Description
Taylor et al. (2003) challenged the longstanding notion that independence is the capstone
of the audit profession by proposing a conceptual framework that emphasizes reliability,
rather than independence, as the professional endgame for auditors. Although the reliability
framework has attracted attention from policymakers, it has not been tested empirically
in an audit context to assess its validity from a user’s perspective. The objective of this
study is to test the auditor reliability framework and its formative ethical constructs
(i.e., integrity, expertise, independence, objectivity, and reliability) with a sample of 168
commercial lenders. We also extend the reliability framework to examine the extent that
perceived auditor reliability affects lenders’ judgments of financial reporting reliability and
default risk in a hypothetical lending scenario. Finally, we evaluate the extent that lenders’
judgments are affected by auditor provision of nonaudit bookkeeping and payroll services
to a prospective borrower in violation of current independence rules. The results provide
strong empirical support for the relations predicted in the reliability framework. Structural
equation model results indicate that auditor integrity is the foundation of the framework,
directly affecting lenders’ assessments of auditor expertise, independence, objectivity, and
reliability. Further, although integrity and objectivity directly affect perceived auditor reliability,
independence and expertise only affects reliability indirectly through its impact on
objectivity.
A test of the auditor reliability framework using lenders’ judgments
F. Todd DeZoort
a,?
, Travis Holt
b
, Mark H. Taylor
c
a
The University of Alabama, United States
b
University of Tennessee at Chattanooga, United States
c
Case Western Reserve University, United States
a b s t r a c t
Taylor et al. (2003) challenged the longstanding notion that independence is the capstone
of the audit profession by proposing a conceptual framework that emphasizes reliability,
rather than independence, as the professional endgame for auditors. Although the reliabil-
ity framework has attracted attention from policymakers, it has not been tested empirically
in an audit context to assess its validity from a user’s perspective. The objective of this
study is to test the auditor reliability framework and its formative ethical constructs
(i.e., integrity, expertise, independence, objectivity, and reliability) with a sample of 168
commercial lenders. We also extend the reliability framework to examine the extent that
perceived auditor reliability affects lenders’ judgments of ?nancial reporting reliability and
default risk in a hypothetical lending scenario. Finally, we evaluate the extent that lenders’
judgments are affected by auditor provision of nonaudit bookkeeping and payroll services
to a prospective borrower in violation of current independence rules. The results provide
strong empirical support for the relations predicted in the reliability framework. Structural
equation model results indicate that auditor integrity is the foundation of the framework,
directly affecting lenders’ assessments of auditor expertise, independence, objectivity, and
reliability. Further, although integrity and objectivity directly affect perceived auditor reli-
ability, independence and expertise only affects reliability indirectly through its impact on
objectivity. Finally, we ?nd that lenders perceive no decrease in auditor objectivity or reli-
ability when existing independence rules are violated by combining audit services with
nonaudit services for prospective borrowers.
Ó 2012 Elsevier Ltd. All rights reserved.
Introduction
Independence has long been considered the capstone of
the audit profession because it has been assumed to be the
foundation for public trust (Bazerman & Moore, 2011;
Jamal & Sunder, 2011; Jeppesen, 1998; Lee, 1993; Lindberg
& Beck, 2004; Mautz & Sharaf, 1961; Montgomery, 1940;
Nelson, 2006). However, the accounting literature includes
numerous challenges to the role of independence and its
relationship to other critical ethical constructs within the
profession. For example, DeAngelo (1981) and subsequent
studies (e.g., Ganguly, Herbold, & Peecher, 2007) asserted
that the two pillars of audit quality are actually integrity
and competence rather than independence. Jamal and
Sunder (2011) questioned whether mandated indepen-
dence is even necessary for audit quality, ?nding in a ?eld
study of baseball card certi?cation in an unregulated
market that the demand for attester expertise is prioritized
over the demand for independence.
Taylor, DeZoort, Thomas, and Munn (2003) introduced
an auditor reliability framework that de?nes and organizes
critical ethical constructs in the profession (e.g., integrity,
independence, expertise, objectivity) to emphasize profes-
sional reliability rather than independence as the relevant
‘‘endgame’’ when providing assurance related to ?nancial
reporting. They describe auditor reliability in the frame-
work as a condition where stakeholders consistently ?nd
0361-3682/$ - see front matter Ó 2012 Elsevier Ltd. All rights reserved.http://dx.doi.org/10.1016/j.aos.2012.08.003
?
Corresponding author. Address: Culverhouse School of Accountancy,
Box 870220, Tuscaloosa, AL 35487, United States. Tel.: +1 205 348 6694;
fax: +1 205 348 8453.
E-mail address: [email protected] (F.T. DeZoort).
Accounting, Organizations and Society 37 (2012) 519–533
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the auditor’s work credible and dependable, even after
acknowledging the inherent limitations of audit and other
attest functions. In this context, auditor reliability pro-
motes ?nancial reporting reliability that has long been
emphasized as a critical qualitative characteristic of ?nan-
cial information.
In response to the Taylor et al. (2003) reliability frame-
work, the American Institute of Certi?ed Public Accoun-
tants (AICPA) formed a Reliability Task Force to evaluate
the framework’s potential to improve professional stan-
dards and the quality of professional services by shifting
from the traditional ‘‘independence-based’’ model to a reli-
ability-based model (DeZoort, Morgan, Ratcliffe, & Taylor,
2008).
1
Speci?cally, the Task Force recognized that the tradi-
tional independence-based model is a problem for clients
who require more than attest services from their auditors
to achieve reliable ?nancial reporting.
2
The Task Force con-
cluded that a refocus on reliability could better serve the
public interest by allowing auditors to provide attest clients
with certain nonattest services (e.g., internal control ser-
vices) to improve the reliability of ?nancial reporting.
3
Fur-
ther, the reliability framework was used as a basis for
speci?c Task Force recommendations to the Accounting
and Review Services Committee (ARSC), which in turn pro-
posed revisions to longstanding standards to allow auditors
to issue compilation and review reports when independence
is impaired due to the provision of nonattest internal control
services (AICPA, 2009a).
4
Given the Reliability Task Force and ARSC focus on com-
pilation and reviewengagements, the AICPA’s Private Com-
pany Practice Section commissioned an empirical study
(DeZoort & Taylor, 2009) of the reliability framework to
further evaluate its validity in those attest contexts. The
results from commercial lenders provide strong initial
empirical support for the framework’s predicted relations
in both compilation and review settings, even when both
attest and nonattest services were provided in violation
of current independence rules. The study results also indi-
cate that although integrity, expertise, and objectivity have
signi?cant direct and indirect effects on lender assess-
ments of CPA reliability and ?nancial reporting reliability,
independence only affected reliability indirectly through
its impact on objectivity.
Although policymakers have been using the reliability
framework to guide standard-setting (AICPA, 2009a;
DeZoort et al., 2008), the literature lacks empirical evidence
that assesses the validity of the framework’s proposed rela-
tions in the framework’s original audit context. The audit
function is unique given its relatively high levels of assur-
ance, user reliance, scrutiny, and consequence compared
to other attest functions. For example, prior studies (e.g.,
Bartlett, 1991; Gay, Schelluch, & Baines, 1998; Johnson,
Pany, & White, 1983; Yardley, 1989) provide consistent evi-
dence that ?nancial statement users desire and perceive
greater assurance from ?nancial statement audits than
from other attest services (e.g., reviews, compilations). In
a lending context, Reinstein and Leibowitz (2010) suggest
a speci?c link between debt levels and desired assurance le-
vel, with lenders requiring ?nancial statement audits of
borrowers with large outstanding balances. The distinct
features of the audit function motivated the Reliability Task
Force to highlight the need for further research to evaluate
the framework in an audit context (AICPA, 2008).
This study provides an initial empirical test of the audi-
tor reliability framework proposed in Taylor et al. (2003),
revised in DeZoort et al. (2008), and subsequently modi?ed
for testing in compilation and review contexts (DeZoort &
Taylor, 2009). We adopt a users’ perspective in this study
and evaluate lending of?cers’ perceptions about auditor
integrity, expertise, independence, objectivity, and reliabil-
ity in a hypothetical lending scenario and test the validity
of the proposed relations among the framework’s forma-
tive constructs. We also evaluate the extent to which
perceived auditor reliability affects lenders’ judgments of
?nancial reporting reliability and default risk. Finally, we
Fig. 1. Reliability framework (DeZoort et al., 2008).
1
The AICPA Reliability Task Force consisted of practitioners, preparers,
academics, and third-party users (e.g., bankers).
2
The AICPA promulgates technical auditing standards for audits of
nonpublic companies and authoritative ethical rules for all members
engaging in public practice. Although the AICPA Reliability Task Force was
primarily concerned with improving US professional standards, its ?ndings
are applicable to international professional standards. Professional codes of
conduct (e.g., AICPA, 2010; IFAC, 2010) do not allow accountants to issue
audit reports or review reports if independence is lacking. Accountants can
perform compilations when independence is impaired as long as the lack of
independence is disclosed in their report.
3
When considering the framework and current independence rules, the
Task Force distinguished among independence impairments caused by
?nancial interests, family relationships, and CPA performance of nonattest
services. Recommendations focused only on the performance of select
nonattest services. The Reliability Task Force reaf?rmed the importance of
maintaining ‘‘family-based’’ independence (e.g., ensuring that an immedi-
ate family member of the CPA is not in a key management position at the
client) and ‘‘?nancial-interest’’ independence (e.g., avoiding direct invest-
ments in the client) (DeZoort et al., 2008).
4
The ARSC exposure draft motivated a large number of comment letters
that re?ected both strong support and strong opposition to the proposal.
Ultimately, the ?nal standard (AICPA, 2009b) was released without the
provision because of confusion about the speci?c scope of internal control
services targeted in the proposal. The AICPA Professional Ethics Executive
Committee (PEEC) is currently considering revisions to Interpretation 101-3
to clarify that accountants can perform certain internal control services for
clients and maintain independence as long as management takes respon-
sibility for the results of those services (AICPA, 2011).
520 F.T. DeZoort et al. / Accounting, Organizations and Society 37 (2012) 519–533
consider whether lenders’ assessments of the reliability
framework constructs are affected when auditors violate
independence rules by providing both audit and nonaudit
bookkeeping and payroll services to the prospective
borrower.
This study is motivated by the need for empirical evi-
dence to test the reliability framework in its intended audit
context given the theoretical relations proposed, and poli-
cymakers’ interest, in implementing changes based on the
implications of the framework. For example, the framework
(see Fig. 1) describes integrity, expertise, and independence
as formative ethical constructs underlying the pursuit of
objectivity, which in turn underlies auditor reliability
(DeZoort et al., 2008; Taylor et al., 2003). In this context,
although relationship-based independence remains an
important construct, it is not a wholly suf?cient antecedent
to auditor objectivity and reliability given the importance
of integrity and expertise.
5
The framework provides for the
possibility of auditor and ?nancial reporting reliability in sit-
uations where auditors lack independence if they have the
integrity and expertise needed to pursue objectivity. This
study provides initial evidence about the extent that users
agree with the framework’s proposed relations and extends
testing of the framework beyond compilation and reviewset-
tings to consider its validity in the distinct audit context.
We test the reliability framework using a sample of 168
experienced commercial lending of?cers who are members
of the Risk Management Association (RMA). Lenders repre-
sent a critical user group who can provide an initial empiri-
cal perspective on the relative importance of (and relations
among) the reliability framework’s constructs and how the
framework affects perceived ?nancial statement reliability
anddefault risk judgments. The extant accounting literature
provides numerous studies (e.g., Ashton & Ashton, 1995;
Beaulieu, 1994; Danos, Holt, & Imhoff, 1989; Holder-Webb
& Sharma, 2010; Minnis, 2011) focused on lenders’ judg-
ments because of their role as crucial users of audited ?nan-
cial statements. For example, Holder-Webb and Sharma
(2010) studied how commercial lenders’ decisions were af-
fected by their perceptions of reporting reliability, ?nding
that lenders are indeed sensitive to ?nancial condition and
perceived ?nancial reporting reliability.
The results provide strong initial support for the auditor
reliability framework. Speci?cally, we ?nd that lenders’
assessments of auditor expertise, integrity, and indepen-
dence directly affect their assessments of auditor objectiv-
ity. The results also indicate that lenders’ assessments of
auditor objectivity positively affect their perceptions of
auditor reliability. Additionally, we ?nd that perceptions
of auditor reliability are positively associated with assess-
ments of ?nancial reporting reliability, and that ?nancial
reporting reliability, in turn, is negatively related to assess-
ments of default risk. These results are robust when
auditors provide both audit services and nonaudit book-
keeping and payroll services in violation of current auditor
independence rules.
The next section develops the study’s hypotheses re-
lated to the reliability framework and provision of nonau-
dit services. The third section describes the study’s
research method. The fourth section provides the results,
followed by discussion of the study’s limitations and
implications.
Theory and hypotheses
The ?rst set of hypotheses focuses on the reliability
framework’s formative constructs. Speci?cally, we test
the framework’s predicted relations among auditor integ-
rity, expertise, independence, objectivity, and reliability.
We also extend the reliability framework analysis to pre-
dict that lenders’ assessments of auditor reliability will di-
rectly affect their assessments of borrower ?nancial
statement reliability and lenders’ default risk judgments.
Integrity effects
Taylor et al. (2003) identi?ed integrity as a key founda-
tion component in the pursuit of auditor reliability. Integ-
rity in this context is a core virtue in an individual’s
character that re?ects the ability to be straightforward,
honest, and forthright in all professional and business
activities. After AICPA Reliability Task Force deliberations,
DeZoort et al. (2008) revised the initial framework to rec-
ognize integrity as the sole ethical foundation. Speci?cally,
the framework suggests that auditor integrity directly
underlies expertise and independence needed to pursue
objectivity. For example, integrity is posited to directly
underlie auditors’ good faith efforts to acquire and main-
tain the knowledge and experience needed to understand
clients, industries, and engagements to ultimately provide
reliable services. Hardwig (1994) discusses the ‘‘rationality
of trusting experts’’ and highlights that integrity is a criti-
cal antecedent to expertise for users because the underly-
ing integrity of experts provides the basis for trust that is
needed to rely on an expert’s judgments and decisions.
Although this trust is sometimes broken, judgments about
an expert’s integrity remain part of a user’s justi?cation for
relying on the expert. Accordingly, we predict that lenders’
perceptions of auditor integrity will be linked directly to
their assessments of auditor expertise. Stated formally:
Hypothesis 1a. Lenders’ assessments of auditor integrity
will be positively related to their assessments of auditor
expertise.
The framework also proposes a direct link between
integrity and independence in the pursuit of objectivity
and reliability. This link stems from the professional stan-
dards (e.g., AU section 220) which require auditors to be
honest and forthright when evaluating the ?nancial and
non?nancial relationships with clients that can create con-
?icts of interest and undermine objectivity and reliability.
The extant research literature supports this link with evi-
dence that auditors’ level of moral development affects
their independence judgments. For example, Sweeney
and Roberts (1997) found that auditors with increased
levels of moral development were more sensitive to ethical
5
Taylor et al. (2003) developed the framework to address concerns about
independence being the cornerstone of the profession and continued
confusion about the meaning of independence and other key ethical
constructs in the profession.
F.T. DeZoort et al. / Accounting, Organizations and Society 37 (2012) 519–533 521
issues and less likely to rely solely on technical standards
when making independence judgments. From a user’s per-
spective, auditor integrity should be a critical antecedent
to efforts to comply with existing independence rules
and avoid proscribed con?icts of interest when providing
audit services. Speci?cally, in the context of this study,
lenders’ assessments of auditor integrity should be directly
related to their con?dence that auditors will work to com-
ply with existing independence rules to protect the public
interest. Stated formally:
Hypothesis 1b. Lenders’ assessments of auditor integrity
will be positively related to their assessments of auditor
independence.
Given the importance of integrity in the framework and
profession, we also test the extent that auditor integrity is
directly related to perceived auditor objectivity after con-
trolling for integrity effects on perceived expertise and
independence. Objectivity refers to the professional’s abil-
ity to control the biases, con?icts, and inappropriate in?u-
ences that can undermine professional judgment and
reliability. As such, objectivity represents the pursuit of a
‘‘bias-free’’ state of mind that all professionals should pur-
sue when providing attest services to clients.
6
Taylor et al.
(2003) linked auditor integrity directly to objectivity by sug-
gesting that integrity should help professionals maintain
clear focus on ‘‘truthful reporting’’ and be ‘‘sensitive to dis-
honest manipulated reporting behavior’’ (p. 262). Accord-
ingly, we predict that lenders’ assessments of auditor
integrity will be related directly to their assessments of
auditor objectivity. Stated formally:
Hypothesis 1c. Lenders’ assessments of auditor integrity
will be positively related to their assessments of auditor
objectivity.
Expertise effects
The reliability framework also describes auditor exper-
tise as a critical foundation element and antecedent to
objectivity. The accounting literature (e.g., Bonner & Lewis,
1990; Libby & Tan, 1994) de?nes expertise as the knowl-
edge, ability, and experience needed to achieve task-
speci?c superior performance. The research literature also
provides evidence of a link between professional expertise
and objectivity. For example, the performance review liter-
ature in accounting (e.g., Tan & Jamal, 2001) provides
evidence that reviewer expertise is directly related to the
ability to control biases and objectively evaluate the work
of subordinates.
The reliability framework links expertise directly to
objectivity because technical knowledge, ability, and
experience help auditors providing attest services ‘‘to
exercise due diligence and properly ?ll their responsibili-
ties in a competent and pro?cient manner’’ (Taylor et al.,
2003, p. 262). Ultimately, expertise with underlying integ-
rity should help auditors pursue objectivity needed to
manage the variety of technical, client, and industry issues
that arise when providing client services.
7
From a user’s
perspective, the perceived expertise of auditors should di-
rectly affect judgments about auditors’ ability to understand
and evaluate complex issues and manage the judgment and
decision biases that undermine objectivity. Accordingly, we
predict that lenders’ assessments of auditor expertise should
be directly related to their assessments of auditor objectivity
when evaluating a prospective borrower’s credit application.
Stated formally:
Hypothesis 1d. Lenders’ assessments of auditor expertise
will be positively related to their assessments of auditor
objectivity.
Independence effects
Taylor et al. (2003) describe persisting confusion be-
tween independence and objectivity in both the profes-
sional literature and in practice. The reliability framework
de?nes independence as it exists within professional stan-
dards: as a construct focused on the relationships (e.g.,
?nancial, family) that professionals have with their clients.
Alternatively, objectivity refers to the auditor’s state of
mind and ability to manage the cognitive biases and subjec-
tivity that inherently affect professional judgments and
decisions. Accordingly, current independence rules focus
on proscribing ?nancial and non-?nancial relationships
with the client that have the potential to create con?icts
of interest that can impair auditors’ pursuit of objectivity.
Although relationship-based independence and objec-
tivity are clearly related, the framework highlights the
importance of distinguishing between the constructs and
recognizing that independence is one of several antecedents
to objectivity. We test this proposed relation using lenders’
assessments of auditor independence and objectivity. As
suggestedinthe reliabilityframework, lenders’ assessments
of auditor independence shouldbe positivelyrelatedtotheir
assessments of auditor objectivity. Stated formally:
Hypothesis 1e. Lenders’ assessments of auditor indepen-
dence will be positively related to their assessments of
auditor objectivity.
Objectivity effects on auditor reliability
The reliability framework proposes that auditor reliabil-
ity ?ows directly from the pursuit of objectivity re?ecting
underlying integrity, expertise, and independence when
providing professional services to clients (DeZoort et al.,
2008; Taylor et al., 2003). In this study, we test the
framework’s reliability ‘‘in appearance’’ dimension by
evaluating the extent that lenders’ assessments of auditor
objectivity directly affect their overall assessment of auditor
6
The reliability framework recognizes that complete objectivity is
impossible given the subjectivity inherent in judgment-based domains
(Taylor et al., 2003). Accordingly, objectivity in this context represents the
ability to manage subjectivity.
7
Expertise without integrity represents an enormous risk for stakehold-
ers. DeZoort et al. (2008) highlight this risk as a motivating factor in their
revision of the Taylor et al. (2003) reliability framework to propose
integrity as the framework’s sole foundation.
522 F.T. DeZoort et al. / Accounting, Organizations and Society 37 (2012) 519–533
reliability. Speci?cally, lenders’ reliability judgments should
re?ect the amount of con?dence they have in auditors’ abil-
ity to objectively plan and performthe engagement. Accord-
ingly, we predict that lender assessments of auditor
objectivity in attest engagements will be directly related
to their assessments of auditor reliability. Stated formally:
Hypothesis 1f. Lenders’ assessments of auditor objectivity
will be positively related to their assessments of auditor
reliability.
Auditor reliability effects on ?nancial statement reliability
Beyond testing the reliability framework, we also con-
sider how auditor reliability and its formative constructs
affect lenders’ judgments of ?nancial statement reliability.
The accounting literature provides a number of studies
linking the quality of accountants’ work (e.g., audit quality)
to ?nancial statement reliability (e.g., Fischbacher &
Stefani, 2007; Johnson, Kurana, & Reynolds, 2002; Stanley
& DeZoort, 2007). For example, Fischbacher and Stefani
(2007) found that managers were less likely to manipulate
?nancial statements in the presence of increased auditor
effort resulting in improvements in audited ?nancial infor-
mation. From a lender’s perspective, ?nancial statements
provide information that is used to assess a company’s cur-
rent ?nancial condition and future cash ?ows. However,
information asymmetry between ?nancial statement pre-
parers and users increases uncertainty for lenders and
the cost of lending (Watts & Zimmerman, 1986). Audit ser-
vices should reduce lender uncertainty about ?nancial
information provided by the prospective borrower.
Accordingly, to the extent that audits are designed to in-
crease the credibility of ?nancial statements, we expect
perceived auditor reliability to directly affect lenders’
assessments of ?nancial reporting reliability. In addition,
lenders’ assessments of ?nancial reporting reliability
should affect their assessment of a loan applicant’s credit
worthiness. Speci?cally, we expect an inverse relation be-
tween perceived ?nancial reporting reliability and the loan
applicant’s risk of default on the loan. Stated formally:
Hypothesis 2. Lenders’ assessments of auditor reliability
will be positively related to their assessments of a
prospective borrower’s ?nancial statement reliability.
Hypothesis 3. Lenders’ assessments of a prospective bor-
rower’s ?nancial statement reliability will be negatively
related to their assessments of the borrower’s default risk.
In summary, we test the reliability framework’s pro-
posed relations among auditor integrity, expertise, inde-
pendence, objectivity, and reliability, including ?nancial
statement reliability. The conceptual framework in Fig. 2
summarizes the study’s conceptual model and hypotheses.
Nonaudit service effects
Regulators and others have contended that the provi-
sion of nonaudit services to audit clients has the potential
to impair auditor independence and undermine ?nancial
reporting quality (e.g., Bazerman & Moore, 2011; Frankel,
Johnson, & Nelson, 2002; Levitt, 2000; Simunic, 1984).
For example, Simunic (1984) suggests that the provision
of nonaudit services by auditors leads to economic bonding
between the auditor and client. Because of this bonding,
auditors may be less willing to criticize the work provided
from these services. Therefore, the resulting objectivity
impairment can have detrimental effects on overall ?nan-
cial reporting quality.
However, the literature also includes arguments that
the provision of select nonaudit services to audit clients
can improve the quality of ?nancial reporting (AICPA,
2009a; DeZoort et al., 2008; Joe & Vandervelde, 2007).
Information obtained from the provision of nonaudit ser-
vices is potentially useful during the audit. For example,
Joe and Vandervelde (2007) found that auditors gained
knowledge in performing nonaudit tasks. Their results
suggested that this knowledge could be transferred to
audit tasks (i.e., risk assessment) that may lead to im-
proved ?nancial reporting quality. Additionally, DeZoort
and Taylor (2009) found that lender perceptions of CPA
reliability and ?nancial reporting reliability in compila-
tion and review engagements did not decrease when
CPAs provided both attest and nonattest bookkeeping
and payroll services to a client in violation of indepen-
dence rules. Lenders perceived signi?cantly higher reli-
ability in a compilation setting where nonattest
services were provided despite reporting lower perceived
independence.
We question whether such ?ndings will extend to an
audit context given the high level of assurance and the in-
creased focus on the importance of independence. The reli-
ability framework suggests that perceived auditor integrity
and expertise have the potential to offset user concern
about compromised independence resulting from combin-
ing audit and nonaudit services. Accordingly, we question
the extent that the framework’s relations will be affected
when auditors provide both audit and nonaudit services
to clients. Stated formally:
Research Question. To what extent does the provision
of nonaudit services to audit clients affect lenders’
framework component assessments and default risk
judgments?
Method
Participants
The study’s participants were commercial lender mem-
bers of the Risk Management Association (RMA). RMA of?-
cials reviewed the research materials and e-mailed lender
members to endorse the study and request participation.
The request for participation provided a link to the website
containing the research instrument. After 2 weeks, a second
request was sent to the RMA members asking themfor par-
ticipation if they had not already completed the study.
8
8
No signi?cant differences were found among responses from partici-
pants who responded after the ?rst and second requests.
F.T. DeZoort et al. / Accounting, Organizations and Society 37 (2012) 519–533 523
One hundred eighty-seven commercial lenders pro-
vided complete responses in the study.
9
We cannot deter-
mine the speci?c number of requests sent or the response
rate for the study because data collection was facilitated
by RMA contacts. As indicated in Table 1, the participants
average 14 years of lending experience and represent 99 cit-
ies in the United States and Canada. Almost half (49%) work
in ?nancial institutions with more than $5 billion in assets. A
majority of the participants were male (72%), lacking a pro-
fessional license (74%), and possessing a bachelor’s degree
(or equivalent) as their highest level of education (67%).
We found no signi?cant demographic effects.
Research instrument
The online research instrument (see Appendix A) was
adapted from DeZoort and Taylor (2009) and administered
using PsychData.
10
After completing an online consent form,
participants received general instructions and were told
they were evaluating an application from a hypothetical
privately-held tool manufacturer (hereafter ‘‘Tools’’) to
re?nance a $1.5 million line of credit. Company background
information (see Appendix A) described Tools as an average
Fig. 2. Conceptual framework.
Ã
Constructs and hypotheses below the dashed line represent the Reliability Framework introduced by Taylor et al. (2003)
and revised by DeZoort et al. (2008).
9
We omitted 18 participants who provided incomplete responses.
However, our results are qualitatively similar if these participants are left
in the analysis.
Table 1
Demographics (n = 168).
Number of cities represented 99
Professional designation
No 74%
Yes 26%
Gender
Female 28%
Male 72%
Size of ?nancial institution (assets)
Less than $1 billion 25%
$1 billion - $5 billion 26%
Greater than $5 billion 49%
Lending experience (years) 13.99
Education
Bachelors 67%
Masters 33%
10
The research instrument was developed in consultation with groups of
lenders, researchers, and representatives from the AICPA and the RMA to
ensure case realism, understandability, and content validity for the
framework’s measurement items. We then pretested the instrument with
53 MBA students. The development and pretest procedures led to minor
modi?cations to the instrument. The study and all research materials were
approved by the Institutional Review Boards at the researchers’
universities.
524 F.T. DeZoort et al. / Accounting, Organizations and Society 37 (2012) 519–533
(medium) risk company with effective internal controls,
competent management and directors, and stable ?nancial
health and growth in recent years. Participants were told
that Tools was a new prospective customer for them. Sum-
mary ?nancial information provided unaudited account bal-
ances and performance results. The background information
also indicated that the re?nanced line of credit would be se-
cured by Tools’ accounts receivables and inventory.
11
The instrument then described Tools’ public accounting
?rm as a regional public accounting ?rm that had been in
business for 20 years and provided a full menu of services
to their clients. In addition, the instrument stated that the
accounting ?rm had approximately 80 professionals work-
ing in four of?ces in the United States. After reading the
accounting ?rm description, participants were told the
accounting ?rm has provided audit services for Tools for
the past 3 years. The instrument provided the most recent
audit report providing an unquali?ed opinion on the ?nan-
cial statements.
Independent variables
We manipulated the provision of nonaudit service lev-
els at two levels randomly between subjects (see Appen-
dix, Panel B). Participants assigned to the audit only
group were told that the public accounting ?rm only pro-
vided audit services, while participants in the audit and
nonaudit services group were told that their accounting
?rm provided audit and nonaudit bookkeeping and payroll
services. We developed a service-based independence
problem in this study rather than a ?nancial interest or
family con?ict independence problem because of recent
policymaker interest in the area (DeZoort et al., 2008).
The focus on auditor provision of bookkeeping and payroll
services as our speci?c independence problem came after
consulting with a number of lenders and regulators during
study development about types of nonaudit services that
would create a transparent auditor independence problem.
Overall, the participants found the research scenario to
be both realistic (overall mean = 6.63 on a nine-point scale
where 1 = ‘‘Very unrealistic’’ and 9 = ‘‘Very realistic’’) and
understandable (overall mean = 6.61 on a nine-point scale
where 1 = ‘‘Very dif?cult to understand’’ and 9 = ‘‘Very easy
to understand’’). The results did not differ signi?cantly be-
tween treatment groups.
Dependent variables
We developed a series of 20 items to measure the reli-
ability framework constructs (see Appendix A). Speci?-
cally, integrity (items 1–4), expertise (items 5–8),
independence (items 9–12), objectivity (items 13–16),
and reliability (items 17–20) were each measured with
four items. The expertise items focused on various dimen-
sions of expertise, including experience, knowledge, and
ability. Similarly, the independence items were written to
measure perceived independence related to both fees
charged and the scope of services provided. The reliability
statements were split with two items focused on auditor
reliability and two items focused on ?nancial statement
reliability. Response items were randomized and measured
using a ?ve-point Likert scale anchored ‘‘Strongly Dis-
agree’’ and ‘‘Strongly Agree’’. Each scale contained nega-
tively worded items to control for response bias.
Manipulation checks and other questions
We used two multiple-choice questions to assess par-
ticipants’ understanding of the study’s experimental mate-
rials. First, we asked participants to indicate whether the
accounting ?rm in the scenario provided Tools Company
with audit, compilation, or review services for the past
3 years. Second, we asked participants to indicate whether
the accounting ?rm provided audit services only to Tools
or if it provided both audit and nonaudit bookkeeping
and payroll services. The manipulation check questions
had a 92% pass rate, leaving 168 participants for the
remainder of the analysis after excluding individuals who
missed at least one manipulation check question.
12
After the manipulation checks, we asked participants to
assess the default risk associated with approving Tool Com-
pany’s application to re?nance its line of credit using a nine-
point scale anchored 1 = ‘‘No Risk’’ and 9 = ‘‘A Great Deal of
Risk’’.
13
The ?nding of an overall loan applicant default risk
mean of 5.06 indicates that the participants assessed default
risk for Tools at a moderate level as intended in the case. We
alsoaskedfor assessments of theamount of assuranceprovided
by audits, reviews, and compilations and found signi?cant ex-
pected differences among all three engagement types (audit
mean = 7.58, review mean = 5.08, compilation mean = 3.47 on
a scale anchored 1 = ‘‘no assurance’’ and 9 = ‘‘total assurance’’)
at the 0.01 level. The instrument concluded with a series of
demographics questions used to evaluate the sample and as-
sess potential differences due to individual characteristics.
Results
Descriptive results and measure validation
Table 2 provides descriptive statistics for the measure-
ment items used in the study. We used a multitrait matrix
(Campbell & Fiske, 1959) to evaluate the construct validity
of the reliability framework measures used in the study.
14
11
Given our focus on auditor characteristics in this study, we developed a
borrower and lending scenario that, aside from audit-based manipulation,
was as normal as possible. For example, our work with lenders during
instrument development indicated that the vast majority of commercial
lines of credit are secured. However, the bene?ts provided by a secured line
of credit (e.g., the existence and valuation of collateral assets) become less
certain in the presence of compromised auditor independence.
12
The study’s results are qualitatively similar if all of the participants are
included in the analysis.
13
The literature (e.g., Booth, 1992; Minnis, 2011) provides evidence that
lender reliance on audited ?nancial statements is particularly high when
evaluating risk and setting interest rates.
14
Construct validity is the extent that a scale measures the theoretical
construct it purports to measure. Campbell and Fiske (1959) describe
construct validity in terms of convergent validity (i.e., the degree that
measures of theoretically related construct are related in fact) and
discriminant validity (i.e., the degree that measures of theoretically distinct
constructs are not related in fact).
F.T. DeZoort et al. / Accounting, Organizations and Society 37 (2012) 519–533 525
For example, we examined correlations among all of the
measurement items to assess their convergent and discrim-
inant validity related to the framework’s formative con-
structs. The results provide evidence of validity, with
coef?cients consistently higher among items designed to
measure the same construct than among items measuring
different constructs. We also ?nd evidence of internal con-
sistency (reliability) for the measures with Cronbach’s alpha
exceeding 0.800 for all of the framework constructs.
Table 3 presents pairwise correlations among the
framework constructs and default risk judgments. The re-
sults show signi?cant correlations among the framework
constructs and ?nancial statement reliability (p < 0.01).
Pairwise correlations among the framework variables
range from 0.349 (Independence–Expertise) to 0.704 (Audi-
tor Reliability–F/S Reliability). As expected, the results also
show consistent negative correlations between the frame-
work’s constructs and default risk.
SEM results
We used AMOS 18 to conduct structural equation mod-
eling (SEM) with maximum likelihood estimation to test
the hypothesized relations summarized in Fig. 2. Table 4
provides the measurement model results. We identi?ed
each latent variable by setting the loading of one measure-
ment item for each framework component to 1 because the
latent variables are not measured directly. The con?rma-
tory factor analysis provides evidence of convergent valid-
ity (Hair, Anderson, Tatham, & Black, 1995) by revealing
signi?cant standardized loadings that are consistently
greater than 0.700 (p < 0.001 for all items).
Fig. 3 provides the ?t statistics and standardized param-
eter estimates for the structural model. Overall, the results
indicate that the model ?ts the data well (v
2
(df) =
14.694(10), p = 0.144, v
2
/df = 1.469, GFI = 0.976, AGFI =
0.933, CFI = 0.993, RMSEA = 0.051 (90% CI = 0–0.102),
Table 2
Descriptive statistics for framework measures.
Framework component Mean SD Cronbach’s a
Integrity 0.857
APC makes truthful claims 3.68 0.615
I do not believe what professionals at APC tell me
a
3.99 0.702
I trust the professionals at APC 3.65 0.675
The professionals at APC are honest 3.47 0.650
Expertise 0.825
APC has a great deal of experience 3.57 0.664
APC lacks the expertise needed in the Tools engagement
a
3.79 0.659
APC has the knowledge needed to complete the Tools engagement 3.75 0.644
APC has the ability to do the Tools engagement 3.80 0.623
Independence 0.871
APC is independent in its relationship with Tools 3.66 0.978
The scope of services provided by APC for Tools creates a con?ict of interest
a
3.59 0.931
The fees paid by Tools to APC create a con?ict of interest
a
3.65 0.850
APC has no con?ict of interest in the Tools engagement 3.44 0.849
Objectivity 0.813
APC professionals are biased when providing services to Tools
a
3.56 0.894
APC professionals provide unbiased services to Tools 3.59 0.814
APC’s professionals lack objectivity in their work related to Tools
a
3.76 0.775
APC’s professionals are objective when providing services to Tools 3.61 0.712
Auditor Reliability 0.816
I can rely on APC’s work when evaluating Tools’ credit application 3.84 0.752
APC’s work with Tools Company should not be relied upon
a
3.82 0.766
F/S Reliability 0.889
Tools’ ?nancial statements can be relied upon when making a credit decision 3.98 0.852
I cannot rely on Tools’ ?nancial statements
a
3.97 0.823
All responses for the reliability framework (i.e., integrity, expertise, independence, objectivity, reliability) items are measured using a ?ve-point scale where
1 = ‘‘Strongly Disagree’’, 2 = ‘‘Disagree’’, 3 = ‘‘Neutral’’, 4 = ‘‘Agree’’, and 5 = ‘‘Strongly Agree’’.
a
Indicates the negatively-worded item mean score was reverse-coded for consistency.
Table 3
Correlation matrix.
Integrity Expertise Independence Objectivity Auditor reliability F/S Reliability
Integrity
Expertise 0.462
Independence 0.452 0.349
Objectivity 0.548 0.499 0.670
Auditor reliability 0.525 0.477 0.414 0.590
F/S Reliability 0.497 0.406 0.369 0.562 0.704
Default risk À0.339 À0.294 À0.293 À0.337 À0.329 À0.345
Notes: Bold (Pearson) correlations indicate signi?cance at 0.01 level.
526 F.T. DeZoort et al. / Accounting, Organizations and Society 37 (2012) 519–533
SRMR = 0.051).
15
In addition, the sample-to-parameter ratio
of 6.72 (168/25) suggests the sample size is reasonable for
the speci?ed model.
16
The ?rst three hypotheses (H1a–H1c) predict that lend-
ers’ assessment of auditor integrity will affect their assess-
ments of auditor expertise, independence, and objectivity.
As predicted in H1a, the model’s path coef?cients in Fig. 3
indicate that Integrity is positively associated with Expertise
(path coef?cient = 0.562, p < 0.001). The results also indi-
cate a signi?cant positive link between Integrity and Inde-
pendence (path coef?cient = 0.552, p < 0.001), providing
support for H1b. Finally, the signi?cant positive link be-
tween Integrity and Objectivity (path coef?cient = 0.286,
p < 0.001) provides support for H1c. These results provide
strong evidence that integrity is the foundation of the reli-
ability framework.
The results in Fig. 3 also show the effects of lenders’
assessments of auditor expertise and independence on per-
ceptions of auditor objectivity. As predicted in H1d, we
?nd a signi?cant link between Expertise and Objectivity
(path coef?cient = 0.156, p = 0.04). The signi?cant positive
relation between Independence and Objectivity (path coef?-
cient = 0.580, p < 0.001) provide support for H1e. Finally,
the ?ndings support H1f by showing that perceived Objec-
tivity directly affects perceived Auditor Reliability (path
coef?cient = 0.358, p < 0.001). These ?ndings provide
strong support for the relations posited in the auditor reli-
ability framework.
The structural model results in Fig. 3 also highlight sev-
eral links among the framework constructs that extend the
hypothesis tests and provide additional insight into how
the reliability framework works. For example, although
the reliability framework predicts an indirect relationship
between Integrity and Auditor Reliability through Objectiv-
ity, the results clearly show that a direct relationship also
exists. Speci?cally, the signi?cant direct link between
Integrity and Auditor Reliability (path coef?cient = 0.253,
p < 0.01) provides further evidence of the in?uence of
integrity in the framework. Alternatively, we ?nd insignif-
icant direct links with Auditor Reliability for both Expertise
and Independence at the 0.05 level (path coef?-
cients = 0.101 and 0.081, respectively).
In addition to providing evidence in support of the audi-
tor reliability framework, the results also provide evidence
that auditor reliability strongly in?uences lenders’ assess-
ments of ?nancial statement reliability and, in turn,
borrower default risk. Speci?cally, Fig. 3 results show that
H2 is supported by the signi?cant positive link
between Auditor Reliability and F/S Reliability (path
Table 4
Measurement model.
Framework component Standardized loading t-Value
Integrity
APC makes truthful claims 0.707
a
I do not believe what professionals at APC tell me
a
0.767 7.533
I trust the professionals at APC 0.779 7.600
The professionals at APC are honest 0.753 7.462
Expertise
APC has a great deal of experience 0.706
a
APC lacks the expertise needed in the Tools engagement
a
0.812 8.816
APC has the knowledge needed to complete the Tools engagement 0.862 9.185
APC has the ability to do the Tools engagement 0.827 8.938
Independence
APC is independent in its relationship with Tools 0.850
a
The scope of services provided by APC for Tools creates a con?ict of interest
a
0.872 14.241
The fees paid by Tools to APC create a con?ict of interest
a
0.758 11.457
APC has no con?ict of interest in the Tools engagement 0.825 13.053
Objectivity
APC professionals are biased when providing services to Tools
a
0.712
a
APC professionals provide unbiased services to Tools 0.789 8.793
APC’s professionals lack objectivity in their work related to Tools
a
0.781 8.721
APC’s professionals are objective when providing services to Tools 0.778 8.695
Auditor reliability
I can rely on APC’s work when evaluating Tools’ credit application 0.811
a
APC’s work with Tools Company should not be relied upon
a
0.836 13.000
F/S statement reliability
Tools’ ?nancial statements can be relied upon when making a credit decision 0.893
a
I cannot rely on Tools’ ?nancial statements
a
0.897 16.308
All t-values are signi?cant at p < 0.001.
a
Indicates that a parameter is ?xed at 1.0 in the original solution.
15
The literature (e.g., Hooper, Coughlan, & Mullen, 2008; Iacobucci, 2010;
Kline, 2011) describes a wide variety of model ?t indices and some
disparity in opinion about thresholds for ‘‘good ?t.’’ However, common
rules of thumb for acceptable model ?t are that the p-value for the chi-
square test statistic should be greater than 0.05 (Iacobucci, 2010); GFI,
AGFI, and CFI should be greater than 0.90 (Bentler & Bonnet, 1980; Hu &
Bentler, 1998); RMSEA should be less than 0.06 (Hooper et al., 2008; Kline,
2011); v
2
/df should be less than 5 (Arbuckle & Wothke, 1999); and SRMR
should be less than 0.08 (Hooper et al., 2008; Hu & Bentler, 1998; Iacobucci,
2010; Kenny, 2011).
16
The literature (e.g., Grafton, Lillis, & Widener, 2010; Hair et al., 1995)
suggests that a subject-to-parameter ratio of 5 or more is adequate for
structural equation modeling.
F.T. DeZoort et al. / Accounting, Organizations and Society 37 (2012) 519–533 527
coef?cient = 0.802, p < 0.001). In addition, we ?nd the
expected H3 negative relation between F/S Reliability and
Default Risk (path coef?cient = À0.361, p < 0.001). These
additional ?ndings highlight the framework’s potential to
go beyond understanding users’ perceptions of auditor
reliability and its formative constructs to also understand-
ing the extent that auditor reliability affects ?nancial state-
ment reliability and important user judgments.
Nonaudit service effects
We evaluated nonaudit service effects on each of the
framework constructs in the structural model. Table 5, Pa-
nel A, provides the means and standard deviations for the
framework components across NONAUDIT condition. Uni-
variate comparisons indicate that perceived CPA indepen-
dence, objectivity, and auditor reliability are signi?cantly
lower (p < 0.01 in all cases) when auditors provide nonaudit
bookkeeping and payroll services in addition to ?nancial
statement audit services. The NONAUDIT manipulation
did not signi?cantly affect perceived auditor integrity,
expertise, ?nancial statement reliability, or default risk.
The ANCOVA results in Table 5, Panel B, indicate that the
NONAUDIT treatment did not signi?cantly affect lenders’
assessments of auditor integrity or expertise. However, as
expected, the lenders did report signi?cantly higher inde-
pendence for auditors who provide only audit services to
the loan applicant than for auditors who provide both
audit and nonaudit services (audit mean = 16.07 vs. audit/
nonaudit mean = 13.04, p < 0.001). Interestingly, despite
the decrease in perceived independence when auditors also
provide nonaudit services, we ?nd no corresponding
decrease in lenders’ assessments of auditor objectivity,
auditor reliability, or ?nancial statement reliability after
controlling for underlying framework variables.
We also conducted a multigroup moderation test in
AMOS that compares structural model performance for
the two nonaudit services groups. Speci?cally, we used a
chi-square difference test to compare an unconstrained
model (where structural paths were allowed to differ for
the two nonaudit service groups) to a constrained model
(where structural paths were constrained to be the same
for the two nonaudit service groups). Table 5, Panel C, re-
ports the path comparison results for the two nonaudit
services groups. The chi-square difference test reveals a
signi?cant difference in model performance for the two
groups (p < 0.05). Follow-up path comparisons reveal that
NONAUDIT signi?cantly moderates the Integrity–Indepen-
dence path (z = 3.642, p < 0.001) and the Objectivity–Auditor
Reliability path (z = 3.164, p < 0.01). However, the paths are
signi?cant (p < 0.01) for both groups and simply stronger
for the nonaudit services group than for the no nonaudit
services group. No other signi?cant between-group path
differences were found.
Fig. 3. Structural model results. Model ?t: v
2
(df) = 14.694(10), p = 0.144), v
2
/df = 1.469, GFI = 0.976, AGFI = 0.933, CFI = 0.993, RMSEA (90% CI) = 0.051 (0 –
0.102), SRMR = 0.051.
ÃÃÃ
,
ÃÃ
,
Ã
Signi?cant at the 0.001, 0.01, and 0.05 levels, respectively. Dashed lines represent insigni?cant links.
528 F.T. DeZoort et al. / Accounting, Organizations and Society 37 (2012) 519–533
Supplemental analysis
In addition to extending the DeZoort et al. (2008) reli-
ability framework in Fig. 1 to test both direct and indirect
effects of integrity, expertise, and independence on reli-
ability, we also evaluated a number of alternative struc-
tural models to assess their relative performance. For
example, we tested the structural model without ?nancial
statement reliability (H2) and default risk (H3) to evaluate
Fig. 1 reliability framework initially proposed in DeZoort
et al. (2008). The reduced model had similar ?t (e.g.,
v
2
(df) = 10.363(5), p = 0.066, v
2
/df = 2.073, GFI = 0.980,
AGFI = 0.916, CFI = 0.992, RMSEA = 0.060 (90% CI = 0.000–
0.012), SRMR = 0.0407) and path signi?cance, suggesting
that the base reliability proposed in the literature stands
reasonably on its own and that ?nancial statement reliabil-
ity and default risk are not driving model ?t.
We also tested a variety of alternative models that mod-
ify the framework relations posited in Taylor et al. (2003)
and DeZoort et al. (2008) to assess their relative perfor-
mance. First, we compared our main model to an alterna-
tive model with independence, integrity, and expertise
speci?ed as the three foundational constructs. This alterna-
tive model is inferior to the main model (AIC = 189.585 vs.
50.694 for the main model) and poorly ?t (e.g., v
2
(df) =
139.282(12), p = 0.000, v
2
/df = 11.607, GFI = 0.769,
AGFI = 0.568, RMSEA = 0.244 (90% CI = 0.211–0.278),
SRMR = 0.268).
17
Second, we tested an alternative model
with independence (rather than objectivity) as the primary
Table 5
Nonaudit service effects.
Panel A: Means (standard deviations)
Nonaudit services provided
No Yes Overall
Integrity 15.05 (1.91) 14.63 (2.16) 14.84 (2.04)
Expertise 14.95 (2.16) 14.84 (2.17) 14.90 (2.16)
Independence 15.74 (1.87)
***
12.92 (3.54) 14.35 (3.15)
Objectivity 15.12 (1.97)
***
13.92 (2.95) 14.52 (2.57)
Auditor reliability 7.96 (1.06)
**
7.48 (1.49) 7.73 (1.31)
F/S Reliability 8.15 (1.25) 7.86 (1.82) 8.01 (1.56)
Default risk 4.88 (1.31) 5.17 (1.41) 5.02 (1.36)
Panel B: ANCOVA results
Dependent variable
Integrity Expertise Independence Objectivity Auditor reliability F/S Reliability
Test variable
Nonaudit 1.642 0.516 43.361
***
1.903 0.043 0.683
Covariates
Integrity 59.997
*
72.898
***
15.253
***
9.802
**
2.536
Expertise 1.390 2.341 0.137
Independence 89.334
***
1.979 0.187
Objectivity 25.654
***
4.214
*
Auditor reliability 97.699
***
Observations 168 168 168 168 168 168
F 1.642 30.001
***
64.518
***
69.912
***
42.730
***
58.847
***
Adj. R
2
.014 .278 .453 .645 .583 .675
Panel C: Structural model path comparisons‘
Path coef?cients
No nonaudit services provided Nonaudit services provided z-Value
Link
Integrity ?Expertise .443
***
.673
***
1.269
Integrity ?Independence .460
***
.648
***
3.642
***
Integrity ?Objectivity .327
***
.263
**
.157
Integrity ?Auditor reliability .262
*
.283
**
.570
Expertise ?Objectivity .176
*
.138 À.799
Independence ?Objectivity .398
***
.630
***
1.010
Expertise ?Auditor reliability .158 À.005 À1.578
Independence ?Auditor reliability .142 À.009 À1.131
Objectivity ?Auditor reliability .227
**
.661
***
3.164
**
Auditor reliability ?F/S reliability .735
***
.881
***
1.673
Auditor reliability ?Default risk À.352
***
À.350
***
.755
Variables de?nitions: Nonaudit = provision of nonaudit services, with 1 = only audit services provided and 2 = audit and nonaudit services provided.
*
Signi?cant at the 0.05 levels.
**
Signi?cant at the 0.01 levels.
***
Signi?cant at the 0.001 levels.
17
The AIC (Akaike Information Criterion) is a commonly-used predictive
?t index for comparing alternative non-hierarchical models estimated with
the same data (Kline, 2011). The model with the smallest AIC value has
better ?t and the greatest chance to replicate.
F.T. DeZoort et al. / Accounting, Organizations and Society 37 (2012) 519–533 529
mediator. The ?ndings indicate that this alternative model
also is inferior to the main model (AIC = 116.041) and poorly
?t (e.g., v
2
(df) = 86.041 (10), p = 0.000, v
2
/df = 8.604,
GFI = 0.891, AGFI = 0.765, RMSEA = 0.183 (90% CI = 0.148–
0.221), SRMR = 0.147). Finally, we evaluated alternative
models with expertise and integrity as the foundation con-
structs (DeAngelo, 1981; Ganguly et al., 2007), with only
independence or expertise speci?ed as the foundation con-
struct, and with independence and objectivity combined as
one factor.
18
Similar to the original Taylor et al. (2003) mod-
el, these other alternative models also had higher AIC scores
than the main model and considerably weaker goodness of
?t results.
Discussion and conclusion
This study extends the reliability literature in account-
ing (e.g., DeZoort et al., 2008; Taylor et al., 2003) by provid-
ing an initial empirical test of the reliability framework in
an audit context. Overall, the results provide support for
the framework’s posited relations. For example, the pri-
mary and alternative model results provide strong evi-
dence that integrity is the foundation of the framework,
with lenders’ assessments of auditor integrity directly
affecting their assessments of auditor expertise, indepen-
dence, objectivity, and reliability. The ?ndings also indicate
that lenders’ assessments of auditor expertise and inde-
pendence directly affect their assessments of auditor
objectivity, which in turn directly affects assessments of
auditor reliability.
In addition to testing the framework’s primary rela-
tions, we also consider the effects of auditor reliability on
lenders’ assessments of ?nancial reporting reliability and
corresponding default risk. As predicted, the results reveal
a signi?cant positive relation between lenders’ assess-
ments of auditor reliability and their assessments of over-
all ?nancial reporting reliability for the credit applicant in
the case. Further, we ?nd a signi?cant inverse relation be-
tween lenders’ assessments of ?nancial reporting reliabil-
ity and borrower default risk, providing initial evidence
linking the reliability framework to critical business judg-
ments by users of ?nancial statements and auditor
services.
Finally, the study’s results provide evidence that the
reliability framework is robust when auditors provide both
audit and nonaudit services to the prospective borrower.
Speci?cally, although the provision of nonaudit services
to an audit client decreases lenders’ assessments of auditor
independence, it does not also decrease assessed auditor
objectivity or reliability.
Collectively, this study has a number of implications for
research, policy, and practice. From a research perspective,
the results extend the reliability literature in accounting by
providing initial direct empirical evidence about the valid-
ity of the reliability framework in an audit context. DeZoort
and Taylor (2009) provided initial support for the frame-
work in compilation and review engagements, but the lit-
erature presents serious questions about the framework’s
validity in an audit context (AICPA, 2008). Our results re-
lated to the framework’s formative constructs help synthe-
size and extend the extant literature on the effects of
integrity on expertise (e.g., Hardwig, 1994), integrity on
independence (e.g., Sweeney & Roberts, 1997), expertise
on objectivity (e.g., Tan & Jamal, 2001), and auditor reli-
ability on ?nancial reporting reliability (e.g., Fischbacher
& Stefani, 2007; Johnson et al., 2002; Stanley & DeZoort,
2007). The study’s ?ndings also contribute to the indepen-
dence literature in accounting (see Anandarajan, Kleinman,
and Palmon (2010) for a recent review) by distinguishing
empirically between independence and objectivity and
providing evidence that users do not perceive indepen-
dence to be the most important ethical construct for audi-
tors in pursuit of reliability. Further, our ?nding that the
provision of nonaudit services to audit clients did not neg-
atively affect lender perceptions of auditor objectivity and
reliability are consistent with DeZoort and Taylor’s (2009)
?ndings in compilation and review engagements and com-
plement prior research suggesting functional effects of
combining audit and nonaudit services for clients (e.g.,
Ashbaugh, LaFond, & Mayhew, 2003; Davis & Hollie,
2008; Dopuch, King, & Schwartz, 2003; Joe & Vandervelde,
2007; Kinney, Palmrose, & Scholz, 2004).
From policy and practice perspectives, our results relate
directly to the ongoing debate (e.g., Bazerman & Moore,
2011; Gul, Tsui, & Dhaliwal, 2006; Kohlbeck, Looknanan-
Brown, & Trainor, 2010; Nelson, 2006) about widespread
banning of nonaudit services for audit clients following
the Sarbanes-Oxley Act of 2002 push to strengthen auditor
independence. In this study, although the provision of non-
audit services signi?cantly affected lenders’ assessments of
auditor independence, it did not signi?cantly affect their
assessments of auditor objectivity and reliability.
Finally, the results reinforce the importance of the role
that auditor and ?nancial reporting reliability play in len-
der judgment and decision-making. Speci?cally, the
study’s ?ndings highlight the effects of perceived auditor
integrity, expertise, and independence on lenders’ default
risk assessments through their effects on (auditor and
?nancial reporting) reliability. The results also highlight
that lenders ?nd auditors credible even when auditor inde-
pendence is impaired by providing nonaudit internal con-
trol services. Further, the results suggest that the
information contained in these reports has the potential
to reduce the costs of borrowing.
We highlight several limitations to consider when
evaluating the study’s implications. For example, although
Taylor et al. (2003) discuss the importance of reliability in
fact and in appearance, this initial study focuses only on
users’ perceptions of auditor reliability (i.e., reliability in
appearance). Future research is needed to develop mea-
sures and test the extent to which the framework’s posited
relations hold when the formative constructs (e.g., integ-
rity, expertise, independence) are measured directly using
auditors. In addition, future research also should extend
framework assessment across user groups (e.g., investors,
analysts) and reliance domains (e.g., regulatory, country)
18
We tested alternative models with independence and objectivity items
combined into one factor because the two constructs are closely related in
the literature (Taylor et al., 2003) and because exploratory factor analysis
provided some evidence that the items for the two constructs loaded on
one factor.
530 F.T. DeZoort et al. / Accounting, Organizations and Society 37 (2012) 519–533
given fundamental differences in objectives, relationships,
and stakes. Although lenders represent a highly relevant
audit user group (Reinstein & Leibowitz, 2010), they pos-
sess a different power relationship than absentee owners/
investors to the extent that they have the ability to request
and receive more information from borrowers. Alterna-
tively, although investors can always seek other invest-
ment opportunities, they are relatively limited in their
ability to request additional information from
management.
Future research also should evaluate whether the
framework results hold across different types of auditor
independence violations. This study’s focus on ‘‘service-
based’’ independence involving bookkeeping and payroll
services was motivated by speci?c policymaker interest.
However, questions remain about how users would re-
spond to framework measures in settings involving inde-
pendence issues related to the provision of alternative
nonaudit services, ?nancial interests, and family con?icts.
Further, although our experiment was framed in terms
of a nonpublic company audit to enhance comparability
with other studies of the framework in other attest settings
(e.g., DeZoort & Taylor, 2009), the possibility exists that
user perceptions would be systematically different in a set-
ting involving a public company to the extent that expo-
sure and risk are different. Our framework results in this
study are similar the DeZoort and Taylor (2009) ?ndings
in compilation and review settings, providing support for
theoretical suggestion that the framework should perform
similarly across user groups and domains. However, addi-
tional research is needed to further assess these issues.
Finally, despite our testing of alternative models, this
study does not establish that the reliability framework pro-
posed in the literature (e.g., DeZoort et al., 2008; Taylor
et al., 2003) is the optimal model for organizing key ethical
constructs in the profession. The theoretical links proposed
in the framework are intended to be robust, but future re-
search involving triangulated methods should continue to
challenge the conceptual relations proposed in the reliabil-
ity framework and continue pursuit of a comprehensive
ethical framework that organizes key constructs and
guides future research, policy, and practice.
Acknowledgements
We gratefully acknowledge the generous support re-
ceived from the AICPA’s Private Companies Practice Sec-
tion and the Risk Management Association. We thank
seminar and workshop participants at Case Western Re-
serve University, Kennesaw State University, The Univer-
sity of Alabama, the 2010 National Auditing Conference,
and the 2010 AAA Annual Meeting. We also thank Mark
Peecher (editor), Mark Koziel, Chuck Landes, Tom Ratcliffe,
and Mark Zmiewski for their generous support throughout
the entire research process and Doug Boyle, Chris Burant,
Tim Fogarty, George Franke, Dana Hermanson, Tim Louw-
ers, Doug Prawitt, Jonathan Stanley, Anne Wilkins, and
Yi-Jing Wu for their helpful comments and suggestions. Fi-
nally, we thank participating Risk Management Association
members for their willingness to share their valuable time
and insights.
Appendix A. Experimental materials
Panel. A. Background information
Midwest Tools & Supply Company
Please assume that you are evaluating an application from
Midwest Tools & Supply (Tools) Company to re?nance a
$1.5 million line of credit. Tools is a new prospective cus-
tomer for your bank and you have not worked with the
company in any other setting.
Tools Company Background
Tools is a privately-held tool manufacturer that sells to dis-
tributors and select retailers. Tools has been in business for
10 years and employs 60 people. The company has had sta-
ble ?nancial health and growth in recent years. Back-
ground research indicates that Tools is an average
(medium) risk company with effective internal controls
over ?nancial reporting and competent management and
directors.
Summary (unaudited) Annual Financial Information
Revenues $6.0 million
Pretax income $0.7 million
Net income $0.5 million
Accounts receivable (net) $1.0 million
Inventory $1.4 million
Current assets $2.4 million
PP&E (net) $2.0 million
Total assets $5.2 million
Current liabilities $1.0 million
Total liabilities $3.0 million
Total equity $2.2 million
The re?nanced line of credit would be secured by Tools’
Accounts Receivable and Inventory. Tools has no other
debt.
Panel. B. Experimental treatments
APC services provided
Tools’ accounting ?rm is Andrews, Parker, and Carlson, LLP
(APC). APC is a regional public accounting ?rm established
20 years ago. The ?rm provides a full menu of accounting,
assurance, and tax services and currently employs approx-
imately 80 professionals working in four of?ces in the Uni-
ted States. APC has provided audit services to Tools for the
past 3 years. In addition, APC also provides nonattest book-
keeping and payroll services (or ‘‘provides no other attest
or nonattest services’’) to Tools. The Tools engagement is
adequately staffed and supervised in accordance with ?rm
and AICPA quality control standards. Prior year engage-
ments have produced no signi?cant disagreements. Below
is a copy of the most recent audit report issued by APC:
AUDIT REPORT
To the Board of Directors
Midwest Tools & Supply Company
We have audited the accompanying balance sheet of
Midwest Tools & Supply Company as of December 31,
F.T. DeZoort et al. / Accounting, Organizations and Society 37 (2012) 519–533 531
2007, and the related statement of operations, stockhold-
ers’ equity, and cash ?ows for the year then ended. These
?nancial statements are the responsibility of the Com-
pany’s management. Our responsibility is to express an
opinion on these ?nancial statements based on our audit.
We conducted our audit in accordance with auditing
standards generally accepted in the United States of Amer-
ica. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the
?nancial statements are free of material misstatement.
An audit includes consideration of internal control over
?nancial reporting as a basis for designing audit proce-
dures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effective-
ness of the Company’s internal control over ?nancial
reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the ?nancial
statements, assessing the accounting principles used and
signi?cant estimates made by management, as well as
evaluating the overall ?nancial statement presentation.
We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the ?nancial statements referred to
above present fairly, in all material respects, the ?nancial
position of the Company as of December 31, 2007, and
the results of its operations and its cash ?ows for the year
then ended in conformity with US generally accepted
accounting principles.
Andrews, Parker, and Carlson, LLP
February 10, 2008
Panel. C. Reliability framework questions
Please respond to the following items related to APC,
LLP’s professional services for Midwest Tools & Supply
Company (Tools).
(1) I trust the professionals at APC.
(2) APC makes truthful claims.
Ã
(3) The professionals at APC are honest.
Ã
(4) I do not believe what professionals at APC tell
me.
(5) APC has a great deal of experience.
(6) APC has the knowledge needed to complete the
Tools engagement.
(7) APC has the ability to do the Tools engagement.
Ã
(8) APC lacks the expertise needed in the Tools
engagement.
(9) APC is independent in its relationship with
Tools.
(10) APC has no con?ict of interest in the Tools
engagement.
Ã
(11) The scope of services provided by APC for Tools
creates a con?ict of interest.
Ã
(12) The fees paid by Tools to APC create a con?ict of
interest.
(13) APC’s professionals are objective when
providing services to Tools.
(14) APC provides unbiased services to Tools.
Ã
(15) APC’s professionals lack objectivity in their
work related to Tools.
Ã
(16) APC is biased when providing services to Tools.
(17) I can rely on APC’s work when evaluating Tools’
credit application.
Ã
(18) APC’s work with Tools should not be relied
upon.
(19) Tools’ ?nancial statements can be relied upon
when making a credit decision.
Ã
(20) I cannot rely on Tools’ ?nancial statements.
Ã
Negatively-worded item that required reverse coding.
All responses measured on a ?ve-point scale with
the following labels: ‘‘Strongly Disagree’’, ‘‘Disagree’’,
‘‘Neutral’’, ‘‘Agree’’, and ‘‘Strongly Agree’’
Appendix B. Supplementary material
Supplementary data associated with this article can be
found, in the online version, athttp://dx.doi.org/10.1016/
j.aos.2012.08.003.
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F.T. DeZoort et al. / Accounting, Organizations and Society 37 (2012) 519–533 533
doc_117880549.pdf
Taylor et al. (2003) challenged the longstanding notion that independence is the capstone
of the audit profession by proposing a conceptual framework that emphasizes reliability,
rather than independence, as the professional endgame for auditors. Although the reliability
framework has attracted attention from policymakers, it has not been tested empirically
in an audit context to assess its validity from a user’s perspective. The objective of this
study is to test the auditor reliability framework and its formative ethical constructs
(i.e., integrity, expertise, independence, objectivity, and reliability) with a sample of 168
commercial lenders. We also extend the reliability framework to examine the extent that
perceived auditor reliability affects lenders’ judgments of financial reporting reliability and
default risk in a hypothetical lending scenario. Finally, we evaluate the extent that lenders’
judgments are affected by auditor provision of nonaudit bookkeeping and payroll services
to a prospective borrower in violation of current independence rules. The results provide
strong empirical support for the relations predicted in the reliability framework. Structural
equation model results indicate that auditor integrity is the foundation of the framework,
directly affecting lenders’ assessments of auditor expertise, independence, objectivity, and
reliability. Further, although integrity and objectivity directly affect perceived auditor reliability,
independence and expertise only affects reliability indirectly through its impact on
objectivity.
A test of the auditor reliability framework using lenders’ judgments
F. Todd DeZoort
a,?
, Travis Holt
b
, Mark H. Taylor
c
a
The University of Alabama, United States
b
University of Tennessee at Chattanooga, United States
c
Case Western Reserve University, United States
a b s t r a c t
Taylor et al. (2003) challenged the longstanding notion that independence is the capstone
of the audit profession by proposing a conceptual framework that emphasizes reliability,
rather than independence, as the professional endgame for auditors. Although the reliabil-
ity framework has attracted attention from policymakers, it has not been tested empirically
in an audit context to assess its validity from a user’s perspective. The objective of this
study is to test the auditor reliability framework and its formative ethical constructs
(i.e., integrity, expertise, independence, objectivity, and reliability) with a sample of 168
commercial lenders. We also extend the reliability framework to examine the extent that
perceived auditor reliability affects lenders’ judgments of ?nancial reporting reliability and
default risk in a hypothetical lending scenario. Finally, we evaluate the extent that lenders’
judgments are affected by auditor provision of nonaudit bookkeeping and payroll services
to a prospective borrower in violation of current independence rules. The results provide
strong empirical support for the relations predicted in the reliability framework. Structural
equation model results indicate that auditor integrity is the foundation of the framework,
directly affecting lenders’ assessments of auditor expertise, independence, objectivity, and
reliability. Further, although integrity and objectivity directly affect perceived auditor reli-
ability, independence and expertise only affects reliability indirectly through its impact on
objectivity. Finally, we ?nd that lenders perceive no decrease in auditor objectivity or reli-
ability when existing independence rules are violated by combining audit services with
nonaudit services for prospective borrowers.
Ó 2012 Elsevier Ltd. All rights reserved.
Introduction
Independence has long been considered the capstone of
the audit profession because it has been assumed to be the
foundation for public trust (Bazerman & Moore, 2011;
Jamal & Sunder, 2011; Jeppesen, 1998; Lee, 1993; Lindberg
& Beck, 2004; Mautz & Sharaf, 1961; Montgomery, 1940;
Nelson, 2006). However, the accounting literature includes
numerous challenges to the role of independence and its
relationship to other critical ethical constructs within the
profession. For example, DeAngelo (1981) and subsequent
studies (e.g., Ganguly, Herbold, & Peecher, 2007) asserted
that the two pillars of audit quality are actually integrity
and competence rather than independence. Jamal and
Sunder (2011) questioned whether mandated indepen-
dence is even necessary for audit quality, ?nding in a ?eld
study of baseball card certi?cation in an unregulated
market that the demand for attester expertise is prioritized
over the demand for independence.
Taylor, DeZoort, Thomas, and Munn (2003) introduced
an auditor reliability framework that de?nes and organizes
critical ethical constructs in the profession (e.g., integrity,
independence, expertise, objectivity) to emphasize profes-
sional reliability rather than independence as the relevant
‘‘endgame’’ when providing assurance related to ?nancial
reporting. They describe auditor reliability in the frame-
work as a condition where stakeholders consistently ?nd
0361-3682/$ - see front matter Ó 2012 Elsevier Ltd. All rights reserved.http://dx.doi.org/10.1016/j.aos.2012.08.003
?
Corresponding author. Address: Culverhouse School of Accountancy,
Box 870220, Tuscaloosa, AL 35487, United States. Tel.: +1 205 348 6694;
fax: +1 205 348 8453.
E-mail address: [email protected] (F.T. DeZoort).
Accounting, Organizations and Society 37 (2012) 519–533
Contents lists available at SciVerse ScienceDirect
Accounting, Organizations and Society
j our nal homepage: www. el sevi er. com/ l ocat e/ aos
the auditor’s work credible and dependable, even after
acknowledging the inherent limitations of audit and other
attest functions. In this context, auditor reliability pro-
motes ?nancial reporting reliability that has long been
emphasized as a critical qualitative characteristic of ?nan-
cial information.
In response to the Taylor et al. (2003) reliability frame-
work, the American Institute of Certi?ed Public Accoun-
tants (AICPA) formed a Reliability Task Force to evaluate
the framework’s potential to improve professional stan-
dards and the quality of professional services by shifting
from the traditional ‘‘independence-based’’ model to a reli-
ability-based model (DeZoort, Morgan, Ratcliffe, & Taylor,
2008).
1
Speci?cally, the Task Force recognized that the tradi-
tional independence-based model is a problem for clients
who require more than attest services from their auditors
to achieve reliable ?nancial reporting.
2
The Task Force con-
cluded that a refocus on reliability could better serve the
public interest by allowing auditors to provide attest clients
with certain nonattest services (e.g., internal control ser-
vices) to improve the reliability of ?nancial reporting.
3
Fur-
ther, the reliability framework was used as a basis for
speci?c Task Force recommendations to the Accounting
and Review Services Committee (ARSC), which in turn pro-
posed revisions to longstanding standards to allow auditors
to issue compilation and review reports when independence
is impaired due to the provision of nonattest internal control
services (AICPA, 2009a).
4
Given the Reliability Task Force and ARSC focus on com-
pilation and reviewengagements, the AICPA’s Private Com-
pany Practice Section commissioned an empirical study
(DeZoort & Taylor, 2009) of the reliability framework to
further evaluate its validity in those attest contexts. The
results from commercial lenders provide strong initial
empirical support for the framework’s predicted relations
in both compilation and review settings, even when both
attest and nonattest services were provided in violation
of current independence rules. The study results also indi-
cate that although integrity, expertise, and objectivity have
signi?cant direct and indirect effects on lender assess-
ments of CPA reliability and ?nancial reporting reliability,
independence only affected reliability indirectly through
its impact on objectivity.
Although policymakers have been using the reliability
framework to guide standard-setting (AICPA, 2009a;
DeZoort et al., 2008), the literature lacks empirical evidence
that assesses the validity of the framework’s proposed rela-
tions in the framework’s original audit context. The audit
function is unique given its relatively high levels of assur-
ance, user reliance, scrutiny, and consequence compared
to other attest functions. For example, prior studies (e.g.,
Bartlett, 1991; Gay, Schelluch, & Baines, 1998; Johnson,
Pany, & White, 1983; Yardley, 1989) provide consistent evi-
dence that ?nancial statement users desire and perceive
greater assurance from ?nancial statement audits than
from other attest services (e.g., reviews, compilations). In
a lending context, Reinstein and Leibowitz (2010) suggest
a speci?c link between debt levels and desired assurance le-
vel, with lenders requiring ?nancial statement audits of
borrowers with large outstanding balances. The distinct
features of the audit function motivated the Reliability Task
Force to highlight the need for further research to evaluate
the framework in an audit context (AICPA, 2008).
This study provides an initial empirical test of the audi-
tor reliability framework proposed in Taylor et al. (2003),
revised in DeZoort et al. (2008), and subsequently modi?ed
for testing in compilation and review contexts (DeZoort &
Taylor, 2009). We adopt a users’ perspective in this study
and evaluate lending of?cers’ perceptions about auditor
integrity, expertise, independence, objectivity, and reliabil-
ity in a hypothetical lending scenario and test the validity
of the proposed relations among the framework’s forma-
tive constructs. We also evaluate the extent to which
perceived auditor reliability affects lenders’ judgments of
?nancial reporting reliability and default risk. Finally, we
Fig. 1. Reliability framework (DeZoort et al., 2008).
1
The AICPA Reliability Task Force consisted of practitioners, preparers,
academics, and third-party users (e.g., bankers).
2
The AICPA promulgates technical auditing standards for audits of
nonpublic companies and authoritative ethical rules for all members
engaging in public practice. Although the AICPA Reliability Task Force was
primarily concerned with improving US professional standards, its ?ndings
are applicable to international professional standards. Professional codes of
conduct (e.g., AICPA, 2010; IFAC, 2010) do not allow accountants to issue
audit reports or review reports if independence is lacking. Accountants can
perform compilations when independence is impaired as long as the lack of
independence is disclosed in their report.
3
When considering the framework and current independence rules, the
Task Force distinguished among independence impairments caused by
?nancial interests, family relationships, and CPA performance of nonattest
services. Recommendations focused only on the performance of select
nonattest services. The Reliability Task Force reaf?rmed the importance of
maintaining ‘‘family-based’’ independence (e.g., ensuring that an immedi-
ate family member of the CPA is not in a key management position at the
client) and ‘‘?nancial-interest’’ independence (e.g., avoiding direct invest-
ments in the client) (DeZoort et al., 2008).
4
The ARSC exposure draft motivated a large number of comment letters
that re?ected both strong support and strong opposition to the proposal.
Ultimately, the ?nal standard (AICPA, 2009b) was released without the
provision because of confusion about the speci?c scope of internal control
services targeted in the proposal. The AICPA Professional Ethics Executive
Committee (PEEC) is currently considering revisions to Interpretation 101-3
to clarify that accountants can perform certain internal control services for
clients and maintain independence as long as management takes respon-
sibility for the results of those services (AICPA, 2011).
520 F.T. DeZoort et al. / Accounting, Organizations and Society 37 (2012) 519–533
consider whether lenders’ assessments of the reliability
framework constructs are affected when auditors violate
independence rules by providing both audit and nonaudit
bookkeeping and payroll services to the prospective
borrower.
This study is motivated by the need for empirical evi-
dence to test the reliability framework in its intended audit
context given the theoretical relations proposed, and poli-
cymakers’ interest, in implementing changes based on the
implications of the framework. For example, the framework
(see Fig. 1) describes integrity, expertise, and independence
as formative ethical constructs underlying the pursuit of
objectivity, which in turn underlies auditor reliability
(DeZoort et al., 2008; Taylor et al., 2003). In this context,
although relationship-based independence remains an
important construct, it is not a wholly suf?cient antecedent
to auditor objectivity and reliability given the importance
of integrity and expertise.
5
The framework provides for the
possibility of auditor and ?nancial reporting reliability in sit-
uations where auditors lack independence if they have the
integrity and expertise needed to pursue objectivity. This
study provides initial evidence about the extent that users
agree with the framework’s proposed relations and extends
testing of the framework beyond compilation and reviewset-
tings to consider its validity in the distinct audit context.
We test the reliability framework using a sample of 168
experienced commercial lending of?cers who are members
of the Risk Management Association (RMA). Lenders repre-
sent a critical user group who can provide an initial empiri-
cal perspective on the relative importance of (and relations
among) the reliability framework’s constructs and how the
framework affects perceived ?nancial statement reliability
anddefault risk judgments. The extant accounting literature
provides numerous studies (e.g., Ashton & Ashton, 1995;
Beaulieu, 1994; Danos, Holt, & Imhoff, 1989; Holder-Webb
& Sharma, 2010; Minnis, 2011) focused on lenders’ judg-
ments because of their role as crucial users of audited ?nan-
cial statements. For example, Holder-Webb and Sharma
(2010) studied how commercial lenders’ decisions were af-
fected by their perceptions of reporting reliability, ?nding
that lenders are indeed sensitive to ?nancial condition and
perceived ?nancial reporting reliability.
The results provide strong initial support for the auditor
reliability framework. Speci?cally, we ?nd that lenders’
assessments of auditor expertise, integrity, and indepen-
dence directly affect their assessments of auditor objectiv-
ity. The results also indicate that lenders’ assessments of
auditor objectivity positively affect their perceptions of
auditor reliability. Additionally, we ?nd that perceptions
of auditor reliability are positively associated with assess-
ments of ?nancial reporting reliability, and that ?nancial
reporting reliability, in turn, is negatively related to assess-
ments of default risk. These results are robust when
auditors provide both audit services and nonaudit book-
keeping and payroll services in violation of current auditor
independence rules.
The next section develops the study’s hypotheses re-
lated to the reliability framework and provision of nonau-
dit services. The third section describes the study’s
research method. The fourth section provides the results,
followed by discussion of the study’s limitations and
implications.
Theory and hypotheses
The ?rst set of hypotheses focuses on the reliability
framework’s formative constructs. Speci?cally, we test
the framework’s predicted relations among auditor integ-
rity, expertise, independence, objectivity, and reliability.
We also extend the reliability framework analysis to pre-
dict that lenders’ assessments of auditor reliability will di-
rectly affect their assessments of borrower ?nancial
statement reliability and lenders’ default risk judgments.
Integrity effects
Taylor et al. (2003) identi?ed integrity as a key founda-
tion component in the pursuit of auditor reliability. Integ-
rity in this context is a core virtue in an individual’s
character that re?ects the ability to be straightforward,
honest, and forthright in all professional and business
activities. After AICPA Reliability Task Force deliberations,
DeZoort et al. (2008) revised the initial framework to rec-
ognize integrity as the sole ethical foundation. Speci?cally,
the framework suggests that auditor integrity directly
underlies expertise and independence needed to pursue
objectivity. For example, integrity is posited to directly
underlie auditors’ good faith efforts to acquire and main-
tain the knowledge and experience needed to understand
clients, industries, and engagements to ultimately provide
reliable services. Hardwig (1994) discusses the ‘‘rationality
of trusting experts’’ and highlights that integrity is a criti-
cal antecedent to expertise for users because the underly-
ing integrity of experts provides the basis for trust that is
needed to rely on an expert’s judgments and decisions.
Although this trust is sometimes broken, judgments about
an expert’s integrity remain part of a user’s justi?cation for
relying on the expert. Accordingly, we predict that lenders’
perceptions of auditor integrity will be linked directly to
their assessments of auditor expertise. Stated formally:
Hypothesis 1a. Lenders’ assessments of auditor integrity
will be positively related to their assessments of auditor
expertise.
The framework also proposes a direct link between
integrity and independence in the pursuit of objectivity
and reliability. This link stems from the professional stan-
dards (e.g., AU section 220) which require auditors to be
honest and forthright when evaluating the ?nancial and
non?nancial relationships with clients that can create con-
?icts of interest and undermine objectivity and reliability.
The extant research literature supports this link with evi-
dence that auditors’ level of moral development affects
their independence judgments. For example, Sweeney
and Roberts (1997) found that auditors with increased
levels of moral development were more sensitive to ethical
5
Taylor et al. (2003) developed the framework to address concerns about
independence being the cornerstone of the profession and continued
confusion about the meaning of independence and other key ethical
constructs in the profession.
F.T. DeZoort et al. / Accounting, Organizations and Society 37 (2012) 519–533 521
issues and less likely to rely solely on technical standards
when making independence judgments. From a user’s per-
spective, auditor integrity should be a critical antecedent
to efforts to comply with existing independence rules
and avoid proscribed con?icts of interest when providing
audit services. Speci?cally, in the context of this study,
lenders’ assessments of auditor integrity should be directly
related to their con?dence that auditors will work to com-
ply with existing independence rules to protect the public
interest. Stated formally:
Hypothesis 1b. Lenders’ assessments of auditor integrity
will be positively related to their assessments of auditor
independence.
Given the importance of integrity in the framework and
profession, we also test the extent that auditor integrity is
directly related to perceived auditor objectivity after con-
trolling for integrity effects on perceived expertise and
independence. Objectivity refers to the professional’s abil-
ity to control the biases, con?icts, and inappropriate in?u-
ences that can undermine professional judgment and
reliability. As such, objectivity represents the pursuit of a
‘‘bias-free’’ state of mind that all professionals should pur-
sue when providing attest services to clients.
6
Taylor et al.
(2003) linked auditor integrity directly to objectivity by sug-
gesting that integrity should help professionals maintain
clear focus on ‘‘truthful reporting’’ and be ‘‘sensitive to dis-
honest manipulated reporting behavior’’ (p. 262). Accord-
ingly, we predict that lenders’ assessments of auditor
integrity will be related directly to their assessments of
auditor objectivity. Stated formally:
Hypothesis 1c. Lenders’ assessments of auditor integrity
will be positively related to their assessments of auditor
objectivity.
Expertise effects
The reliability framework also describes auditor exper-
tise as a critical foundation element and antecedent to
objectivity. The accounting literature (e.g., Bonner & Lewis,
1990; Libby & Tan, 1994) de?nes expertise as the knowl-
edge, ability, and experience needed to achieve task-
speci?c superior performance. The research literature also
provides evidence of a link between professional expertise
and objectivity. For example, the performance review liter-
ature in accounting (e.g., Tan & Jamal, 2001) provides
evidence that reviewer expertise is directly related to the
ability to control biases and objectively evaluate the work
of subordinates.
The reliability framework links expertise directly to
objectivity because technical knowledge, ability, and
experience help auditors providing attest services ‘‘to
exercise due diligence and properly ?ll their responsibili-
ties in a competent and pro?cient manner’’ (Taylor et al.,
2003, p. 262). Ultimately, expertise with underlying integ-
rity should help auditors pursue objectivity needed to
manage the variety of technical, client, and industry issues
that arise when providing client services.
7
From a user’s
perspective, the perceived expertise of auditors should di-
rectly affect judgments about auditors’ ability to understand
and evaluate complex issues and manage the judgment and
decision biases that undermine objectivity. Accordingly, we
predict that lenders’ assessments of auditor expertise should
be directly related to their assessments of auditor objectivity
when evaluating a prospective borrower’s credit application.
Stated formally:
Hypothesis 1d. Lenders’ assessments of auditor expertise
will be positively related to their assessments of auditor
objectivity.
Independence effects
Taylor et al. (2003) describe persisting confusion be-
tween independence and objectivity in both the profes-
sional literature and in practice. The reliability framework
de?nes independence as it exists within professional stan-
dards: as a construct focused on the relationships (e.g.,
?nancial, family) that professionals have with their clients.
Alternatively, objectivity refers to the auditor’s state of
mind and ability to manage the cognitive biases and subjec-
tivity that inherently affect professional judgments and
decisions. Accordingly, current independence rules focus
on proscribing ?nancial and non-?nancial relationships
with the client that have the potential to create con?icts
of interest that can impair auditors’ pursuit of objectivity.
Although relationship-based independence and objec-
tivity are clearly related, the framework highlights the
importance of distinguishing between the constructs and
recognizing that independence is one of several antecedents
to objectivity. We test this proposed relation using lenders’
assessments of auditor independence and objectivity. As
suggestedinthe reliabilityframework, lenders’ assessments
of auditor independence shouldbe positivelyrelatedtotheir
assessments of auditor objectivity. Stated formally:
Hypothesis 1e. Lenders’ assessments of auditor indepen-
dence will be positively related to their assessments of
auditor objectivity.
Objectivity effects on auditor reliability
The reliability framework proposes that auditor reliabil-
ity ?ows directly from the pursuit of objectivity re?ecting
underlying integrity, expertise, and independence when
providing professional services to clients (DeZoort et al.,
2008; Taylor et al., 2003). In this study, we test the
framework’s reliability ‘‘in appearance’’ dimension by
evaluating the extent that lenders’ assessments of auditor
objectivity directly affect their overall assessment of auditor
6
The reliability framework recognizes that complete objectivity is
impossible given the subjectivity inherent in judgment-based domains
(Taylor et al., 2003). Accordingly, objectivity in this context represents the
ability to manage subjectivity.
7
Expertise without integrity represents an enormous risk for stakehold-
ers. DeZoort et al. (2008) highlight this risk as a motivating factor in their
revision of the Taylor et al. (2003) reliability framework to propose
integrity as the framework’s sole foundation.
522 F.T. DeZoort et al. / Accounting, Organizations and Society 37 (2012) 519–533
reliability. Speci?cally, lenders’ reliability judgments should
re?ect the amount of con?dence they have in auditors’ abil-
ity to objectively plan and performthe engagement. Accord-
ingly, we predict that lender assessments of auditor
objectivity in attest engagements will be directly related
to their assessments of auditor reliability. Stated formally:
Hypothesis 1f. Lenders’ assessments of auditor objectivity
will be positively related to their assessments of auditor
reliability.
Auditor reliability effects on ?nancial statement reliability
Beyond testing the reliability framework, we also con-
sider how auditor reliability and its formative constructs
affect lenders’ judgments of ?nancial statement reliability.
The accounting literature provides a number of studies
linking the quality of accountants’ work (e.g., audit quality)
to ?nancial statement reliability (e.g., Fischbacher &
Stefani, 2007; Johnson, Kurana, & Reynolds, 2002; Stanley
& DeZoort, 2007). For example, Fischbacher and Stefani
(2007) found that managers were less likely to manipulate
?nancial statements in the presence of increased auditor
effort resulting in improvements in audited ?nancial infor-
mation. From a lender’s perspective, ?nancial statements
provide information that is used to assess a company’s cur-
rent ?nancial condition and future cash ?ows. However,
information asymmetry between ?nancial statement pre-
parers and users increases uncertainty for lenders and
the cost of lending (Watts & Zimmerman, 1986). Audit ser-
vices should reduce lender uncertainty about ?nancial
information provided by the prospective borrower.
Accordingly, to the extent that audits are designed to in-
crease the credibility of ?nancial statements, we expect
perceived auditor reliability to directly affect lenders’
assessments of ?nancial reporting reliability. In addition,
lenders’ assessments of ?nancial reporting reliability
should affect their assessment of a loan applicant’s credit
worthiness. Speci?cally, we expect an inverse relation be-
tween perceived ?nancial reporting reliability and the loan
applicant’s risk of default on the loan. Stated formally:
Hypothesis 2. Lenders’ assessments of auditor reliability
will be positively related to their assessments of a
prospective borrower’s ?nancial statement reliability.
Hypothesis 3. Lenders’ assessments of a prospective bor-
rower’s ?nancial statement reliability will be negatively
related to their assessments of the borrower’s default risk.
In summary, we test the reliability framework’s pro-
posed relations among auditor integrity, expertise, inde-
pendence, objectivity, and reliability, including ?nancial
statement reliability. The conceptual framework in Fig. 2
summarizes the study’s conceptual model and hypotheses.
Nonaudit service effects
Regulators and others have contended that the provi-
sion of nonaudit services to audit clients has the potential
to impair auditor independence and undermine ?nancial
reporting quality (e.g., Bazerman & Moore, 2011; Frankel,
Johnson, & Nelson, 2002; Levitt, 2000; Simunic, 1984).
For example, Simunic (1984) suggests that the provision
of nonaudit services by auditors leads to economic bonding
between the auditor and client. Because of this bonding,
auditors may be less willing to criticize the work provided
from these services. Therefore, the resulting objectivity
impairment can have detrimental effects on overall ?nan-
cial reporting quality.
However, the literature also includes arguments that
the provision of select nonaudit services to audit clients
can improve the quality of ?nancial reporting (AICPA,
2009a; DeZoort et al., 2008; Joe & Vandervelde, 2007).
Information obtained from the provision of nonaudit ser-
vices is potentially useful during the audit. For example,
Joe and Vandervelde (2007) found that auditors gained
knowledge in performing nonaudit tasks. Their results
suggested that this knowledge could be transferred to
audit tasks (i.e., risk assessment) that may lead to im-
proved ?nancial reporting quality. Additionally, DeZoort
and Taylor (2009) found that lender perceptions of CPA
reliability and ?nancial reporting reliability in compila-
tion and review engagements did not decrease when
CPAs provided both attest and nonattest bookkeeping
and payroll services to a client in violation of indepen-
dence rules. Lenders perceived signi?cantly higher reli-
ability in a compilation setting where nonattest
services were provided despite reporting lower perceived
independence.
We question whether such ?ndings will extend to an
audit context given the high level of assurance and the in-
creased focus on the importance of independence. The reli-
ability framework suggests that perceived auditor integrity
and expertise have the potential to offset user concern
about compromised independence resulting from combin-
ing audit and nonaudit services. Accordingly, we question
the extent that the framework’s relations will be affected
when auditors provide both audit and nonaudit services
to clients. Stated formally:
Research Question. To what extent does the provision
of nonaudit services to audit clients affect lenders’
framework component assessments and default risk
judgments?
Method
Participants
The study’s participants were commercial lender mem-
bers of the Risk Management Association (RMA). RMA of?-
cials reviewed the research materials and e-mailed lender
members to endorse the study and request participation.
The request for participation provided a link to the website
containing the research instrument. After 2 weeks, a second
request was sent to the RMA members asking themfor par-
ticipation if they had not already completed the study.
8
8
No signi?cant differences were found among responses from partici-
pants who responded after the ?rst and second requests.
F.T. DeZoort et al. / Accounting, Organizations and Society 37 (2012) 519–533 523
One hundred eighty-seven commercial lenders pro-
vided complete responses in the study.
9
We cannot deter-
mine the speci?c number of requests sent or the response
rate for the study because data collection was facilitated
by RMA contacts. As indicated in Table 1, the participants
average 14 years of lending experience and represent 99 cit-
ies in the United States and Canada. Almost half (49%) work
in ?nancial institutions with more than $5 billion in assets. A
majority of the participants were male (72%), lacking a pro-
fessional license (74%), and possessing a bachelor’s degree
(or equivalent) as their highest level of education (67%).
We found no signi?cant demographic effects.
Research instrument
The online research instrument (see Appendix A) was
adapted from DeZoort and Taylor (2009) and administered
using PsychData.
10
After completing an online consent form,
participants received general instructions and were told
they were evaluating an application from a hypothetical
privately-held tool manufacturer (hereafter ‘‘Tools’’) to
re?nance a $1.5 million line of credit. Company background
information (see Appendix A) described Tools as an average
Fig. 2. Conceptual framework.
Ã
Constructs and hypotheses below the dashed line represent the Reliability Framework introduced by Taylor et al. (2003)
and revised by DeZoort et al. (2008).
9
We omitted 18 participants who provided incomplete responses.
However, our results are qualitatively similar if these participants are left
in the analysis.
Table 1
Demographics (n = 168).
Number of cities represented 99
Professional designation
No 74%
Yes 26%
Gender
Female 28%
Male 72%
Size of ?nancial institution (assets)
Less than $1 billion 25%
$1 billion - $5 billion 26%
Greater than $5 billion 49%
Lending experience (years) 13.99
Education
Bachelors 67%
Masters 33%
10
The research instrument was developed in consultation with groups of
lenders, researchers, and representatives from the AICPA and the RMA to
ensure case realism, understandability, and content validity for the
framework’s measurement items. We then pretested the instrument with
53 MBA students. The development and pretest procedures led to minor
modi?cations to the instrument. The study and all research materials were
approved by the Institutional Review Boards at the researchers’
universities.
524 F.T. DeZoort et al. / Accounting, Organizations and Society 37 (2012) 519–533
(medium) risk company with effective internal controls,
competent management and directors, and stable ?nancial
health and growth in recent years. Participants were told
that Tools was a new prospective customer for them. Sum-
mary ?nancial information provided unaudited account bal-
ances and performance results. The background information
also indicated that the re?nanced line of credit would be se-
cured by Tools’ accounts receivables and inventory.
11
The instrument then described Tools’ public accounting
?rm as a regional public accounting ?rm that had been in
business for 20 years and provided a full menu of services
to their clients. In addition, the instrument stated that the
accounting ?rm had approximately 80 professionals work-
ing in four of?ces in the United States. After reading the
accounting ?rm description, participants were told the
accounting ?rm has provided audit services for Tools for
the past 3 years. The instrument provided the most recent
audit report providing an unquali?ed opinion on the ?nan-
cial statements.
Independent variables
We manipulated the provision of nonaudit service lev-
els at two levels randomly between subjects (see Appen-
dix, Panel B). Participants assigned to the audit only
group were told that the public accounting ?rm only pro-
vided audit services, while participants in the audit and
nonaudit services group were told that their accounting
?rm provided audit and nonaudit bookkeeping and payroll
services. We developed a service-based independence
problem in this study rather than a ?nancial interest or
family con?ict independence problem because of recent
policymaker interest in the area (DeZoort et al., 2008).
The focus on auditor provision of bookkeeping and payroll
services as our speci?c independence problem came after
consulting with a number of lenders and regulators during
study development about types of nonaudit services that
would create a transparent auditor independence problem.
Overall, the participants found the research scenario to
be both realistic (overall mean = 6.63 on a nine-point scale
where 1 = ‘‘Very unrealistic’’ and 9 = ‘‘Very realistic’’) and
understandable (overall mean = 6.61 on a nine-point scale
where 1 = ‘‘Very dif?cult to understand’’ and 9 = ‘‘Very easy
to understand’’). The results did not differ signi?cantly be-
tween treatment groups.
Dependent variables
We developed a series of 20 items to measure the reli-
ability framework constructs (see Appendix A). Speci?-
cally, integrity (items 1–4), expertise (items 5–8),
independence (items 9–12), objectivity (items 13–16),
and reliability (items 17–20) were each measured with
four items. The expertise items focused on various dimen-
sions of expertise, including experience, knowledge, and
ability. Similarly, the independence items were written to
measure perceived independence related to both fees
charged and the scope of services provided. The reliability
statements were split with two items focused on auditor
reliability and two items focused on ?nancial statement
reliability. Response items were randomized and measured
using a ?ve-point Likert scale anchored ‘‘Strongly Dis-
agree’’ and ‘‘Strongly Agree’’. Each scale contained nega-
tively worded items to control for response bias.
Manipulation checks and other questions
We used two multiple-choice questions to assess par-
ticipants’ understanding of the study’s experimental mate-
rials. First, we asked participants to indicate whether the
accounting ?rm in the scenario provided Tools Company
with audit, compilation, or review services for the past
3 years. Second, we asked participants to indicate whether
the accounting ?rm provided audit services only to Tools
or if it provided both audit and nonaudit bookkeeping
and payroll services. The manipulation check questions
had a 92% pass rate, leaving 168 participants for the
remainder of the analysis after excluding individuals who
missed at least one manipulation check question.
12
After the manipulation checks, we asked participants to
assess the default risk associated with approving Tool Com-
pany’s application to re?nance its line of credit using a nine-
point scale anchored 1 = ‘‘No Risk’’ and 9 = ‘‘A Great Deal of
Risk’’.
13
The ?nding of an overall loan applicant default risk
mean of 5.06 indicates that the participants assessed default
risk for Tools at a moderate level as intended in the case. We
alsoaskedfor assessments of theamount of assuranceprovided
by audits, reviews, and compilations and found signi?cant ex-
pected differences among all three engagement types (audit
mean = 7.58, review mean = 5.08, compilation mean = 3.47 on
a scale anchored 1 = ‘‘no assurance’’ and 9 = ‘‘total assurance’’)
at the 0.01 level. The instrument concluded with a series of
demographics questions used to evaluate the sample and as-
sess potential differences due to individual characteristics.
Results
Descriptive results and measure validation
Table 2 provides descriptive statistics for the measure-
ment items used in the study. We used a multitrait matrix
(Campbell & Fiske, 1959) to evaluate the construct validity
of the reliability framework measures used in the study.
14
11
Given our focus on auditor characteristics in this study, we developed a
borrower and lending scenario that, aside from audit-based manipulation,
was as normal as possible. For example, our work with lenders during
instrument development indicated that the vast majority of commercial
lines of credit are secured. However, the bene?ts provided by a secured line
of credit (e.g., the existence and valuation of collateral assets) become less
certain in the presence of compromised auditor independence.
12
The study’s results are qualitatively similar if all of the participants are
included in the analysis.
13
The literature (e.g., Booth, 1992; Minnis, 2011) provides evidence that
lender reliance on audited ?nancial statements is particularly high when
evaluating risk and setting interest rates.
14
Construct validity is the extent that a scale measures the theoretical
construct it purports to measure. Campbell and Fiske (1959) describe
construct validity in terms of convergent validity (i.e., the degree that
measures of theoretically related construct are related in fact) and
discriminant validity (i.e., the degree that measures of theoretically distinct
constructs are not related in fact).
F.T. DeZoort et al. / Accounting, Organizations and Society 37 (2012) 519–533 525
For example, we examined correlations among all of the
measurement items to assess their convergent and discrim-
inant validity related to the framework’s formative con-
structs. The results provide evidence of validity, with
coef?cients consistently higher among items designed to
measure the same construct than among items measuring
different constructs. We also ?nd evidence of internal con-
sistency (reliability) for the measures with Cronbach’s alpha
exceeding 0.800 for all of the framework constructs.
Table 3 presents pairwise correlations among the
framework constructs and default risk judgments. The re-
sults show signi?cant correlations among the framework
constructs and ?nancial statement reliability (p < 0.01).
Pairwise correlations among the framework variables
range from 0.349 (Independence–Expertise) to 0.704 (Audi-
tor Reliability–F/S Reliability). As expected, the results also
show consistent negative correlations between the frame-
work’s constructs and default risk.
SEM results
We used AMOS 18 to conduct structural equation mod-
eling (SEM) with maximum likelihood estimation to test
the hypothesized relations summarized in Fig. 2. Table 4
provides the measurement model results. We identi?ed
each latent variable by setting the loading of one measure-
ment item for each framework component to 1 because the
latent variables are not measured directly. The con?rma-
tory factor analysis provides evidence of convergent valid-
ity (Hair, Anderson, Tatham, & Black, 1995) by revealing
signi?cant standardized loadings that are consistently
greater than 0.700 (p < 0.001 for all items).
Fig. 3 provides the ?t statistics and standardized param-
eter estimates for the structural model. Overall, the results
indicate that the model ?ts the data well (v
2
(df) =
14.694(10), p = 0.144, v
2
/df = 1.469, GFI = 0.976, AGFI =
0.933, CFI = 0.993, RMSEA = 0.051 (90% CI = 0–0.102),
Table 2
Descriptive statistics for framework measures.
Framework component Mean SD Cronbach’s a
Integrity 0.857
APC makes truthful claims 3.68 0.615
I do not believe what professionals at APC tell me
a
3.99 0.702
I trust the professionals at APC 3.65 0.675
The professionals at APC are honest 3.47 0.650
Expertise 0.825
APC has a great deal of experience 3.57 0.664
APC lacks the expertise needed in the Tools engagement
a
3.79 0.659
APC has the knowledge needed to complete the Tools engagement 3.75 0.644
APC has the ability to do the Tools engagement 3.80 0.623
Independence 0.871
APC is independent in its relationship with Tools 3.66 0.978
The scope of services provided by APC for Tools creates a con?ict of interest
a
3.59 0.931
The fees paid by Tools to APC create a con?ict of interest
a
3.65 0.850
APC has no con?ict of interest in the Tools engagement 3.44 0.849
Objectivity 0.813
APC professionals are biased when providing services to Tools
a
3.56 0.894
APC professionals provide unbiased services to Tools 3.59 0.814
APC’s professionals lack objectivity in their work related to Tools
a
3.76 0.775
APC’s professionals are objective when providing services to Tools 3.61 0.712
Auditor Reliability 0.816
I can rely on APC’s work when evaluating Tools’ credit application 3.84 0.752
APC’s work with Tools Company should not be relied upon
a
3.82 0.766
F/S Reliability 0.889
Tools’ ?nancial statements can be relied upon when making a credit decision 3.98 0.852
I cannot rely on Tools’ ?nancial statements
a
3.97 0.823
All responses for the reliability framework (i.e., integrity, expertise, independence, objectivity, reliability) items are measured using a ?ve-point scale where
1 = ‘‘Strongly Disagree’’, 2 = ‘‘Disagree’’, 3 = ‘‘Neutral’’, 4 = ‘‘Agree’’, and 5 = ‘‘Strongly Agree’’.
a
Indicates the negatively-worded item mean score was reverse-coded for consistency.
Table 3
Correlation matrix.
Integrity Expertise Independence Objectivity Auditor reliability F/S Reliability
Integrity
Expertise 0.462
Independence 0.452 0.349
Objectivity 0.548 0.499 0.670
Auditor reliability 0.525 0.477 0.414 0.590
F/S Reliability 0.497 0.406 0.369 0.562 0.704
Default risk À0.339 À0.294 À0.293 À0.337 À0.329 À0.345
Notes: Bold (Pearson) correlations indicate signi?cance at 0.01 level.
526 F.T. DeZoort et al. / Accounting, Organizations and Society 37 (2012) 519–533
SRMR = 0.051).
15
In addition, the sample-to-parameter ratio
of 6.72 (168/25) suggests the sample size is reasonable for
the speci?ed model.
16
The ?rst three hypotheses (H1a–H1c) predict that lend-
ers’ assessment of auditor integrity will affect their assess-
ments of auditor expertise, independence, and objectivity.
As predicted in H1a, the model’s path coef?cients in Fig. 3
indicate that Integrity is positively associated with Expertise
(path coef?cient = 0.562, p < 0.001). The results also indi-
cate a signi?cant positive link between Integrity and Inde-
pendence (path coef?cient = 0.552, p < 0.001), providing
support for H1b. Finally, the signi?cant positive link be-
tween Integrity and Objectivity (path coef?cient = 0.286,
p < 0.001) provides support for H1c. These results provide
strong evidence that integrity is the foundation of the reli-
ability framework.
The results in Fig. 3 also show the effects of lenders’
assessments of auditor expertise and independence on per-
ceptions of auditor objectivity. As predicted in H1d, we
?nd a signi?cant link between Expertise and Objectivity
(path coef?cient = 0.156, p = 0.04). The signi?cant positive
relation between Independence and Objectivity (path coef?-
cient = 0.580, p < 0.001) provide support for H1e. Finally,
the ?ndings support H1f by showing that perceived Objec-
tivity directly affects perceived Auditor Reliability (path
coef?cient = 0.358, p < 0.001). These ?ndings provide
strong support for the relations posited in the auditor reli-
ability framework.
The structural model results in Fig. 3 also highlight sev-
eral links among the framework constructs that extend the
hypothesis tests and provide additional insight into how
the reliability framework works. For example, although
the reliability framework predicts an indirect relationship
between Integrity and Auditor Reliability through Objectiv-
ity, the results clearly show that a direct relationship also
exists. Speci?cally, the signi?cant direct link between
Integrity and Auditor Reliability (path coef?cient = 0.253,
p < 0.01) provides further evidence of the in?uence of
integrity in the framework. Alternatively, we ?nd insignif-
icant direct links with Auditor Reliability for both Expertise
and Independence at the 0.05 level (path coef?-
cients = 0.101 and 0.081, respectively).
In addition to providing evidence in support of the audi-
tor reliability framework, the results also provide evidence
that auditor reliability strongly in?uences lenders’ assess-
ments of ?nancial statement reliability and, in turn,
borrower default risk. Speci?cally, Fig. 3 results show that
H2 is supported by the signi?cant positive link
between Auditor Reliability and F/S Reliability (path
Table 4
Measurement model.
Framework component Standardized loading t-Value
Integrity
APC makes truthful claims 0.707
a
I do not believe what professionals at APC tell me
a
0.767 7.533
I trust the professionals at APC 0.779 7.600
The professionals at APC are honest 0.753 7.462
Expertise
APC has a great deal of experience 0.706
a
APC lacks the expertise needed in the Tools engagement
a
0.812 8.816
APC has the knowledge needed to complete the Tools engagement 0.862 9.185
APC has the ability to do the Tools engagement 0.827 8.938
Independence
APC is independent in its relationship with Tools 0.850
a
The scope of services provided by APC for Tools creates a con?ict of interest
a
0.872 14.241
The fees paid by Tools to APC create a con?ict of interest
a
0.758 11.457
APC has no con?ict of interest in the Tools engagement 0.825 13.053
Objectivity
APC professionals are biased when providing services to Tools
a
0.712
a
APC professionals provide unbiased services to Tools 0.789 8.793
APC’s professionals lack objectivity in their work related to Tools
a
0.781 8.721
APC’s professionals are objective when providing services to Tools 0.778 8.695
Auditor reliability
I can rely on APC’s work when evaluating Tools’ credit application 0.811
a
APC’s work with Tools Company should not be relied upon
a
0.836 13.000
F/S statement reliability
Tools’ ?nancial statements can be relied upon when making a credit decision 0.893
a
I cannot rely on Tools’ ?nancial statements
a
0.897 16.308
All t-values are signi?cant at p < 0.001.
a
Indicates that a parameter is ?xed at 1.0 in the original solution.
15
The literature (e.g., Hooper, Coughlan, & Mullen, 2008; Iacobucci, 2010;
Kline, 2011) describes a wide variety of model ?t indices and some
disparity in opinion about thresholds for ‘‘good ?t.’’ However, common
rules of thumb for acceptable model ?t are that the p-value for the chi-
square test statistic should be greater than 0.05 (Iacobucci, 2010); GFI,
AGFI, and CFI should be greater than 0.90 (Bentler & Bonnet, 1980; Hu &
Bentler, 1998); RMSEA should be less than 0.06 (Hooper et al., 2008; Kline,
2011); v
2
/df should be less than 5 (Arbuckle & Wothke, 1999); and SRMR
should be less than 0.08 (Hooper et al., 2008; Hu & Bentler, 1998; Iacobucci,
2010; Kenny, 2011).
16
The literature (e.g., Grafton, Lillis, & Widener, 2010; Hair et al., 1995)
suggests that a subject-to-parameter ratio of 5 or more is adequate for
structural equation modeling.
F.T. DeZoort et al. / Accounting, Organizations and Society 37 (2012) 519–533 527
coef?cient = 0.802, p < 0.001). In addition, we ?nd the
expected H3 negative relation between F/S Reliability and
Default Risk (path coef?cient = À0.361, p < 0.001). These
additional ?ndings highlight the framework’s potential to
go beyond understanding users’ perceptions of auditor
reliability and its formative constructs to also understand-
ing the extent that auditor reliability affects ?nancial state-
ment reliability and important user judgments.
Nonaudit service effects
We evaluated nonaudit service effects on each of the
framework constructs in the structural model. Table 5, Pa-
nel A, provides the means and standard deviations for the
framework components across NONAUDIT condition. Uni-
variate comparisons indicate that perceived CPA indepen-
dence, objectivity, and auditor reliability are signi?cantly
lower (p < 0.01 in all cases) when auditors provide nonaudit
bookkeeping and payroll services in addition to ?nancial
statement audit services. The NONAUDIT manipulation
did not signi?cantly affect perceived auditor integrity,
expertise, ?nancial statement reliability, or default risk.
The ANCOVA results in Table 5, Panel B, indicate that the
NONAUDIT treatment did not signi?cantly affect lenders’
assessments of auditor integrity or expertise. However, as
expected, the lenders did report signi?cantly higher inde-
pendence for auditors who provide only audit services to
the loan applicant than for auditors who provide both
audit and nonaudit services (audit mean = 16.07 vs. audit/
nonaudit mean = 13.04, p < 0.001). Interestingly, despite
the decrease in perceived independence when auditors also
provide nonaudit services, we ?nd no corresponding
decrease in lenders’ assessments of auditor objectivity,
auditor reliability, or ?nancial statement reliability after
controlling for underlying framework variables.
We also conducted a multigroup moderation test in
AMOS that compares structural model performance for
the two nonaudit services groups. Speci?cally, we used a
chi-square difference test to compare an unconstrained
model (where structural paths were allowed to differ for
the two nonaudit service groups) to a constrained model
(where structural paths were constrained to be the same
for the two nonaudit service groups). Table 5, Panel C, re-
ports the path comparison results for the two nonaudit
services groups. The chi-square difference test reveals a
signi?cant difference in model performance for the two
groups (p < 0.05). Follow-up path comparisons reveal that
NONAUDIT signi?cantly moderates the Integrity–Indepen-
dence path (z = 3.642, p < 0.001) and the Objectivity–Auditor
Reliability path (z = 3.164, p < 0.01). However, the paths are
signi?cant (p < 0.01) for both groups and simply stronger
for the nonaudit services group than for the no nonaudit
services group. No other signi?cant between-group path
differences were found.
Fig. 3. Structural model results. Model ?t: v
2
(df) = 14.694(10), p = 0.144), v
2
/df = 1.469, GFI = 0.976, AGFI = 0.933, CFI = 0.993, RMSEA (90% CI) = 0.051 (0 –
0.102), SRMR = 0.051.
ÃÃÃ
,
ÃÃ
,
Ã
Signi?cant at the 0.001, 0.01, and 0.05 levels, respectively. Dashed lines represent insigni?cant links.
528 F.T. DeZoort et al. / Accounting, Organizations and Society 37 (2012) 519–533
Supplemental analysis
In addition to extending the DeZoort et al. (2008) reli-
ability framework in Fig. 1 to test both direct and indirect
effects of integrity, expertise, and independence on reli-
ability, we also evaluated a number of alternative struc-
tural models to assess their relative performance. For
example, we tested the structural model without ?nancial
statement reliability (H2) and default risk (H3) to evaluate
Fig. 1 reliability framework initially proposed in DeZoort
et al. (2008). The reduced model had similar ?t (e.g.,
v
2
(df) = 10.363(5), p = 0.066, v
2
/df = 2.073, GFI = 0.980,
AGFI = 0.916, CFI = 0.992, RMSEA = 0.060 (90% CI = 0.000–
0.012), SRMR = 0.0407) and path signi?cance, suggesting
that the base reliability proposed in the literature stands
reasonably on its own and that ?nancial statement reliabil-
ity and default risk are not driving model ?t.
We also tested a variety of alternative models that mod-
ify the framework relations posited in Taylor et al. (2003)
and DeZoort et al. (2008) to assess their relative perfor-
mance. First, we compared our main model to an alterna-
tive model with independence, integrity, and expertise
speci?ed as the three foundational constructs. This alterna-
tive model is inferior to the main model (AIC = 189.585 vs.
50.694 for the main model) and poorly ?t (e.g., v
2
(df) =
139.282(12), p = 0.000, v
2
/df = 11.607, GFI = 0.769,
AGFI = 0.568, RMSEA = 0.244 (90% CI = 0.211–0.278),
SRMR = 0.268).
17
Second, we tested an alternative model
with independence (rather than objectivity) as the primary
Table 5
Nonaudit service effects.
Panel A: Means (standard deviations)
Nonaudit services provided
No Yes Overall
Integrity 15.05 (1.91) 14.63 (2.16) 14.84 (2.04)
Expertise 14.95 (2.16) 14.84 (2.17) 14.90 (2.16)
Independence 15.74 (1.87)
***
12.92 (3.54) 14.35 (3.15)
Objectivity 15.12 (1.97)
***
13.92 (2.95) 14.52 (2.57)
Auditor reliability 7.96 (1.06)
**
7.48 (1.49) 7.73 (1.31)
F/S Reliability 8.15 (1.25) 7.86 (1.82) 8.01 (1.56)
Default risk 4.88 (1.31) 5.17 (1.41) 5.02 (1.36)
Panel B: ANCOVA results
Dependent variable
Integrity Expertise Independence Objectivity Auditor reliability F/S Reliability
Test variable
Nonaudit 1.642 0.516 43.361
***
1.903 0.043 0.683
Covariates
Integrity 59.997
*
72.898
***
15.253
***
9.802
**
2.536
Expertise 1.390 2.341 0.137
Independence 89.334
***
1.979 0.187
Objectivity 25.654
***
4.214
*
Auditor reliability 97.699
***
Observations 168 168 168 168 168 168
F 1.642 30.001
***
64.518
***
69.912
***
42.730
***
58.847
***
Adj. R
2
.014 .278 .453 .645 .583 .675
Panel C: Structural model path comparisons‘
Path coef?cients
No nonaudit services provided Nonaudit services provided z-Value
Link
Integrity ?Expertise .443
***
.673
***
1.269
Integrity ?Independence .460
***
.648
***
3.642
***
Integrity ?Objectivity .327
***
.263
**
.157
Integrity ?Auditor reliability .262
*
.283
**
.570
Expertise ?Objectivity .176
*
.138 À.799
Independence ?Objectivity .398
***
.630
***
1.010
Expertise ?Auditor reliability .158 À.005 À1.578
Independence ?Auditor reliability .142 À.009 À1.131
Objectivity ?Auditor reliability .227
**
.661
***
3.164
**
Auditor reliability ?F/S reliability .735
***
.881
***
1.673
Auditor reliability ?Default risk À.352
***
À.350
***
.755
Variables de?nitions: Nonaudit = provision of nonaudit services, with 1 = only audit services provided and 2 = audit and nonaudit services provided.
*
Signi?cant at the 0.05 levels.
**
Signi?cant at the 0.01 levels.
***
Signi?cant at the 0.001 levels.
17
The AIC (Akaike Information Criterion) is a commonly-used predictive
?t index for comparing alternative non-hierarchical models estimated with
the same data (Kline, 2011). The model with the smallest AIC value has
better ?t and the greatest chance to replicate.
F.T. DeZoort et al. / Accounting, Organizations and Society 37 (2012) 519–533 529
mediator. The ?ndings indicate that this alternative model
also is inferior to the main model (AIC = 116.041) and poorly
?t (e.g., v
2
(df) = 86.041 (10), p = 0.000, v
2
/df = 8.604,
GFI = 0.891, AGFI = 0.765, RMSEA = 0.183 (90% CI = 0.148–
0.221), SRMR = 0.147). Finally, we evaluated alternative
models with expertise and integrity as the foundation con-
structs (DeAngelo, 1981; Ganguly et al., 2007), with only
independence or expertise speci?ed as the foundation con-
struct, and with independence and objectivity combined as
one factor.
18
Similar to the original Taylor et al. (2003) mod-
el, these other alternative models also had higher AIC scores
than the main model and considerably weaker goodness of
?t results.
Discussion and conclusion
This study extends the reliability literature in account-
ing (e.g., DeZoort et al., 2008; Taylor et al., 2003) by provid-
ing an initial empirical test of the reliability framework in
an audit context. Overall, the results provide support for
the framework’s posited relations. For example, the pri-
mary and alternative model results provide strong evi-
dence that integrity is the foundation of the framework,
with lenders’ assessments of auditor integrity directly
affecting their assessments of auditor expertise, indepen-
dence, objectivity, and reliability. The ?ndings also indicate
that lenders’ assessments of auditor expertise and inde-
pendence directly affect their assessments of auditor
objectivity, which in turn directly affects assessments of
auditor reliability.
In addition to testing the framework’s primary rela-
tions, we also consider the effects of auditor reliability on
lenders’ assessments of ?nancial reporting reliability and
corresponding default risk. As predicted, the results reveal
a signi?cant positive relation between lenders’ assess-
ments of auditor reliability and their assessments of over-
all ?nancial reporting reliability for the credit applicant in
the case. Further, we ?nd a signi?cant inverse relation be-
tween lenders’ assessments of ?nancial reporting reliabil-
ity and borrower default risk, providing initial evidence
linking the reliability framework to critical business judg-
ments by users of ?nancial statements and auditor
services.
Finally, the study’s results provide evidence that the
reliability framework is robust when auditors provide both
audit and nonaudit services to the prospective borrower.
Speci?cally, although the provision of nonaudit services
to an audit client decreases lenders’ assessments of auditor
independence, it does not also decrease assessed auditor
objectivity or reliability.
Collectively, this study has a number of implications for
research, policy, and practice. From a research perspective,
the results extend the reliability literature in accounting by
providing initial direct empirical evidence about the valid-
ity of the reliability framework in an audit context. DeZoort
and Taylor (2009) provided initial support for the frame-
work in compilation and review engagements, but the lit-
erature presents serious questions about the framework’s
validity in an audit context (AICPA, 2008). Our results re-
lated to the framework’s formative constructs help synthe-
size and extend the extant literature on the effects of
integrity on expertise (e.g., Hardwig, 1994), integrity on
independence (e.g., Sweeney & Roberts, 1997), expertise
on objectivity (e.g., Tan & Jamal, 2001), and auditor reli-
ability on ?nancial reporting reliability (e.g., Fischbacher
& Stefani, 2007; Johnson et al., 2002; Stanley & DeZoort,
2007). The study’s ?ndings also contribute to the indepen-
dence literature in accounting (see Anandarajan, Kleinman,
and Palmon (2010) for a recent review) by distinguishing
empirically between independence and objectivity and
providing evidence that users do not perceive indepen-
dence to be the most important ethical construct for audi-
tors in pursuit of reliability. Further, our ?nding that the
provision of nonaudit services to audit clients did not neg-
atively affect lender perceptions of auditor objectivity and
reliability are consistent with DeZoort and Taylor’s (2009)
?ndings in compilation and review engagements and com-
plement prior research suggesting functional effects of
combining audit and nonaudit services for clients (e.g.,
Ashbaugh, LaFond, & Mayhew, 2003; Davis & Hollie,
2008; Dopuch, King, & Schwartz, 2003; Joe & Vandervelde,
2007; Kinney, Palmrose, & Scholz, 2004).
From policy and practice perspectives, our results relate
directly to the ongoing debate (e.g., Bazerman & Moore,
2011; Gul, Tsui, & Dhaliwal, 2006; Kohlbeck, Looknanan-
Brown, & Trainor, 2010; Nelson, 2006) about widespread
banning of nonaudit services for audit clients following
the Sarbanes-Oxley Act of 2002 push to strengthen auditor
independence. In this study, although the provision of non-
audit services signi?cantly affected lenders’ assessments of
auditor independence, it did not signi?cantly affect their
assessments of auditor objectivity and reliability.
Finally, the results reinforce the importance of the role
that auditor and ?nancial reporting reliability play in len-
der judgment and decision-making. Speci?cally, the
study’s ?ndings highlight the effects of perceived auditor
integrity, expertise, and independence on lenders’ default
risk assessments through their effects on (auditor and
?nancial reporting) reliability. The results also highlight
that lenders ?nd auditors credible even when auditor inde-
pendence is impaired by providing nonaudit internal con-
trol services. Further, the results suggest that the
information contained in these reports has the potential
to reduce the costs of borrowing.
We highlight several limitations to consider when
evaluating the study’s implications. For example, although
Taylor et al. (2003) discuss the importance of reliability in
fact and in appearance, this initial study focuses only on
users’ perceptions of auditor reliability (i.e., reliability in
appearance). Future research is needed to develop mea-
sures and test the extent to which the framework’s posited
relations hold when the formative constructs (e.g., integ-
rity, expertise, independence) are measured directly using
auditors. In addition, future research also should extend
framework assessment across user groups (e.g., investors,
analysts) and reliance domains (e.g., regulatory, country)
18
We tested alternative models with independence and objectivity items
combined into one factor because the two constructs are closely related in
the literature (Taylor et al., 2003) and because exploratory factor analysis
provided some evidence that the items for the two constructs loaded on
one factor.
530 F.T. DeZoort et al. / Accounting, Organizations and Society 37 (2012) 519–533
given fundamental differences in objectives, relationships,
and stakes. Although lenders represent a highly relevant
audit user group (Reinstein & Leibowitz, 2010), they pos-
sess a different power relationship than absentee owners/
investors to the extent that they have the ability to request
and receive more information from borrowers. Alterna-
tively, although investors can always seek other invest-
ment opportunities, they are relatively limited in their
ability to request additional information from
management.
Future research also should evaluate whether the
framework results hold across different types of auditor
independence violations. This study’s focus on ‘‘service-
based’’ independence involving bookkeeping and payroll
services was motivated by speci?c policymaker interest.
However, questions remain about how users would re-
spond to framework measures in settings involving inde-
pendence issues related to the provision of alternative
nonaudit services, ?nancial interests, and family con?icts.
Further, although our experiment was framed in terms
of a nonpublic company audit to enhance comparability
with other studies of the framework in other attest settings
(e.g., DeZoort & Taylor, 2009), the possibility exists that
user perceptions would be systematically different in a set-
ting involving a public company to the extent that expo-
sure and risk are different. Our framework results in this
study are similar the DeZoort and Taylor (2009) ?ndings
in compilation and review settings, providing support for
theoretical suggestion that the framework should perform
similarly across user groups and domains. However, addi-
tional research is needed to further assess these issues.
Finally, despite our testing of alternative models, this
study does not establish that the reliability framework pro-
posed in the literature (e.g., DeZoort et al., 2008; Taylor
et al., 2003) is the optimal model for organizing key ethical
constructs in the profession. The theoretical links proposed
in the framework are intended to be robust, but future re-
search involving triangulated methods should continue to
challenge the conceptual relations proposed in the reliabil-
ity framework and continue pursuit of a comprehensive
ethical framework that organizes key constructs and
guides future research, policy, and practice.
Acknowledgements
We gratefully acknowledge the generous support re-
ceived from the AICPA’s Private Companies Practice Sec-
tion and the Risk Management Association. We thank
seminar and workshop participants at Case Western Re-
serve University, Kennesaw State University, The Univer-
sity of Alabama, the 2010 National Auditing Conference,
and the 2010 AAA Annual Meeting. We also thank Mark
Peecher (editor), Mark Koziel, Chuck Landes, Tom Ratcliffe,
and Mark Zmiewski for their generous support throughout
the entire research process and Doug Boyle, Chris Burant,
Tim Fogarty, George Franke, Dana Hermanson, Tim Louw-
ers, Doug Prawitt, Jonathan Stanley, Anne Wilkins, and
Yi-Jing Wu for their helpful comments and suggestions. Fi-
nally, we thank participating Risk Management Association
members for their willingness to share their valuable time
and insights.
Appendix A. Experimental materials
Panel. A. Background information
Midwest Tools & Supply Company
Please assume that you are evaluating an application from
Midwest Tools & Supply (Tools) Company to re?nance a
$1.5 million line of credit. Tools is a new prospective cus-
tomer for your bank and you have not worked with the
company in any other setting.
Tools Company Background
Tools is a privately-held tool manufacturer that sells to dis-
tributors and select retailers. Tools has been in business for
10 years and employs 60 people. The company has had sta-
ble ?nancial health and growth in recent years. Back-
ground research indicates that Tools is an average
(medium) risk company with effective internal controls
over ?nancial reporting and competent management and
directors.
Summary (unaudited) Annual Financial Information
Revenues $6.0 million
Pretax income $0.7 million
Net income $0.5 million
Accounts receivable (net) $1.0 million
Inventory $1.4 million
Current assets $2.4 million
PP&E (net) $2.0 million
Total assets $5.2 million
Current liabilities $1.0 million
Total liabilities $3.0 million
Total equity $2.2 million
The re?nanced line of credit would be secured by Tools’
Accounts Receivable and Inventory. Tools has no other
debt.
Panel. B. Experimental treatments
APC services provided
Tools’ accounting ?rm is Andrews, Parker, and Carlson, LLP
(APC). APC is a regional public accounting ?rm established
20 years ago. The ?rm provides a full menu of accounting,
assurance, and tax services and currently employs approx-
imately 80 professionals working in four of?ces in the Uni-
ted States. APC has provided audit services to Tools for the
past 3 years. In addition, APC also provides nonattest book-
keeping and payroll services (or ‘‘provides no other attest
or nonattest services’’) to Tools. The Tools engagement is
adequately staffed and supervised in accordance with ?rm
and AICPA quality control standards. Prior year engage-
ments have produced no signi?cant disagreements. Below
is a copy of the most recent audit report issued by APC:
AUDIT REPORT
To the Board of Directors
Midwest Tools & Supply Company
We have audited the accompanying balance sheet of
Midwest Tools & Supply Company as of December 31,
F.T. DeZoort et al. / Accounting, Organizations and Society 37 (2012) 519–533 531
2007, and the related statement of operations, stockhold-
ers’ equity, and cash ?ows for the year then ended. These
?nancial statements are the responsibility of the Com-
pany’s management. Our responsibility is to express an
opinion on these ?nancial statements based on our audit.
We conducted our audit in accordance with auditing
standards generally accepted in the United States of Amer-
ica. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the
?nancial statements are free of material misstatement.
An audit includes consideration of internal control over
?nancial reporting as a basis for designing audit proce-
dures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effective-
ness of the Company’s internal control over ?nancial
reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the ?nancial
statements, assessing the accounting principles used and
signi?cant estimates made by management, as well as
evaluating the overall ?nancial statement presentation.
We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the ?nancial statements referred to
above present fairly, in all material respects, the ?nancial
position of the Company as of December 31, 2007, and
the results of its operations and its cash ?ows for the year
then ended in conformity with US generally accepted
accounting principles.
Andrews, Parker, and Carlson, LLP
February 10, 2008
Panel. C. Reliability framework questions
Please respond to the following items related to APC,
LLP’s professional services for Midwest Tools & Supply
Company (Tools).
(1) I trust the professionals at APC.
(2) APC makes truthful claims.
Ã
(3) The professionals at APC are honest.
Ã
(4) I do not believe what professionals at APC tell
me.
(5) APC has a great deal of experience.
(6) APC has the knowledge needed to complete the
Tools engagement.
(7) APC has the ability to do the Tools engagement.
Ã
(8) APC lacks the expertise needed in the Tools
engagement.
(9) APC is independent in its relationship with
Tools.
(10) APC has no con?ict of interest in the Tools
engagement.
Ã
(11) The scope of services provided by APC for Tools
creates a con?ict of interest.
Ã
(12) The fees paid by Tools to APC create a con?ict of
interest.
(13) APC’s professionals are objective when
providing services to Tools.
(14) APC provides unbiased services to Tools.
Ã
(15) APC’s professionals lack objectivity in their
work related to Tools.
Ã
(16) APC is biased when providing services to Tools.
(17) I can rely on APC’s work when evaluating Tools’
credit application.
Ã
(18) APC’s work with Tools should not be relied
upon.
(19) Tools’ ?nancial statements can be relied upon
when making a credit decision.
Ã
(20) I cannot rely on Tools’ ?nancial statements.
Ã
Negatively-worded item that required reverse coding.
All responses measured on a ?ve-point scale with
the following labels: ‘‘Strongly Disagree’’, ‘‘Disagree’’,
‘‘Neutral’’, ‘‘Agree’’, and ‘‘Strongly Agree’’
Appendix B. Supplementary material
Supplementary data associated with this article can be
found, in the online version, athttp://dx.doi.org/10.1016/
j.aos.2012.08.003.
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