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While some research suggests that explicit incentives to meet time budgets have recently been reduced at audit firms, there is also evidence indicating that audit seniors and staff still feel at least implicit pressure to meet budgets. We examine the possibility that both of these findings tell a part of the story. Specifically, we explore whether, and under what conditions, seniors and staff are implicitly encouraged to underreport time through future engagement staffing decisions and the performance evaluation process. Further, we consider the extent to which agency theory can serve as a framework for understanding how the incentives of audit managers and partners influence how they view underreporting by their engagement staff. We place participants in a scenario in which they are responsible for evaluating an engagement senior who appears to have worked more hours than were budgeted. We manipulate the senior’s reporting accuracy (underreporting versus accurate reporting) and the desirability of the client (more versus less desirable). We find that, when managers’ agency-related incentives conflict more strongly with those of the firm (more desirable client), they tend to tacitly encourage underreporting through their evaluations of the senior’s performance. Managers are also more likely to request an underreporter on a future engagement. In contrast, partners placed in the same setting show no evidence of encouraging underreporting. Thus, our results suggest that managers’ tacit encouragement of underreporting is contrary to what the “principals” of the firm (i.e., partners) appear to want. Further, while firms may have reduced their emphasis on formal, explicit incentives to underreport, it appears likely that implicit manager incentives persist.
