The influence of Islam on auditors' professional judgments in Pakistan

This thesis by publication contributes to the literature on auditors' judgment and decision making by investigating the influence of Islam on auditors' professional judgments. Pakistan, this study's proxy for Islamic countries, provides an appropriate national setting because over 97% of the population strongly identifies with Islam. Pakistan is selected as a proxy for Islamic countries given its adoption, without modifications, of the International Standards on Auditing (ISAs) in 2005 as part of international auditing and accounting convergence. Given the growing influence of Islam on accounting and auditing practices, it is timely to examine its influence on auditors' professional judgments. Auditors' professional judgments pervade virtually all aspects of contemporary financial statement audits and is selected for examination in this thesis because the exercise of informed judgments is referred to as the most important element i n applying the firm's audit approach at the various stages of the audit . This thesis consists of three individual studies . Study 1 is based on a survey conducted in medium - tier auditing firms. Given the calls to provide causal evidence in audit research, Studies 2 and 3 adopted 2x2 between - subjects experimental designs and collected data from Big 4 firms. The overall aim of this thesis is to investigate the influence of Islamic culture on auditors' judgments. Prior research provides evidence of the influence of culture as a broad variable on auditors' judgments ; this thesis "unpacks" culture by invoking the concept of Islamic religiosity, which provides sharper insights into auditors' judgments. As such, this thesis contributes to the literature by introducing an Islamic religiosity measure to the audit judgment literature. Together, the three interrelated studies of the thesis provide holistic insights into the influence of Islam on auditors' professional judgments. Specifically, Study 1 investigates the influence of Islamic religiosity on auditors' preference for more or less judgment in a doubtful debt provision context. T his doubtful debt assessment scenario is selected because it involves a considerable level of judgment and i s relevant to various audit seniority levels. The Muslim Religiosity Personality Inventory (MRPI), a well - validated and extensively used Islamic religiosity framework, is selected in this study to measure auditors' Islamic religiosity. Based on Kraussetal. (2005) framework, "Islamic values" are referred to as Islamic worldview and "Islamic rituals" are referred to as religious personality. Islamic worldview represents deeply held, core Islamic values while religious personality measures believers' perceptions of rituals, prayers, and worship. The survey was conducted with a sample of 66 auditors in medium - tier auditing firms. Medium - tier auditing firms were selected as an appropriate sample for participation given their mandatory adoption of ISAs. In addition, owing to their smaller size and limited integration with international networks, their firm culture was expected to be similar to other local organizations. The results suggest that auditors who scored high on the overall Islamic religiosity and Islam ic worldview scales, on average, have a preference for more judgment . However, the results are not significant for auditors' religious personality levels. The results, however, indicate that regardless of auditors' preference for more or less judgment , the re is an issue with the quality of those judgments. More specifically most auditors based their final judgment (the adjustment to the provision for doubtful debt) on unverified information provided by the client. The results suggest evidence reliability assessment concerns, non - compliance with ISAs, inappropriate level of professional scepticism, and conservatism. Given the auditors' reliance on unverified client - provided information in Study 1, Study 2 introduces a manipulated cultural variable, that is, clients' religious adherence (manipulated as low and high adherence to Islamic religious practices). Clients' gender is also manipulated . Study 2 investigates the influence of clients' religious adherence and gender on auditors' evidence reliability judgments. A 2x2 between - subjects experiment was conducted with 97 auditors in Big 4 auditing firms. Big 4 firms were selected for examination because audit methodologies adopted by Big 4 firms are in line with ISAs, they exhibit a similar organizational culture , and represent a relatively homogenous sample. The results provide evidence that audit evidence provided by a client with high religious adherence is assessed by auditors to be more reliable. However, the gender of the client did not significantly influence audit evidence reliability judgments. The results raise further concerns that are similar to those in Study 1 regarding non - compliance of ISAs within the context of audit evidence reliability assessments, a 6 inappropriately low level of professional scepticism, and conservatism resulting in negative consequences for audit quality. Study 3 extends the research by focusing on the level of conservatism in auditors' judgments by specifically examining the influence of auditors' Islamic religiosity and clients' religious adherence on the level of conservatism. Conservatism is selected for examination because it is a core cultural value in society and influences almost all aspects of personal and professional conduct. The MRPI is adopted to measure auditors' Islamic religiosity, Islamic worldview, and religious personality. Clients' religious adherence to Islamic practices is manipulated between subjects as high versus low. The results of a 2x2 between - subjects experiment with 105 auditors in Big 4 auditing firms provide support for the hypotheses that auditors who scored high on the overall Islamic religiosity and Islamic worldview scales, on average, exhibit a higher level of conservatism in their judgments. However, clients' religious adherence and auditors' religious personality do not impact the level of conservatism in auditors' judgments. The results further support the concerns raised by the results of Studies 1 and 2 of this thesis regarding auditors' non - compliance with ISAs and exercise of an inappropriate level of professional scepticism and conservatism resulting in reduced audit quality and materially misstated financial information. Overall the results of this thesis demonstrate the importance of Islam (specifically Islamic religiosity and religious adherence) as a cultural variable in the auditing context. The results from the three studies highlight a number of significant biases resulting in non - compliance with ISAs, exercise of an inappropriate level of professional scepticism, and conservatism. The results of this thesis also support the recent findings of the International Forum of Independent Audit Regulators' (IFIAR) global annual audit inspection survey (IFIAR, 2018), which highlights many instances of auditors' failure to assess the reasonableness of assumptions, including consideration of contrary or inconsistent evidence regarding accounting estimates (IFIAR, 2018, p. 10). The findings of this thesis have a number of important implications for cultural audit research, global and regional standards setters, and global audit firms either operating in Islamic countries or employing auditors with an Islamic cultural background. Particularly, the findings of this thesis provide greater insights into auditors' judgments in an Islamic cultural context and will assist global standard setters and auditing firms enhance the quality and consistency of audit practices within and across countries, particularly in response to the international convergence of ISAs as well as the growing cultural diversity in auditing firms. The findings suggest that understanding Islamic culture will assist global standard setters and multinational auditing firms in considering the potential implications of cultural variables such as Islamic religiosity on auditors' judgments and assist them and professional bodies in developing relevant policies, procedures, and training to overcome potential consequential culturally induced biases with a negative impact on audit quality.