Auditors' perceptions of client firms: The stigma of decline and the stigma of growth

Abstract This paper examines the relationship between auditors' perceptions of client organizations' growth/ decline status and the auditors' assessments of client managers' competence and integrity. It is hypothesized that perceived growth/decline status will have an inverted-U relationship with perceived management competence and integrity. If client organizations are perceived by auditors as rapidly declining or rapidly growing, the auditors' evaluations of their managers' competence and integrity will be lower than if the organizations are perceived as stable. Results from a study of auditors' perceptions of 123 actual client organizations are partially supportive of the hypotheses. We conclude that rapid organizational decline may be stigmatizing in the eyes of auditors because it raises questions about management competence. Rapid organizational growth also may be stigmatizing, but for a different reason: it creates auditor doubts about management integrity. The results of the study are discussed from the perspectives organization studies and auditing research after which suggestions for future investigation are made.

[1]  J. Ford,et al.  Organizational Adaptation to Performance Downturns: An Interpretation-Based Perspective , 1987 .

[2]  Jacob Cohen.  Partialed products are interactions; partialed powers are curve components. , 1978 .

[3]  Masoud Yasai-Ardekani,et al.  Effects of Environmental Scarcity and Munificence on the Relationship of Context to Organizational Structure , 1989 .

[4]  Joel Brockner,et al.  Survivors' Reactions to Layoffs: We Get By with a Little Help for Our Friends. , 1987 .

[5]  R. I. Sutton,et al.  The Stigma of Bankruptcy: Spoiled Organizational Image and Its Management , 1987 .

[6]  D. Whetten.  Organizational Responses to Scarcity: Exploring the Obstacles to Innovative Approaches.to Retrenchment in Education , 1981 .

[7]  Carol M. Sánchez,et al.  Organizational downsizing: Constraining, cloning, learning , 1995 .

[8]  Jitendra V. Singh.  Performance, Slack, and Risk Taking in Organizational Decision Making , 1986 .

[9]  M. Jegers.  Prospect Theory and The Risk-Return Relation: Some Belgian Evidence , 1991 .

[10]  Robert I. Sutton,et al.  Feelings about a Disneyland Visit , 1992 .

[11]  Raymond F. Zammuto,et al.  Environmental Decline and Organizational Response. , 1982 .

[12]  Richard A. D'Aveni.  Top Managerial Prestige and Organizational Bankruptcy , 1990 .

[13]  K. R. Harrigan.  Strategy Formulation in Declining Industries , 1980 .

[14]  R. I. Sutton,et al.  Functions of Parting CEremonies in Dying Organizations , 1986 .

[15]  S. Mezias.  An Institutional Model of Organizational Practice: Financial Reporting at the Fortune 200 , 1990 .

[16]  Joel Brockner,et al.  Layoffs, Job Insecurity, And Survivors' Work Effort: Evidence Of An Inverted-U Relationship , 1992 .

[17]  D. Whetten.  Organizational Growth and Decline Processes , 1987 .

[18]  Heather A. Haveman.  Ghosts of Managers Past: Managerial Succession and Organizational Mortality , 1993 .

[19]  Jeffrey D. Ford,et al.  The Occurrence of Structural Hysteresis In Declining Organizations , 1980 .

[20]  S. Grover.  Lying, Deceit, and Subterfuge: A Model of Dishonesty in the Workplace , 1993 .

[21]  J. E. Sheridan,et al.  Organizational Culture and Employee Retention , 1992 .

[22]  Donald B. Fedor,et al.  Scarcity in the Environment: Organizational Perceptions, Interpretations and Responses , 1983 .

[23]  R. Merton.  Social Theory and Social Structure , 1958 .

[24]  Sanford B. Ehrlich,et al.  The Romance of Leadership and The Evaluation of Organizational Performance , 1987 .

[25]  R. I. Sutton.  The Process of Organizational Death: Disbanding and Reconnecting , 1987 .

[26]  W. Boeker.  Power and Managerial Dismissal: Scapegoating at the Top. , 1992 .

[27]  Sheila M. Puffer,et al.  Corporate Performance and CEO Turnover: The Role of Performance Expectations , 1991 .

[28]  J. Argenti.  Corporate Collapse: The Causes and Symptoms , 1976 .

[29]  B. M. Staw.  The Escalation of Commitment To a Course of Action , 1981 .

[30]  J. Meindl,et al.  Corporate attributions as strategic illusions of management control. , 1984 .

[31]  N. Macintosh.  The Ethics of profit manipulation: A Dialectic of Control Analysis , 1995 .

[32]  J. Brockner.  Managing the Effects of Layoffs on Survivors , 1992 .

[33]  Robert I. Sutton,et al.  Decreasing Organizational Size: Untangling the Effects of Money and People , 1989 .

[34]  Rocki-Lee Dewitt.  The Structural Consequences of Downsizing , 1993 .

[35]  Jeffrey Pfeffer,et al.  The Bases and Use of Power in Organizational Decision Making: The Case of a University. , 1974 .

[36]  Mark A. Mone,et al.  Retrenchment: Cause of turnaround or consequence of decline? , 1994 .

[37]  Chao-chuan Chen,et al.  The Construction of Leadership Images in the Popular Press: The Case of Donald Burr and People Express. , 1991 .

[38]  Jennifer A. Chatman.  Matching People and Organizations: Selection and Socialization in Public Accounting Firms , 1989 .

[39]  John A. Pearce,et al.  Turnaround: Retrenchment and recovery , 1992 .

[40]  Mark J. Martinko,et al.  The Leader/Member Attribution Process , 1987 .

[41]  Donald C. Hambrick,et al.  Large Corporate Failures as Downward Spirals , 1988 .

[42]  Michael Masuch,et al.  Vicious circles in organizations. , 1985 .

[43]  Barton A. Weitz,et al.  Attributions in the Board Room: Causal Reasoning in Corporate Annual Reports , 1983 .

[44]  David G. Mayes,et al.  Sharpbenders: The Secrets of Unleashing Corporate Potential , 1988 .

[45]  E. Morrison,et al.  Newcomer information seeking: Exploring types, modes, sources, and outcomes. , 1993 .

[46]  B. Bozeman,et al.  Scarcity and Environmental Stress in Public organizations , 1979 .

[47]  C. Fombrun,et al.  What's in a Name? Reputation Building and Corporate Strategy , 1990 .

[48]  M. C. Brown,et al.  Administrative Succession and Organizational Performance: The Succession Effect. , 1982 .

[49]  G. Castrogiovanni,et al.  Curing sick businesses: changing CEOS in turnaround efforts , 1992 .

[50]  A. Tversky,et al.  Prospect Theory : An Analysis of Decision under Risk Author ( s ) : , 2007 .

[51]  H. Thomas,et al.  Attitudes Toward Risk and The Risk–Return Paradox: Prospect Theory Explanations , 1988 .

[52]  Daniel A. Levinthal,et al.  Duynamics of Interorganizational Attachments: Auditor-Client Relationships , 1988 .

[53]  Wallace N. Davidson,et al.  Layoff Announcements and Stockholder Wealth , 1991 .

[54]  Daniel A. Levinthal,et al.  Role of Individual Attachments in the Dissolution of Interorganizational Relationships , 1992 .

[55]  Richard A. D'Aveni.  The Aftermath Of Organizational Decline: A Longitudinal Study Of The Strategic And Managerial Characteristics Of Declining Firms , 1989 .

[56]  Joel Brockner,et al.  Layoffs, self-esteem, and survivor guilt: Motivational, affective, and attitudinal consequences , 1985 .

[57]  J. Dutton,et al.  Categorizing Strategic Issues: Links to Organizational Action , 1987 .

[58]  P. Bromiley.  Testing a Causal Model of Corporate Risk Taking and Performance , 1991 .

[59]  Donald C. Hambrick,et al.  A Model of CEO Dismissal , 1988 .

[60]  Daniel B. Cornfield,et al.  Chances of layoff in a corporation: A case study. , 1983 .

[61]  Aneil Mishra,et al.  Best practices in white-collar downsizing: managing contradictions , 1991 .

[62]  Richard A. D'Aveni.  Dependability and Organizational Bankruptcy: An Application of Agency and Prospect Theory , 1989 .

[63]  M. Mentzer.  The leader succession-performance relationship in a non-profit organization* , 1993 .

[64]  Dean C. Ludwig,et al.  Adapting to a Declining Environment: Lessons from a Religious Order , 1993 .

[65]  Frances J. Milliken.  Perceiving and interpreting environmental change: An examination of college administrators''interpre , 1990 .

[66]  D. Whetten,et al.  Organizational Dysfunctions of Decline , 1987 .

[67]  P. Yetton,et al.  Individual and Group Judgments of Internal Control Systems , 1983 .

[68]  Barry M. Staw,et al.  The Justification of Organizational Performance. , 1983 .

[69]  B. Weiner.  An attributional theory of motivation and emotion , 1986 .

[70]  David A. Whetten,et al.  Organizational Effects of Decline and Turbulence. , 1987 .

[71]  J. Ford.  The Effects of Causal Attributions on Decision Makers' Responses to Performance Downturns , 1985 .

[72]  William R. Kinney,et al.  Characteristics of firms correcting previously reported quarterly earnings , 1989 .

[73]  Michael Patrick Allen,et al.  Power, Performance, and Succession in the Large Corporation , 1982 .

[74]  William Weitzel,et al.  Decline in Organizations: A Literature Integration and Extension. , 1989 .

[75]  K. Cameron,et al.  Organizational Downsizing: A Convergence and Reorientation Framework , 1993 .

[76]  D. Hambrick,et al.  Turnaround Strategies for Mature Industrial-Product Business Units , 1983 .

[77]  Michael Wright,et al.  Bank failures, stigma management and the accounting establishment☆ , 1992 .

[78]  Barry M. Staw,et al.  Attribution of the "causes" of performance: A general alternative interpretation of cross-sectional research on organizations. , 1975 .

[79]  Kenneth B. Schwartz,et al.  Executive Succession in Failing Firms , 1985 .

[80]  Allen G. Schick,et al.  The Influence of Auditors' Perceptions of Organizational Decline on Audit Risk , 1993 .

[81]  M. Fennell,et al.  Leadership instability in hospitals: the influence of Board-CEO relations and organizational growth and decline. , 1993, Administrative science quarterly.

[82]  Philip M.J. Reckers,et al.  The Impact of Group Processing on Selected Audit Disclosure Decisions , 1981 .

[83]  Michael Patrick Allen,et al.  Managerial Succession and Organizational Performance: A Recalcitrant Problem Revisited. , 1979 .

[84]  Frances J. Milliken,et al.  The role of managerial learning and interpretation in strategic persistence and reorientation: An empirical exploration , 1992 .

[85]  Gary J. Castrogiovanni,et al.  Environmental Munihcence; A Theoretical Assessment , 1991 .

[86]  Perceptions of Resource Criticality in Times of Resource Scarcity: The Case of University Departments , 1986 .

[87]  John B. Cullen,et al.  Administrative Reorganization and Configurational Context: The Contingent Effects of Age, Size, and Change in Size , 1993 .

[88]  Allen G. Schick,et al.  University Budgeting: Administrative Perspective, Budget Structure, and Budget Process , 1985 .

[89]  Samuel B. Bacharach,et al.  Research in the Sociology of Organization. , 1994 .

[90]  T. S. Bateman,et al.  Assignment of Credit and Blame for Performance Outcomes , 1993 .

[91]  George W. Krull,et al.  Auditors' Assessment of Management's Disposition: An Attributional Analysis* , 1992 .

[92]  W. Mckinley.  Complexity and Administrative Intensity: The Case of Declining Organizations. , 1987 .