By utilizing unique audit hour (actual and budgeted) data from Korea, this study examines the impact of auditors' workload on audit quality under audit hour budget pressure. We find the intensity of auditor workload has a negative impact on audit quality when total audit hours exceed budgeted hours (i.e., unfavourable budget variance). When we breakdown the audit workload by auditor level, we find partner workload has a negative impact on audit quality regardless of the budget variance, while senior auditor workload negatively affects audit quality only when the budget variance is unfavourable. We cautiously interpret our empirical findings to suggest that stress and burnout caused by increased audit hours under budget pressure can compel auditors to engage in behaviours that undermine audit quality.
1 | INTRODUCTION
Using unique audit hour data from Korea, we examine how auditors' workload under audit hour budget pressure impacts audit quality. Prior studies document a trade-off between budgeted audit hours and audit quality (Ettredge et al., 2008; Liyanarachchi & McNamara, 2007; Otley & Pierce, 1996; Pierce & Sweeney, 2004), which resonates with the concerns of professional accounting organizations (Commission on Auditors' Responsibilities, 1978; National Commission on Fraudulent Financial Reporting, 1987).
Driven by intensified competition in recent audit markets, audit firms are cutting their audit fees to stay competitive, which, in turn, affects audit practice in the form of reduced budgeted audit hours (Houston, 1999). The budget pressure caused by reduced audit fees can eventually affect audit firms' overall audit quality negatively. For example, under budget pressure, auditors may need to omit or reduce planned tests in order to complete assigned audit tasks on time, or auditors may need to work more unreported hours to improve documented efficiency, which can increase the auditor workload. However, stress caused by budget pressure and workload can increase an auditor's level of anxiety and depression, which can then have adverse organizational consequences (Gaertner & Ruhe, 1981).
6 | CONCLUSIONS
The lack of data availability has been one of the biggest challenges researchers face in examining the relation between audit quality and auditor workload under audit hour budget pressure. Utilizing unique data set with both actual and budgeted audit hours for the Korean audit market, this study examines how auditor workload under audit hour budget pressure affects audit quality. We first document a negative relation between auditor workload and audit quality only when total reported audit hours exceed budgeted audit hours. This finding is consistent with the notion that the stress and burnout caused by increased audit hours under budget pressure leads auditors to engage in quality-threatening behaviour and to affect audit quality negatively. We also document that partners' workload has a negative impact on audit quality, but senior auditor workload negatively affects audit quality only when the budget variance is unfavourable. This implies that non-partner auditors are more likely to be affected by the increase in workload under budget pressure conditions.
One caveat of this study concerns our use of accrual quality as the measure of audit quality, an inherently noisy proxy. We considered using alternative proxies, such as the number of financial restatements or going concern opinions for audit quality, as used in other studies; however, in the Korean market, financial restatements and going concern opinions are very rare. For example, during our sample period, only four firms received qualified opinions and two firms received going concern opinions. In addition, in any given year, there are fewer than 10 restatement announcements among 1500 listed companies in Korea (FSS, 2020). Therefore, we cannot rule out the possibility that our results are sensitive to other measures of audit quality.