audit effectiveness was established by AICPA’s Public Oversight Board (2000)
to examine the issue of audit quality. The panel gathered information from peer reviews
and surveys of financial executives, internal auditors and external auditing professionals.
Their findings indicate that dysfunctional audit behaviour (DAB) is a continuing concern
for the auditing profession. DAB can adversely affect the ability of public accounting firms
to generate revenue, complete professional quality work on a timely basis and accurately
evaluate employee performance. This study makes a contribution in both the auditing
literature and the behavioural literature with respect to organisational aspects. The
discussion of findings of this study will help audit firms to better understand the harmful
impact of the DAB and to identify possible ways of better managing the DAB issues. In
addition, the results of the study could impact on the auditing procedures, hiring, training
and promotion decisions, and help minimise the occurrence and acceptance of DAB.
The study advances Malaysian auditing research by examining the specific factors Journal of Applied Accounting
that contribute to this behaviour including locus of control (LOC), self-rated employee Research
Vol. 13 No. 1, 2012
performance (EP) and turnover intentions (TI). In early 2007, the Malaysian Institute of pp. 37-55
r Emerald Group Publishing Limited
Accountants (MIA, 2010) Practice Review Committee issued the first ever practice 0967-5426
review (PR) report undertaken by MIA, for the period of 2003-2006, highlighting some DOI 10.1108/09675421211231907
JAAR audit quality problems when judged against International Standards on Auditing,
13,1 Malaysia Standards on Auditing and Company Act 1965 requirements. This study was
carried out to coincide with that report ( publicly available at the MIA web site as
www.mia.org.my/dept/prw/circulars.htm). This study is significant because there is an
increased awareness in the MIA, as the policy makers, and the PR Committee,
concerning the audit quality and DAB. A survey of specific DAB from all levels of
38 auditors in 2007 confirms the existence of DAB within Malaysian practices. A total of
57 per cent of respondents admitted to engaging in some form of DAB such as
premature sign-off, and 72 per cent of respondents admitted to engaging “at least
sometimes” in one or more of the specified behaviours (Paino et al., 2010).
These concerns have not been ignored in the academic literature. The underlying
premise of much academic research has been that DAB is a dysfunctional reaction to the
environment (i.e. the control system). These behaviours can, in turn, have both direct
and indirect impacts on audit quality. Behaviours that directly affect audit quality
include premature signing-off of audit steps without completion of the procedure (Otley
and Pierce, 1995; Rhode, 1978; Alderman and Deitrick, 1982), gathering of insufficient
evidential materials (Alderman and Deitrick, 1982), processing inaccuracy (McDaniel,
1990) and the omission of audit steps (Margheim and Pany, 1986). Underreporting of
audit time has also been shown to have an indirect impact on audit quality (Smith, 1995;
Kelley and Margheim, 1990; Lightner et al., 1982). Underreporting of time leads to poor
personnel decisions, obscures the need for budget revisions and results in unrecognised
time pressures on future audits (Donnelly et al., 2003).
The purpose of this study is to investigate individual or personal factors
contributing to individual auditor differences in acceptance of DAB. Identifying the
factors that contribute to an auditor’s attitudinal acceptance of DAB can be regarded as
an important first step in ascertaining the determinants of actual DAB. To this end,
an explanatory or theoretical model was developed that relates LOC, EP, organisational
commitment (OC) and TI to auditors’ acceptance of DAB. Specifically, it is hypothesised
that auditors with an external LOC, higher EP and lower TI are more accepting of DAB.
Using a path analysis from a partial least square (PLS) technique, results of an analysis
of 225 auditors generally support the proposed explanatory model.
The remainder of this paper is organised into four sections. The first section
presents the theoretical development and the hypotheses of the study, while the second
section discusses the research method including data collection and measurement
information. In the third section, empirical results are presented. The final section
concludes with a discussion of the findings and a review of the limitations of the study.

2. Theoretical development
Auditor acceptance of DAB is likely to contribute to an environment in which DAB
occurs more frequently. To further our understanding of the underlying factors
contributing to DAB, this section develops a theoretical model linking LOC, EP and TI
to auditor acceptance of DAB. These linkages are referred to as “direct associations”.
Additional “indirect” effects are also discussed followed by a formal presentation of the
research hypotheses. The full theoretical model appears in Figure 1. Each link in the
model is labelled with its respective hypothesis, and is discussed subsequently.

2.1 Direct association with dysfunctional behaviour

Auditor acceptance of dysfunctional behaviour is likely to contribute to an
environment in which dysfunctional behaviour occurs more frequently. To further
 LOC Dysfunctional
H1+ behaviour
H1a +

H1b + OC
DAB
H1c – H2b – H2 +

EP
39
H2a + H3 –

Figure 1.
TI Theoretical model

understand the underlying factors contributing to acceptance of dysfunctional

behaviour in relation to individual factors, individual factors, namely, LOC, EP and
TI were tested, i.e. the direct association of selected individual factors to acceptance
of dysfunctional behaviour, and is a modification to the audit quality model developed
by DeAngelo (1981). While most research in the area of dysfunctional behaviour
has focused on the individual, it seems quite likely that the organisation also plays a
vital role. For one thing, the organisation is important in that it provides a setting in
which the individual may display dysfunctional behaviour. The individual spends
most of his/her waking hours at job sites, thus increasing the timeframe within which
he/she is displaying this behaviour. An organisation provides people towards whom
the individual may find it easier to display this behaviour, rather than towards the
family members. And the work setting provides all kinds of stimulants that could
provoke individuals who already have a high propensity towards dysfunctional
behaviour.
Studies have shown a strong correlation between LOC and an individual’s
willingness to use deception or manipulation (e.g. Gable and Dangello, 1994; Comer,
1985). Based on a meta-analytic review of 20 studies examining this relationship,
Mudrack (1989) concluded that the use of manipulation, deception or ingratiation
tactics may reflect an attempt on the part of externals to assert some influence over a
hostile or stressful environment. Furthermore, this behaviour is most likely to manifest
itself in situations where the employee perceives a high degree of structure or
supervisory control (Gable and Dangello, 1994). In the auditing context, manipulation
or deception will manifest itself in the form of DAB. These behaviours provide the
means by which the auditor can manipulate the audit process in order to achieve
individual performance objectives. The reduction in audit quality resulting from these
actions may be viewed as a necessary sacrifice in order for the individual to survive in
the audit environment (Donnelly et al., 2003).
LOC has been used extensively in behavioural research to explain human behaviour
in organisational settings. Donnelly et al. (2003) suggest that individuals develop
generalised expectations of whether success in a given situation will be contingent on
their own personal behaviour or controlled by external forces. On the one hand,
individuals with an internal LOC are more likely to rely on their own determination of
what is right and wrong and are more likely to accept responsibility for the
consequences of their behaviours. On the other hand, individuals with an external LOC
believe that results are attributable to events beyond their control, and are less likely to
JAAR take personal responsibility for the consequences (Shapeero et al., 2003). Thus, the
13,1 following hypothesis was tested:

H1. There is a positive association between external LOC and acceptance of

dysfunctional behaviour.

40 Some prior literature has identified environmental factors such as time pressure and
supervisory style that contribute to DAB especially when it is related to the measurement
of performance. However, extant literature has not found that individual differences
among auditors significantly affect DAB. As the purpose of this study is to investigate
factors contributing to DAB that relate to individual factors, it is therefore necessary to
include employee performance as a single variable to the acceptance of DAB.
The literature suggests that dysfunctional behaviour occurs in situations where
individuals see themselves as less capable of achieving the desired or expected
outcome through their own efforts (Gable and Dangello, 1994). Thus, dysfunctional
behaviour is viewed as necessary in situations where organisations and/or personal
goals cannot be achieved through typical means of performance (Donnelly et al., 2003).
This relationship is considered stronger in an environment perceived by the employee
to have high structure or supervisory control (Gable and Dangello, 1994). The use of
audit programmes, time budgets and close supervision could cause the audit process to
be perceived as a highly structured environment.
EP measures were employed since they had been adopted in similar prior studies
(e.g. Donnelly et al., 2003) where their relevance had been demonstrated. Brownell
(1995, p. 44) provides further evidence in support of the use of self-reported measures in
an accounting context.
There is no conclusive evidence on the association between performance and
dysfunctional behaviour in general. This is expected given that the purpose of the
dysfunctional act is to manipulate the performance measure, making it difficult to
obtain a true performance indicator. Lightner et al. (1982) suggest that personal beliefs
impact on the auditor’s willingness to engage in dysfunctional behaviour. Therefore,
the following hypothesis was suggested to be tested:

H2. There is a positive association between EP and acceptance of dysfunctional

behaviour.

Malone and Roberts (1996) suggest that auditors with intentions to leave the firm could
be more willing to engage in dysfunctional behaviour due to the decreased fear of
possible termination if the behaviours were detected. Furthermore, individuals
intending to leave their organisations may be less likely to be concerned with the
potential adverse impact of dysfunctional behaviour on performance appraisal and
promotion. Thus, the following hypothesis was tested:

H3. There is a negative association between TI and acceptance of dysfunctional

behaviour.

2.2 Indirect association with dysfunctional behaviour

Incorporating the interrelationships among external LOC, EP and TI can provide a
better understanding of the complex causes of dysfunctional behaviour. Additionally,
existing literature indicates that OC (at the audit team level) may also play a prominent
role in individual factors through its effect on EP and TI. Thus, a discussion of these Dysfunctional
associations follows. LOC has been found to be an antecedent of OC (Kinicki and behaviour
Vecchio, 1994). In theory, committed employees should work harder, remain with the
organisation and contribute more effectively to an organisation (Mowday et al., 1979).
Prior research also shows that LOC is significantly related and linked to performance,
promotion and salary decisions (Andrisani and Nestle, 1976; Heisler, 1974).
The investigation of the role of LOC in the accounting literature has been somewhat 41
limited, but LOC was identified as a moderator in the participation/performance
association in several earlier participative budgeting studies (Frucot and Shearon,
1991; Brownell, 1981). In an audit setting, Hyatt and Prawitt (2001) provide some
evidence that LOC is associated with enhanced performance.
Several studies have found a significant relationship between LOC and job tenure
showing internals are less prone to turnover than externals (Andrisani and Nestle, 1976;
Organ and Greene, 1974). Given the technical and professional nature of the auditing
profession, internals are expected to be better suited for positions in an audit setting, while
externals are more likely to experience greater job-related conflict. It is hypothesised that
this inherent difference between internals and externals will manifest itself in the auditing
profession via TI. Specifically, externals are expected to exhibit higher levels of TI. Thus,
based on these discussions, the following hypotheses were tested:

H1a. There is a positive association between LOC and OC.

H1b. There is a positive association between LOC and EP.

H1c. There is a negative association between LOC and TI.

In summary, based on the discussion above, LOC is expected to be positively related to the
acceptance of DAB. In addition to that, LOC is also expected to be positively related to OC
and EP, and negatively related to TI. In turn, OC is expected to have a negative association,
EP is expected to have a positive association and TI is expected to have a negative
association with DAB. These relationships therefore suggest that the effect of LOC on DAB
may be indirect through OC, EP and TI. The following hypothesis is therefore tested:

H1d. LOC has an indirect effect on acceptance of DAB through OC, EP and TI.

EP as an antecedent to TI has received considerable attention. Although it has been

argued that superior performers have greater opportunities and are therefore more
likely to turnover (Price, 1977), recent studies suggest that this may not be the case.
In fact, superior performers have been found to be more likely to be promoted and to
stay with their respective organisations than poor performers (Vecchio and Norris,
1996; Wells and Muchinsky, 1985). Given the promotion/tenure nature of public
accounting, one would expect this type of relationship to exist. Auditors who exhibit
high levels of performance are promoted, while those who are unable to attain
minimum performance standards are eventually forced out of the organisation. Based
on these findings, it is expected that EP will be inversely related to TI.
Numerous studies have viewed OC as an antecedent to performance (Randall, 1990).
Work by Mowday et al. (1979) suggests that highly committed employees perform
better than less committed ones. Ferris (1981) found that the performance exhibited by
junior-level professional accountants, was, in part affected by their level of OC.
JAAR Similarly, in a study of the determinants of auditor performance, Ferris and Larcker
13,1 (1983) indicated that auditor’s performance was, in part, a function of OC. In the
current study, employees with greater OC are expected to exhibit better performance
(EP). Thus, based on the above discussion, the following two hypotheses were tested:

H2a. There is a negative association between EP and TI.

42
H2b. There is a positive association between EP and OC.

The direct effect suggests that EP is positively related to the acceptance of DAB
whereas the discussion on indirect association suggests that EP is positively related to
TI and negatively related to OC. In turn, OC and TI are expected to have negative
associations with DAB. These relationships therefore lead to the following hypothesis:

H2c. EP has an indirect effect on the acceptance of DAB through TI and OC.

3. Research method
3.1 Data collection
Data were collected using a survey questionnaire sent to all audit managers registered with
the MIA to a total of 621 audit managers. Questionnaires were sent out to firms of a wide
variety of sizes including big firms, small firms and medium firms. Of the 621 surveys
distributed, respondents returned a total of 225 usable surveys for an effective response
rate of 36 per cent. The average respondent was in the 35-39 age group and had 10-14 years
of audit experience. Females comprised approximately 72 per cent of all respondents.

3.2 Measures
The variables measured in the questionnaire were drawn from previous literature. LOC
was measured using a summed total of the 16-item instrument developed by Spector
(1988). Respondents were asked to identify the relations between reward/outcomes and
causes using a seven-point Likert type scale. The instrument’s reliability and validity
have been deemed acceptable in prior research (Blau, 1987; Donnelly et al., 2003;
Spector, 1988). In the current study, the Cronbach a was 0.41. A summed total of
Mowday et al.’s (1979) nine-item short-form instrument was used to measure OC. The
Cronbach a for this instrument in the current study was 0.72.
EP was measured using a modified version of the Donnelly et al. (2003) multi-
dimensional nine-item scale. Respondents were asked to evaluate their individual
performance with regard to six performance dimensions, including planning,
investigating, coordinating, supervising, representing and staffing. Respondents
were then asked to rate their overall effectiveness in the final question. The Cronbach a
for this instrument in the current study was 0.40. A summed three-item TI scale
assessed the respondent’s immediate TI (within two years), middle-term TI (within five
years) and long-term intentions (until retirement). This multi-period approach is
supported by prior literature in auditing studies (Aranya and Ferris, 1984; Donnelly
et al., 2003; Scandura and Viator, 1994).
For the acceptance of DAB, respondents were asked to report their acceptance rather
than their actual engagement in dysfunctional behaviour. Three major types of DAB
deemed harmful to audit quality were used: premature sign-off (accept PMSO),
underreporting of time (accept URT) and altering/replacement of audit procedures (accept
ARAP). A 12-item, three part DAB instrument was used to measure how accepting an
auditor was to the various forms of dysfunctional behaviour (Donnelly et al., 2003). A Dysfunctional
principal components, varimax with Kaiser normalisation rotation factor analysis behaviour
indicated that all 12 items loaded above 0.5 and suggested that its use for hypotheses
testing was appropriate. Further, the Cronbach a for the 12-item instrument was 0.76.

3.3 Path analysis

Path analysis using PLS was performed to evaluate the proposed hypotheses. Path 43
analysis, rather than moderated regression analysis or ANOVA, was used because the
theoretical model presented in this study is viewed as an antecedent framework for DAB.
PLS can be perceived as a constrained form of component modelling, while conventional
SEM analysis, such as LISREL, can be seen as modelling with common factors. Testing
the path significance is accomplished by the bootstrapping method. Conducting PLS
analysis involves a two-step procedure. The first step is to evaluate a measurement
model for each latent construct. In practice, this assesses the validity and reliability of
the measures. The second step is to conduct a path analysis. In PLS analysis, Chin et al.
(2003) advise that the adequacy of the measures is assessed by evaluating three
components: the reliability of the individual items; the internal consistency of the items
measuring the same latent construct; and the discriminant validity of the construct.
The reliability of the individual items is assessed by examining the loading of the
items on their corresponding construct. Cronbach’s a is the most common method used
to assess measurement reliability. The measure for internal consistency is assessed by
the composite reliability with a desired value of above 0.7. The last indicator is the
average variance extracted (AVE), which refers to how much the items explain the
variance of the construct. The desired value for AVE is above 0.5. The Cronbach a for
DAB is 0.72, and the AVE is 0.64 with their individual item’s loadings ranging from
0.40 to 0.85. The Cronbach a for EP is 0.40, and the AVE is 0.54. Their individual item’s
loadings were from 0.44 to 0.98. The Cronbach a for LOC is 0.41, and the AVE is 0.68
with their individual item’s loading ranging from 0.42 to 0.72. The Cronbach a for OC is
0.72, and the AVE is 0.51. Their individual item’s loading were from 0.41 to 0.62. Lastly,
the Cronbach a for TI is 0.40, and the AVE is 0.62. Their individual item’s loading were
from 0.48 to 0.78. Thus, following Chin et al. (2003), all of the measures satisfied the
necessary requirements for the conduct of PLS analysis.
PLS path analysis uses similar indicators to regression analysis to interpret its
results. R2 can have values 0-1, where higher values mean that the model explains more
variance. The size of path coefficients, b coefficients, refers to the strength of the
relationship between independent and dependent variable. The significance of the path,
t-values, indicates if a particular path is statistically significant PLS using bootstrapping
methods to calculate t-values; bootstrapping is a method for estimating the sampling
distribution of an estimator by re-sampling with replacement from the original sample.

4. Empirical results
4.1 Respondents’ profile and descriptive analysis
There are a few notable points from Table I. First, the profile indicates a high
percentage of responses by females (i.e. 72 per cent). Most of the respondents were from
the medium size audit firm, i.e. 74.2 per cent, and most (i.e. 75.6 per cent) of the
respondents had been in the profession for between 5 and 14 years.
The measurement for the acceptance of PMSO comprises four items which
represent the specific reasons for acceptance of PMSO occurring in the auditing
profession. As per Table II, one of the main reasons for accepting PMSO is the pressure
JAAR
Frequency (%)
13,1
Gender
Male 63 28
Female 162 72
Size of firm
44 Small 45 20
Medium 167 74.2
Big 13 5.8
No. of years in the profession
o5 19 8.4
5-10 69 30.7
Table I. 10-14 101 44.9
Respondents’ profile 414 36 16

Reasons for Strongly Neither agree Strongly

acceptance disagree Disagree nor disagree Agree agree

Believe audit step will not find anything wrong

Frequency 12 41 105 47 20
Per cent 5.33 18.22 46.67 20.89 8.89
Previously, no problem with client’s systems/records
Frequency 87 57 62 9 10
Per cent 38.67 25.33 27.56 4.00 4.44
Supervisor’s pressure
Frequency 6 41 64 32 82
Per cent 2.67 18.22 28.44 14.22 36.44
Believe audit step is unnecessary
Table II. Frequency 38 87 69 21 10
Acceptance of PMSO Per cent 16.80 38.67 30.67 9.33 4.44

from supervisor, i.e. almost 50 per cent of respondents “agree to strongly agree” on
such pressure. This is followed by the belief that the audit step will not find anything
wrong, i.e. almost 30 per cent of them “agree to strongly agree” on that reason. The
measurement for the acceptance of URT involves the four specific reasons for
acceptance, namely, URT improves their chances of promotion and advancement, URT
improves their performance evaluation, URT is suggested by their immediate
supervisor and others URT their time and it is necessary to compete with those other
staff who engaged in URT. Table III presents the detailed responses on acceptance of
URT, 29 per cent of the respondents “agree to strongly agree” that URT will improve
their performance evaluation. In total, 26 per cent respondents also “agree to strongly
agree” that the reason for accepting URT is due to other staff doing URT, making it
necessary for them to compete. On the other hand, very few respondents (i.e. 11.5 per
cent) accepted URT in lieu of improved chances for promotion/advancement.
The measurement for the acceptance of ARAP comprises four items representing
the specific reasons for acceptance of ARAP occurrence in the auditing profession,
namely, they believe the original audit procedure was unnecessary, there were no
problems with this area on previous audits, they do not believe the original procedure
would find anything wrong and they are under a lot of time pressure to complete the Dysfunctional
audit. As per Table IV, 31 per cent of respondents accepted ARAP because they behaviour
believed that the original procedures would not find anything wrong, and 22 per cent of
them accepted it because they were under pressure to complete their audit work. On the
other hand, very few of the respondents (i.e. 9.7 per cent) “agree to strongly agree” in
accepting ARAP because they had found there to be no problem in the previous audits,
and 16 per cent “agree to strongly agree” accepted ARAP due to the original procedure 45
being unnecessary. Pearson’s correlation and ANOVA analyses revealed that there is
no significant correlation between gender and the acceptance of DAB. However, there
are significant correlations for the size of firm as per Table V; these suggest that the
incidence of dysfunctional behaviour and underreporting of time is more problematic
the smaller the audit firm.

4.2 Hypotheses testing

Table VI presents the results of the main analysis and lists each hypothesis and its
corresponding path coefficient. A pictorial representation of the main results is also

Reasons for Strongly Neither agree Strongly

acceptance disagree Disagree nor disagree Agree agree

Improves chances for promotion/advancement

Frequency 35 119 45 19 7
Per cent 15.56 52.89 20.00 8.44 3.11
Improves performance evaluation
Frequency 29 97 33 54 12
Per cent 12.89 43.11 14.67 24.00 5.33
Suggested by immediate supervisor
Frequency 32 95 49 44 5
Per cent 14.22 42.22 21.78 19.56 2.22
Others URT and necessary to compete with them
Frequency 44 95 27 46 13 Table III.
Per cent 19.56 42.22 12.00 20.44 5.78 Acceptance of URT

Reasons for Strongly Neither agree Strongly

acceptance disagree Disagree nor disagree Agree agree

Original audit procedure was unnecessary

Frequency 33 59 97 31 5
Per cent 14.67 26.22 43.11 13.78 2.22
No problem with the previous audits
Frequency 104 74 25 18 4
Per cent 46.22 32.89 11.11 8.00 1.78
Do not believe procedure would find anything wrong
Frequency 16 26 112 51 20
Per cent 7.11 11.56 49.78 22.67 8.89
Under pressure to complete the audit
Frequency 86 50 38 35 16 Table IV.
Per cent 38.22 22.22 16.89 15.56 7.11 Acceptance of ARAP
JAAR displayed in Figure 2. The structural model was evaluated on the basis of R2 for each
13,1 endogenous latent variable, structural paths and effect sizes of exogenous composite
latent variable. The stability and statistical significance of the path estimates were
assessed using the bootstrapping re-sampling method. As shown in Table VII,
exogenous variables explained generous amounts of variance of dysfunctional
behaviour (R2 ¼ 0.38), and at least some variance of TI (R2 ¼ 0.20), employee
46 performance (R2 ¼ 0.28) and OC (R2 ¼ 0.26). For the satisfaction ratings, as shown in
Table VII the components of TI accounted for a partial R2 ¼ 0.159, or 41.77 per cent of
the total explained variance in the acceptance of dysfunctional behaviour, followed by
EP which accounted for a partial of R2 ¼ 0.125, or 32.89 per cent of the total variance
explained. The effect size for LOC accounted for a partial R2 ¼ 0.096, or 25.34 per cent
of the total variance explained in the acceptance of dysfunctional behaviour. Although
lower in effect size, LOC was significant (b coefficient of 0.211, po0.10 for a directional
test), thus supporting H1.
LOC was then tested with the OC (H1a), employee performance (H1b) and TI (H1c)
for indirect association with the acceptance of DAB. In this research, LOC was
predicted to have a positive association with OC and EP, and have a negative
association with TI. Results from data analysis show a positive effect (b coefficient of
0.211) on dysfunctional behaviour, but this path is not statistically significant, thus
rejecting H1a. On the other hand, H1b received stronger support with the b coefficient
of 1.108 (t-statistic significant at po0.10). In addition, it was predicted that LOC would
have a negative association with TI, but the result from data analysis shows otherwise.
A negative association between LOC and TI (b coefficient 0.067) is apparent, but this
path is not statistically significant, therefore, H1c was not supported.
EP was hypothesised to have a positive association with acceptance of DAB for H2.
This hypothesis received strong support with a b coefficient of 0.274 (significant at the
0.01 level). In addition, EP was also hypothesised to have a negative association with

DAB Pearson’s correlation Significance (two-tailed)

Table V.
Size of firm and
Acceptance of DAB 0.527** 0.000
acceptance of
Accept PMSO 0.077 0.251
dysfunctional audit
Accept URT 0.519** 0.000
behaviour (DAB) (and
Accept ARAP 0.118 0.079
each form of acceptance of
DAB) Note: **Correlation is significant at the 0.01 level

Dependent Independent Associated Path t-statistic Significant

variable variable hypothesis coefficient (bootstrapping) p-value

DAB LOC H1 0.211 1.106 po0.10

DAB EP H2 0.274 2.798 po0.01
DAB TI H3 0.348 2.964 po0.01
OC LOC H1a 0.130 0.791 ns
EP LOC H1b 0.278 1.108 po0.10
TI LOC H1c 0.067 0.567 ns
Table VI. TI EP H2a 0.413 5.903 po0.01
Path analysis results OC EP H2b 0.460 2.309 po0.01
 LOC
Dysfunctional
0.211* behaviour
0.130ns

0.278* OC
DAB
–0.067ns 0.460***

EP 0.274***
47
–0.413*** –0.348***

TI
Figure 2.
Path analytic model
Notes: *p<0.10; **p<0.05; ***p<0.01; ns, not significant

R2 Partial R2 (%) R2
Table VII.
DAB 0.38 R2, and partial R2 (unique
LOC 0.26 0.096 25.34 variance components) of
EP 0.28 0.125 32.89 DAB accounted for by
TI 0.20 0.159 41.77 LOC, EP and TI

TI for H2a, and a positive association with OC for H2b. Both hypotheses received
strong support and were significant at the level of 0.01. The b coefficient was 0.413
for H2a, and 0.460 for H2b (at po0.01). Lastly, TI was hypothesised to have a negative
association with acceptance of DAB for H3. This path was negative (b coefficient of
0.348) and was statistically significant (at po0.01), therefore, H3 was supported.
The indirect association or effect of LOC on acceptance of DAB was then measured by
the intervening variables of OC, EP and TI as per H1d, using the criteria suggested by
Baron and Kenny (1986). The main relationships tested involve indirect and intervening
effects. The zero-order correlations between the variables examined are presented in
Table VIII on decomposition of the observed correlations. The indirect effects of LOC on
DAB are calculated based on the values of the following path coefficients:

Path ð1Þ LOC - OC - DAB 0:130 0:335 ¼ 0:0434

Path ð2Þ LOC - EP - DAB 0:2780:274 ¼ 0:0762
Path ð3Þ LOC - TI - DAB 0:067 0:348 ¼ 0:0233
Total indirect effect 0:0095
The results in Table VIII indicate that there were very weak indirect effects of OC, EP and
TI on the acceptance of DAB. According to Bartol (1983), path coefficients of 0.05 and
greater are important in a path analysis. As the indirect effect via OC, EP and TI is o0.05
here, H1d is not supported and the hypothesis is therefore rejected. The absence of a
finding for significant indirect effects is likely attributable to the insignificant relationship
between LOC and OC, EP and TI at the zero-order correlation (observed correlation).
The indirect association or effect of EP on acceptance of DAB was then measured by
the intervening variables of TI and OC as per H2c. The indirect effects of EP on
acceptance of DAB consist of the following paths: Path (1) EP-TI-DAB
JAAR (0.413  0.348) ¼ 0.1437 and Path (2) EP-OC-DAB (0.460  0.335) ¼ 0.1541.
13,1 Total indirect effect was 0.2978.
Path (1) indicates the indirect effect exclusively via TI, which is 0.1437, and Path
(2) indicates the indirect effect through OC (0.1541). As the indirect effects via TI and
OC are in excess of an absolute amount of 0.05, H2c is supported. Note, however, that
only a partial mediation has occurred as zero-order correlation between EP and
48 acceptance of DAB (0.168) remains significant (0.274) after controlling for the
mediating effects (Table IX).

5. Discussion and limitations

The result for H1 implies that an external LOC is more likely to be associated with an
acceptance of DAB. On the other hand, auditors with the strongest internal LOC traits
were less likely to accept DAB. Results of this study also suggest that external LOC
may play a significant role in auditor behaviour. This result is consistent with the
study by Donnelly et al. (2003). In addition to that, the positive association provides
support for the findings of Gable and Dangello (1994) and Comer (1985) in which they
found a positive correlation between external LOC and a willingness to use deception
or manipulation in order to achieve personal objectives.
H2 predicts that there is a positive association between EP and acceptance of
dysfunctional behaviour (DAB). The path coefficient linking these two variables is
0.274 and is significant at the po0.01 level (bootstrap t-statistic 2.798). Therefore the
acceptance of this hypothesis is supported. A notable finding was the fact that
employee performance was a significant variable (p ¼ 0.011 at the 5 per cent level) for
an acceptance of underreporting of time (accept URT). This finding appears to suggest
that underreporting of time (URT) is acceptable when high EP is concerned. The
results from this hypothesis indicate that self-reported, high performance is associated
with higher acceptance of DAB.

Relations Observed correlation Direct effect Indirect effect

LOC-DAB 0.334** 0.211* 0.0095

LOC-OC 0.110 0.130
LOC-EP 0.030 0.278*
LOC-TI 0.022 0.067
OC-DAB 0.359*** 0.335***
Table VIII.
EP-DAB 0.168** 0.274***
Decomposition of
TI-DAB 0.421*** 0.348***
observed correlations
LOC-DAB Notes: *po0.10; **po0.05; ***po0.01

Relations Observed correlation Direct effect Indirect effect

EP-DAB 0.168** 0.274*** 0.2978

EP-TI 0.014 0.413***
EP-OC 0.048 0.460***
Table IX.
OC-DAB 0.359*** 0.335***
Decomposition of
TI-DAB 0.421 0.348***
observed correlations
EP-DAB Notes: *po0.10; **po0.05; ***po0.01
This result is not consistent with Donnelly et al. (2003), who reported a negative Dysfunctional
association between EP and acceptance of DAB (conditioned by LOC and OC). DAB is behaviour
viewed as necessary in situations where organisational and personal goals cannot be
achieved through typical means of performance. This relation is considered stronger in
environments perceived by the employee to have high structure or supervisory control
(Gable and Dangello, 1994). The use of audit programmes, time budgets and close
supervision could cause the audit process to be perceived as a highly structured 49
environment. As there is no conclusive evidence on the association between EP and
acceptance of dysfunctional behaviour in general, this study suggests that auditors
having a higher perception of their performance level are expected to exhibit a higher
acceptance of DAB as hypothesised.
H3 predicts that there is a negative association between TI and acceptance of DAB.
While the accounting turnover literature has focused almost exclusively on the negative
aspects of turnover, this study supports the suggestion that turnover is negative. From
the statistical tests for the path coefficient, the TI is negatively correlated with the
dependent variable of acceptance of DAB, i.e. at the 0.01 significance level (b coefficient
0.348, t-statistic 2.964). Therefore, the results suggest that this hypothesis should be
supported and accepted. This association points to the existence of potentially negative
attrition for the firm and profession. Auditors with lower TI are more accepting of
dysfunctional behaviour, so their voluntary departure to another profession potentially
improves audit quality. There is no doubt that any turnover is costly in terms of the lost
investment in training and development, but this must be balanced against the possible
benefits of higher audit quality and the resulting lower costs of avoiding audit failures
(Donnelly et al., 2003). Another notable finding was the fact that turnover was a
significant variable (at 1 per cent level) for acceptance of underreporting of time (accept
URT) and acceptance of altering or replacing audit procedures (accept ARAP).
The finding of the direct effect between external LOC and acceptance of DAB
reveals the positive association as predicted in H1. This study also extends the
analysis on LOC by demonstrating the indirect association of LOC. These indirect
associations or effects may reflect the influence of OC, EP and TI have on LOC with
regard to DAB. H1a was not supported, i.e. the prediction of a positive association
between external LOC and OC. This indicates that the strength of internal traits (LOC)
significantly influences OC. As H1b was supported, results of the study indicates that
EP was influenced by the external LOC or external traits. This is especially true in a
public accounting or auditing firm environment where the meeting of time deadlines
and budget estimates are an important part of the evaluation process.
H1c predicts that there is a negative association between external LOC and TI. This
was not supported by the results, and thus indicates that externals traits would not
exhibit higher levels of TI. As for the overall discussion of LOC, this study suggests
that efforts to control and reduce DAB might best be targeted towards those with
higher (i.e. external) scores on the LOC scale. The present study was unable to
incorporate the indirect effect of LOC to DAB via OC, employee performance and TI as
hypothesised at H1d. The estimated indirect effect as presented in Table III was less
than the suggested 0.05 threshold. As noted, the absence of findings of significant
indirect effects is likely attributable to the insignificant relationship between LOC-OC,
LOC-EP and LOC-TI at the zero-order correlation.
In addition to H2, as predicted in H2a, employee performance is inversely
associated with TI. The result implies that, auditors who exhibit higher levels of
performance will be promoted, while those who are unable to attain minimum
JAAR performance standards are eventually priced out of the organisation. On the other
13,1 hand, as predicted in H2b, employee performance is positively associated with OC.
This result suggests that highly committed employees perform better than less
committed ones. This is consistent with the findings of Ferris and Larcker (1983) in
which the determinants of auditor’s performance were, in part, a function of OC.
The findings on EP extend previous studies by demonstrating that the relationship
50 between EP and DAB has both a significant direct effect, and a significant indirect effect.
The direct effect revealed that EP was positively associated with DAB (po0.01). The
indirect effect involves links between EP-TI-acceptance of DAB and EP-OC-DAB as
hypothesised at H2c. Both indirect effect were found to be statistically significant
(po0.01). These indirect effects may reflect the influence of TI and OC on EP concerning
DAB. The present study was able to incorporate the effects of employee performance via
TI and OC to the acceptance of DAB. This result is not consistent with the findings of
Donnelly et al. (2003). An additional implication for the audit firm management and the
profession is the need for having timely evaluation and inspection over high performers,
besides the need for timely intervention for low performers. If higher performance is
associated with higher acceptance of DAB, retaining higher performers without taking
appropriate corrective action seems likely to contribute to greater acceptance of DAB
within the firm as a whole. These results suggest that employee performance is one of
the factors that contribute to DAB. They also suggest that size of the audit firm is a
potentially contributory factor to the incidence of both DAB and underreporting of time.
The present study makes a contribution in the area of DAB by focusing on the
combined effect of the group of individual factors. The results of study suggest that
individual factors play a role in identifying those who are more accepting of
dysfunctional behaviour. The results can be useful in the operational and management
control mechanism of human and social developments relating to dysfunctional
behaviour issues in the auditing field. When assessing the implications of this study,
it is necessary to understand that the findings are subject to a number of limitations.
First, survey studies are subject to both lacks of control limitations such as the absence
of data relating to precise working contexts in which the respondents are working, and
potential bias associated with self-reporting. Second, problems of omitted and
uncontrolled intervening or moderating variables may exist. Third, this study focused
only on the Malaysian auditing environment.
Notwithstanding the limitations, this study represents the continued efforts into
better understanding the phenomenon of auditors’ dysfunctional behaviour. Different
factors contributing to the acceptance of DAB as presented in the conceptual model
could be further investigated. Unlike many other studies on DAB and reduced audit
quality, this study includes the higher-rank audit personnel as its sample. This shows
that audit managers are resorting to some DAB. Given the managerial and supervisory
role of other audit personnel, the implications on quality due to their dysfunctional
behaviour could be serious. Future research is needed to include another contextual
variable such as supervisory style, cultural effect, etc. Future research is also needed to
determine whether the variables examined in this study may be generalised to
dysfunctional behaviour in other accounting settings, and to alternative locations.

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Appendix 1. Questionnaire

Section 1: Please tick the relevant box

1 Sex: Male Female

2 Age: 29 and less 30 - 34

35 - 39 40 - 44
45 and over

3 Size of your firm: Small Medium Big

4 Please indicate the highest educational qualification that you have achieved:
Bachelor's
Diploma Degree
Masters PhD

Others, please specify: …………………………………………

5 Do you have any professional qualification? Yes No

If yes, please specify/tick: A.C.C.A C.I.M.A.

I.C.A.E.W. M.I.C.P.A.
C.P.A. (Aus) I.C.S.A

Others:
………………………………………

6 Period of working with current firm/employer (in years):

Less than 5 5 - 9 years
10 - 14 years More than 14

7 Period of working in accounting profession (in years):

Less than 5 5 - 9 years
10 - 14 years More than 14
JAAR Section 2: Please circle your response on a scale of 1 to 5.
[1 = Strongly Agree, 2 = Agree
13,1 Section 2(a) 3 = Neither Agree Nor Disagree,
4 = Disagree, 5 = Strongly Disagree ]
How would you rate your commitment with regard to the following?

1. I am willing to put in a great deal of effort to help this firm be successful 1 2 3 4 5

2. I talk up this firm to others as a great firm to work for 1 2 3 4 5
54 3. I would accept almost any type of job assignment in order to keep working for
this firm 1 2 3 4 5
4. I found my values and the firm's values are very similar 1 2 3 4 5
5. I am proud to tell others that I am a part of this organization 1 2 3 4 5
6. This firm really inspires the very best in me in the way of job performance 1 2 3 4 5
7. I am extremely glad that I choose this firm to work for over others I was
considering at the time I joined. 1 2 3 4 5
8. For me, this is the best of all possible firms to work for 1 2 3 4 5
9. I really care about the fate of this firm 1 2 3 4 5
10. I am willing to put in a great deal of effort to help this profession be
successful 1 2 3 4 5
11. I talk up this profession to others as a great profession to work for 1 2 3 4 5
12. I would accept almost any type of job assignment in order to keep working in
this profession 1 2 3 4 5
13. I found my values and the profession's value are very similar 1 2 3 4 5
14. I am proud to tell others that I am a part of this profession 1 2 3 4 5
15. This profession really inspires the very best in me in the way of job
performance 1 2 3 4 5
16. I am extremely glad that I choose this profession to work for over others I
was considering at the time I joined. 1 2 3 4 5
17. For me, this is the best of all possible professions to work in 1 2 3 4 5
18. I really care about the fate of this profession 1 2 3 4 5
Section 2(b)
[1 = Strongly Agree, 2 = Agree
3 = Neither Agree Nor Disagree,
4 = Disagree, 5 = Strongly Disagree ]
How do you respond to the following?

1. A job is what you make it 1 2 3 4 5

2. On most jobs, people can pretty much accomplish whatever they set out to
accomplish 1 2 3 4 5
3. If you know what you want out of a job, you can find a job that gives that to
you 1 2 3 4 5
4. If employees are unhappy with a decision made by their boss, they should do
something about it 1 2 3 4 5
5. Getting the job you want is mostly a matter of luck 1 2 3 4 5
6. Making money is primarily a matter of good fortune 1 2 3 4 5
7. Most people are capable of doing their jobs well if they make an effort 1 2 3 4 5
8. In order to get a really good job you need to have family members or friends in
high places 1 2 3 4 5
9. Promotions are usually a matter of good fortune 1 2 3 4 5
10. When it comes to landing a really goo d job, who you know is more important
than what you know 1 2 3 4 5
11. Promotions are given to employees who perform well on the job 1 2 3 4 5
12. To make a lot of money you have to know the right people 1 2 3 4 5
13. It takes a lot of luck to be an outstanding employee in most jobs 1 2 3 4 5
14. People who perform their jobs well generally get rewarded 1 2 3 4 5
15. Most employees have more influence on their supervisors than they think 1 2 3 4 5
16. The main difference between people who make a lot of money and people
who make less money is luck 1 2 3 4 5
17. I plan to remain with my current firm/organisation until I retire 1 2 3 4 5
18. I plan to remain with my current firm/organisation for at least two more years 1 2 3 4 5
19. I plan to remain with my current firm /organisation for at least five more years 1 2 3 4 5
 Section 2(c)
[1 = Well Below Average, 2 = Below
Dysfunctional
Average behaviour
3 = Average, 4 = Above Average,
5 = Well Above Average ]
1.How would you self-rate your performance?
My performance with regard to planning (i.e. determining goals and policies,
budgeting, preparing agendas) 1 2 3 4 5
My performance with regard to investigating (i.e. collecting and preparing
information, financial reports, inventories)
55
1 2 3 4 5
My performance with regard to coordinating (i.e. exchanging information with
others, arranging meetings, advising others) 1 2 3 4 5
My performance with regard to supervising (i.e. directing, leading, counselling
and training subordinates) 1 2 3 4 5
My performance with regard to staffing (i.e. college recruiting, employment
interviewing) 1 2 3 4 5
My performance with regard to representing (i.e. advancing general
organisational interests) 1 2 3 4 5
My overall performance 1 2 3 4 5

Section 3: Please circle your response on a scale of 1 to 5.

[1 = Strongly Disagree, 2 =
Agree
3 = Neither Agree Nor Disagree,
1.I would be more accepting of auditors engaging in pre-mature sign off if: 4 = Agree, 5 = Strongly Agree ]

They believe the audit step will not find anything wrong if completed 1 2 3 4 5
On previous audits there were no problems with this part of the client’s
systems/records 1 2 3 4 5
The audit supervisor shows strong concern over the time it’s taking to complete
the audit step and is putting pressure onto get it done 1 2 3 4 5
They believe the audit step is unnecessary 1 2 3 4 5

2.I would be more accepting of auditors under-reporting of time if:

It improves their chances for promotion and advancement 1 2 3 4 5
It improves their performance evaluation 1 2 3 4 5
It is suggested by their immediate supervisor 1 2 3 4 5
Others underreport their time and it’s necessary to compete with them 1 2 3 4 5

3.I would be more accepting of auditors altering/replacing audit procedures

if:
They believe the original audit procedure was unnecessary 1 2 3 4 5
On previous audits there were no problems with this part of the client’s
systems/records 1 2 3 4 5
They do not believe the original procedure would find anything wrong 1 2 3 4 5
They are under a lot of time pressure to complete the audit 1 2 3 4 5

End of Questionnaire
Thank You for your participation

Corresponding author
Malcolm Smith can be contacted at: Malcolm.smith@ecu.edu.au

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