For Auditors, the Blame Game is the Losing Game

By insisting on punishing auditors who make mistakes rather than encouraging an open learning culture, regulators may be driving the problem underground

The essentials

Auditors, alas, are mere humans and subject to mistakes. What happens when mistakes are discovered largely depends on the culture of the individual practice office rather than the norms of the accounting firm. In a “blame culture,” punishment is meted out while in a “learning culture,” isolated errors are corrected and the lesson about what was done wrong is conveyed to all who might make the same mistake.

Working with colleagues Anna Gold (VU University Amsterdam) and Ulfert Gronewold (University of Potsdam), Steven Salterio, Queen’s School of Business professor and Director of the CA-Queen's Centre for Governance, dug deeper into the error management practices of accounting firms. Their work, published in 2014 in The Accounting Review, suggests that audit quality suffers in a blame culture, and that regulatory officials inadvertently may be making matters worse. Salterio discussed the research with QSB Insight.

Why error management practices of major accounting firms vary widely

Our main reason for researching this area was the difference between what we saw as accounting firms’ public commitment to open learning environments and the stories we heard from a minority of our graduates, where they were saying that this wasn’t the case in their offices. The other motivation was our practice experience: we had all encountered colleagues who didn't report errors that they'd discovered in audit files.

Audit firms are decentralized into practice offices. They’re generally organized on a national basis, with anywhere from 15 to maybe 70 offices in any one country. All training, standards, and promotion decisions are made at the audit firm level, so there is a lot of opportunity for the firm to establish a common corporate culture across offices. 

The firms all talk about being very open and supportive. You hear the same rhetoric from the national offices of all of Canada’s six public accounting firms. It’s a question of how much of that rhetoric filters down to audit offices versus how much of it depends on the individual office-managing partner’s attitudes and actions.

Based on research I’ve done, senior accounting firm management knows the offices that are run by partners who are “petty tyrants." And there are offices where they really understand that they’re a learning organization, that auditors make mistakes and that does not necessarily warrant punishment. As long as they don’t keep repeating the same mistakes, they aren’t punished. 

What we tend to see is that if a office managing partner is running a profitable practice, there will be very little scrutiny of the means by which he does that. That’s where problems can fester. Because even though the firm’s upper management is aware that there’s a very strong blame-oriented culture in that office, as long as the financial results are fine, in the short term the firm doesn’t want to intervene with the management style of the partner. 

The value in open learning environments

We tested the question that if you were put into an open climate, would you be more willing to report errors that you discover than if you’re in a blame climate. It was an experimental study in which we enlisted auditors from eight German public accounting firms. The overall finding was that error management climate does matter, that, in general, those who were in more open learning environments were more willing to report errors than folks who were in blame-oriented climates — whether you made the mistake or a peer made it.

Some partners reason that if you punish someone, there will be fewer offences in the future. But research has shown that in a blame climate, mistakes are not committed less frequently but better hidden when found rather than reported. The punishment culture also assumes auditors are deliberately choosing to do a poor job and if you punish them enough they will stop. An alternative perspective is that fatigue, time pressure, lack of training, more complex accounting standards are all contributing to auditors making errors. From our research, this is not a story about sloth and laziness. 

The role regulatory inspectors play in reinforcing a blame culture

Before 2009/2010, North America’s regulatory inspectors (in Canada, the Public Accountability Oversight Board) centred their inspections on an individual engagement, albeit they did examine firm issues. By around 2009, they observed that auditing quality wasn’t improving despite the fact that year after year they were identifying deficiencies and thinking they could be overcome at the engagement level. So they thought, what were the systemic factors that might attribute to lack of high-quality auditing? This is when they began to speculate that firm-level factors were influencing the incentive for the people on the individual audit, and that until these firm-level factors were dealt with, there wouldn’t be any substantial improvement in the individual audit. 

The idea of punishment quickly came to the fore in the regulators’ musings about the problem at the firm level. One of their immediate solutions was to require that audit firms hold people accountable and punish them if they found mistakes. This leads you down the road to a blame climate. 

When we first noted that regulators were starting to look at firm-level variables in trying to understand why audit quality wasn’t improving, we were excited. We always expected that the problem with the inspection process was that it was too focused on the individual audit. But when we realized that they were, perhaps unintentionally, promoting a blame climate, we were dismayed because of the possibility of driving audit errors further underground. 

Lessons for accounting firms and regulators

Accounting firms would be well advised to walk the talk across all their offices of being an open learning organization that is supportive of their personnel. Not be punitive in dealing with errors as long as the person grows from learning how to do it right and doesn’t continually make the same mistakes. 

From a regulatory perspective, it is important not to require firms to take  actions that are counterproductive and enhance a blame climate. Regulators can just as easily prod audit firms to have more open climates because they review the human resource and promotion policies. The investigators are in the office long enough to pick up on the culture of the offices they’re visiting. Rather than say that someone has to be punished, they could identify that this office is having a management problem and suggest changes in management practices so that they achieve their audit quality goal. 

Punishing someone for isolated mistakes, however bad they might turn out to be, is a counterproductive move when you’re trying to improve overall quality of work. If nuclear power station regulators or hospital regulators can find a means of supporting an open error management climate in their particular settings — where the results of failure are much larger than in an individual audit — surely audit regulators can realize that reinforcing blame-oriented cultures is not something they want to be part of. 

Interview by Alan Morantz

Smith School of Business
Goodes Hall, Queen's University
Kingston, Ontario
Canada K7L 3N6

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