Materiality judgments and audit firm culture: Social-behavioral and political perspectives

Abstract Researchers have traditionally interpreted the formation of auditor judgments as either a technical or a cognitive phenomenon. Their research has, therefore, focused mainly on refining empirical techniques designed to reveal the mental processes used to form judgments interior to the individual. This theoretical and empirical analysis opens this conceptualization on three levels. On the first level, the authors interpret auditor judgment formation as a social-behavioral phenomenon in which the social context of the audit firm vis-a-vis its audit philosophy influences materiality judgments. On the second level, rather than interpreting the firm's philosophy as merely one form of “variable” administrative partners may manipulate to achieve desired ends, the authors treat it as determining of and being determined by the social structure of the audit firm and in turn its culture. Accordingly, they hypothesize that (1) a firm's audit culture, expressed in terms of mechanistic versus organic orientations, systematically influences its members' materiality judgments, which are characterized as “rational comprehensive” or “satisficing”, respectively; and (2) the level of experience of audit firm members, expressed in terms of hierarchical ranks, amplifies the effect of firm culture. On the third level, the authors interpret the formation of materiality judgments vis-a-vis culture as forming an implicit tension with political interests in which the practitioner and administrative components of audit firms contend with one another over the “location” of decision-making discretion and autonomy. Results obtained from an experimental simulation involving the participation of 212 partners, managers and seniors from the former Big 8 firms strongly support both audit firm culture hypotheses. Finally, the authors explore implications using empirical results as well as insights gathered during interviews with firms members directed at probing the political forces influencing the location of decision-making discretion.