The Effect Of Audit Workload On Audit Quality: Evidence In Canada

Abstract

The theory of information asymmetry suggests that there is an information difference between sellers and buyers. Management is believed to possess more comprehensive corporate information than outside investors as they are in the position of running the daily operation of the business (Scott et al. 2003), which tilts the market price of the goods. When there is a lack of equal information among market participants, it can lead to suboptimal allocation of goods and services causing inefficiencies and potentially leading to market failure (Akerlof et al., 1970). Information failure is unavoidable in each of the existing free markets, according to Loss et al. (1983), and Loss and Seligman et al. (2001), securities regulators have been concerned about the problem of information asymmetry among investors for a considerable period. Investors depend heavily on financial data to make decisions. Providing investors with access to financial information falls under the responsibility of management and is accomplished by issuing financial statements. Consequently, the significance of financial statements in mitigating information asymmetry is paramount and their credibility is imperative to ensure efficient and effective operations of financial markets. However, financial information can be subject to unreliability and lack of credibility to investors due to the potential earnings manipulation by management to serve their interests. In a scenario where both the management and the shareholders are utility maximizers, the difference between the interest of the two parties creates agency problems due to information asymmetry. Agency theory is frequently employed to explain the act of earning management, which is manipulating the earnings to smooth the company’s financial performance in specific periods (Aharony et al., 1993, Rangan et al., 1998, Erickson & Wang et al., 1999). According to the empirical evidence presented by Richardson et al., (1998), a direct correlation exists between the degree of information asymmetry and earnings management, indicating that information asymmetry is a vital determinant in facilitating the practice of earnings management. A higher level of information failure leads to more difficulties in inspecting and monitoring earnings manipulations (Warfield et al., 1995), hence, the role of external auditors is critical in minimizing investors’ concerns regarding the reliability and integrity of financial statements compiled by management. Auditing firms within the accounting industry are facing an enduring conundrum during the most demanding period, commonly the three months after the fiscal year end of a cluster of companies, referred to as the “peak season”. During this period, a significant amount of work needs to be done with limited resources. Due to the time constraints set by applicable laws and clients for release, the current obstacle is understandable. Specifically, auditors are obliged to undertake a significant workload within a restricted timeline to gather evidence for auditing purposes, by considering their clients’ annual accounting records. In addition, the audit firms’ portfolio includes clients that end their financial year simultaneously, which means auditors must conduct the engagement for companies from many business sectors at literately the same time. The demanding workload results in time limitations and exhaustion, placing significant time pressure on auditors to carry out all essential auditing procedures, sustain their professional skepticism, and raise potential issues. Understandably, the quality of audits suffers as a result of inadequate professional judgment and diminished audit evidence attributable to time constraints (López & Peters et al., 2012). Conducting fieldwork is critical in the audit domain for ensuring accurate audit opinion, in the existence of time constraints, selective procedures are conducted to ensure the comprehensiveness and efficiency of the audit. During peak season, the increase in workload is mainly due to the rising number of working hours, which can reach up to 63 hours per week, according to Sweeney and Summers et al., (2002). They also conclude that this phenomenon has been identified as the principal factor contributing to the high employee turnover at auditing firms. The limited time budget imposed on auditors is known to significantly affect the occurrence of dysfunctional behavior. The research conducted by McDaniel et al., (1990) discovered that audit efficiency diminishes when there is a rise in time pressure. Later research from McNamara et al., (2008), Otley and Pierce et al., (1996), and Pierce and Sweeney et al., (2004) also proposed a strong correlation between time constraints and dysfunctional response.