A Qualitative Examination of Management Control Systems in Large Audit Firms

Audit firms face a constant conflict between the business of auditing and the profession of auditing, characterised in the literature as a cost-quality conflict. This conflict is manifested at trainee levels in the pressure to perform quality work within specified time limits. Prior studies have reported high levels of quality threatening behaviour (QTB) at trainee levels and the importance of examining contributory factors has been highlighted. Multivariate models, based on large-scale surveys have identified some important variables, but calls have been made for in-depth studies to develop a more complete understanding and help refine previous models of auditor behaviour. The objective of this study, the first of its kind, is to conduct a qualitative investigation of how control system variables operate in audit firms and the perceived impact of those variables on QTB. Based on a framework constructed from the management control literature, the study adopted a qualitative approach using 25 semi-structured interviews of audit seniors in four of the (then) Big Five firms in Ireland. The findings suggest that key variables (time pressure, participative target setting, style of performance evaluation and audit review process) have been inadequately operationalised in previous studies. Time pressure emanates not from a single source as suggested previously but from a triad of sources, the balance of which varies over time and is influenced by a range of factors. Participation is heavily influenced by the source of pressure but there is also evidence of a strong interaction between the opportunity for participation and reporting structures. Flatter reporting structures are now in place, promoting asymmetry in the direction of the manager, who is likely to develop more detailed knowledge of all audit areas, and away from the senior who is less likely to be exposed to areas covered by more junior staff. Regarding style of performance evaluation, informal evaluations were reported to be of greater importance than formal evaluations. The shift in performance evaluation approach is not only related to the external economic conditions, but is also facilitated by more regular contact with staff at all levels. The style of audit review has changed to a ‘review by interview’ in audit firms, facilitating more interaction between the manager and the audit team. All of these changes are consistent with the concept of interactive control and a movement away from a diagnostic control system. There is evidence however, that the effectiveness of these interactive controls has been reduced due to understaffing in audit firms at the time of the study. Overall, the study has provided important insights into the nature of the specified variables and their association with QTB. Contributions to the management control literature and areas for future research are outlined.