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Synopsis

Eating time is one of those taboo subjects among public accountants. Empirical research suggests that auditors, particularly individuals near the bottom of the employment hierarchy of major accounting firms, commonly underreport the time that they spend working on their assigned audit tasks. But, this subject is apparently not an acceptable lunch time topic among auditors. Why do auditors underreport the time they work? No doubt, to impress their superiors. In fact, so-called impression management has been a major topic of research in the organizational behavior field in recent years.

This case allows students to identify and discuss the key issues related to the underreporting of time by auditors. Hamilton Wong is currently working on the audit of Wille & Lomax, the largest audit client of his officehis employer is one of the major accounting firms. Among his responsibilities on the engagement is collecting the time worked by each member of the audit team and preparing a weekly progress report for his superiors. Hamiltons friend, Lauren Hutchison, is also assigned to the Wille & Lomax audit. Both Hamilton and Lauren are in their second year in public accounting and both have their eye on the expected vacancy in the senior slot for next years Wille & Lomax audit. Some tension has recently developed between the two in-charge accountants. Hamilton is convinced that Lauren is significantly underreporting the time that she works on her Wille & Lomax assignments. In Hamiltons mind, Lauren is attempting to impress the audit manager and audit partner on the engagement to persuade them that she is the right person to assume the soon-to-be-open senior position on the job. As the case ends, Hamilton is wrestling with the decision of whether he too should begin underreporting the time that he has worked on his Wille & Lomax assignments.

Hamilton Wong, In-Charge Accountant--Key Facts

1. Hamilton Wong is an in-charge accountant on the audit staff of a large, international accounting firm.

2. Wongs administrative duties on the Wille & Lomax audit to which he is assigned include keeping track of the time worked by each member of the audit team.

3. Another member of the Wille & Lomax audit team is Lauren Hutchison, who is also an in-charge accountant.

4. Hutchison and Wong are the top candidates for the expected vacancy in the senior position on the Wille & Lomax audit, which is the largest audit client of their office.

5. Wong is certain that Hutchison has been consistently underreporting the time that she spends each week working on her Wille & Lomax assignments.

6. Wong believes that Hutchison, who has a fast-track image in their office, is underreporting her time to impress her superiors who will choose the next senior for the Wille & Lomax audit.

7. The competition between Hutchison and Wong has created tension between the two friends.

8. The key issue facing Wong is whether he will begin underreporting the time that he spends working on the Wille & Lomax engagement.

Instructional Objectives

1. To illustrate an ethical dilemma, namely, whether or not to accurately report the time spent working on audit tasks, that commonly faces auditors, particularly auditors near the bottom of their firms employment hierarchy.

2. To demonstrate how competition for promotion opportunities within public accounting can influence the work environment of auditors and potentially affect the quality of independent audits.

3. To allow students to place themselves in the professional role of an auditor who must make an important decision that will likely influence his future with his employer.

Suggestions for Use

The key question posed by this case is whether it is improper for auditors to underreport the time that they spend working on their assignments. You might launch the discussion of the case by asking students to respond to that question with a show of hands. My experience has been that most students believe that eating time is wrong since it is dishonest. On the other hand, the typical student, at least initially, sees this offense as no more than a white lie that has few consequences for auditors and the independent audit function. I would encourage you to explore that common observation or belief with your students.

Consider asking students to identify the potential consequences of underreporting time for (1) individual auditors assigned to a specific engagement, (2) those individuals who will be assigned to that engagement in the future, and (3) the overall quality of independent audits, in general. Students often overlook the zero sum feature of promotion opportunities in public accounting. In this case, Hamilton and Lauren are vying for one position. By underreporting her time and enhancing her image with her superiors, Lauren is automatically harming Hamiltons chance of winning the senior job for the important Wille & Lomax engagement. Likewise, Lauren is hurting individuals who will be assigned to the Wille & Lomax audit in the future. Because she has underreported the time that she has worked on her tasks, individuals who are assigned those tasks the following year will likely be given time budgets that are inadequate. In addition, her dishonesty may negatively impact other key audit planning decisions made for the following years engagement. As you pursue this topic, I think students will eventually recognize that underreporting time, although it seems to be only a white lie, does have important implications for individual auditors and for the overall independent audit function. By the time you complete this discussion, your students will likely have covered many, if not most, of the issues raised by the case questions.

Suggested Solutions to Case Questions

1. Require students to fully explain the choice they make, whether it is a yes or a no. Students responding with a yes typically suggest that they would be justified in underreporting their time since Hutchison had obviously done so, which raises the classic Do two wrongs make a right question. These students may also make the interesting observation that Hamilton has already underreported the time he has worked on the engagement by eating the time that he spent helping Lauren on her accounts. So, why shouldnt he do the same thing to benefit himself?

Is underreporting time unethical? I believe that the simpleand properanswer to that question is yes. Certainly, the practice is dishonest. Additionally, underreporting time is almost always an act of unilateral self-interest that places someone at a disadvantage. Typically, that someone is the individual assigned the same task on the following years engagement. In this case, Hamilton Wong is also a victim of Laurens malfeasance.

2. Performance appraisal is clearly one key objective of tracking the number of hours worked by individual audit assignment. Auditors realize that both the quality and quantity of their work is evaluated. An auditor who does an excellent job in ticking and tying, putting together organized and well-formatted workpapers, and writing an articulate and logical memo documenting the work performed will not receive an excellent rating on the given assignment if he or she busts the budget allocated for the task in question. Budgets also serve a quality control function. During the audit planning function, members of the audit team decide how the scarce resources available to them (primarily manpower) should be allocated. A key input into that decision is the number of hours required on individual assignments during past audits. If hours worked are not reported accurately during the current years engagement, the planned allocation of hours for subsequent audits will likely be adversely affected. Finally, tracking hours worked by individual audit tasks is necessary for billing purposes. The audit firm and its client typically agree that the audit fee will be some approximate amount. However, there is usually an out in that agreement that allows the audit firm to bill the client for additional charges if unexpected problems or circumstances arise that require more time than was expected to complete certain tasks. Even if excess hours required for given tasks are not billed to the client, that information is needed to adjust the audit fee for the following years engagement.

Underreporting time can enhance the performance appraisals of individual auditors. Then again, these high marks come at a price. The individuals who underreport their time are likely to experience some degree of stress and possibly regret as a result of their questionable conduct. For example, these individuals may question their own competence since they realize that their glossy appraisals are not totally deserved. As already noted, the underreporting of time worked on audit tasks typically poses a problem for individuals assigned those same tasks on subsequent audits. These individuals will likely be given an insufficient time budget for their assigned tasks, meaning that they will either have to eat hours or be downgraded for their inability to complete the tasks in the allotted hours. Underreporting of time can also impact zero sum type decisions made regarding promotion opportunities within an officewhich was an issue in this case since Hamilton and Lauren were competing for one job opening. Finally, as suggested in the prior paragraph, underreporting of time has overall audit quality implications. Inaccurate reporting of hours worked by individual audit assignments will likely result in improper resource allocation decisions on subsequent audits, meaning that the quality of those audits may be adversely affected.

3. A nave answer to this question is that accounting firms should not place too much emphasis on time budgets in making performance appraisal decisions. In reality, time budgets are among the few objective measures or benchmarks that can be used to assess the performance of auditors. Granted, the most important measure of an auditors performance should be the quality of the work performed as reflected by the content of the relevant workpapers and by the subjective evaluations of that work by the individuals superiors. Another strategy for mitigating the dysfunctional nature of time budgets is for audit firms to rigorously review and challenge all time budget allocations during the planning phase of each engagement. Too often, the number hours charged to a given task during an audit becomes the de facto time budget for that task on the following years audit.

4. Because of the up or out policy that accounting firms, in particular, the major accounting firms, have historically invoked, the public accounting profession has long been known as having a dog-eat-dog or highly competitive work environment. The most effective measure that accounting firms can take to mitigate the negative consequences of this policy is to periodically remind lower-level auditors that there is always room at the top, or, at least, plenty of room at the next job rank. In other words, an individual who does high quality work will nearly always be rewarded with promotion opportunities. This axiom is particularly true in public accounting since the high turnover rate at each employment rank quickly thins out the number of competitors for promotion opportunities. In the context of this case, for example, Hamilton Wong was being shortsighted. Instead of worrying about the supposed threat posed to him by Lauren Hutchisons aberrant behavior, he should have dedicated himself to doing the best job that he could. If he performed his assignments well, he would eventually receive another opportunity if he was not the individual tabbed for the senior position on the Wille & Lomax audit.