Clan Type Controls Over Audit Quality - Audit Seniors' Perspectives

Author:Mcgarry, Clodagh

Previous research on audit quality has highlighted the difficulty of using formal controls in the audit environment and the suitability of more informal types of control such as 'clan controls' has been advocated. This study examines audit seniors' perceptions of the existence and operation of clan type controls in audit firms. Findings based on semi-structured interviews with 16 audit seniors... (see full summary)



The control of audit cost and audit quality is a critical concern for audit firms, and the conflict between cost and quality has been well documented in the literature (McNair, 1991; Sweeney and Pierce, 2004). Audit firms are labour intensive and therefore management of time is the dominant factor for cost control. Time can be monitored using formal time recording procedures such as budgets and timesheets (Rhode, 1978). The assessment of audit quality can prove more problematic however, as the output of an audit is difficult to measure and auditors are often uncertain as to what constitutes a good audit' (Power, 2003). In addition, supervision is a limited form of control in the audit setting, as managers are not usually present at the audit location to supervise seniors (Sweeney and Pierce, 2004), and audit seniors are under time pressure which limits the time they can devote to supervising or reviewing the work of junior staff (Sweeney and Pierce, 2004). Consequently, it has been argued that the characteristics of the audit environment render formal behavioural and output controls less effective in the control of audit quality (Dirsmith and Covaleski, 1985). As a result, audit firms employ formal controls to the extent that they are feasible but they may also rely on informal mechanisms such as clan controls (Macintosh, 1985). Clan controls are a subtle and illusive yet powerful type of social control that require the existence of certain conditions to operate successfully, such as exclusive membership, commitment to organisational goals and agreement on appropriate behaviours (Macintosh, 1985). It has been suggested that these conditions may be present in the audit environment (Macintosh, 1985) and that audit partners are members of a clan and consequently use clan controls to control audit quality (Pierce and Sweeney, 2005).

Previous research in this area in Ireland has focused on audit partners' perspectives of the use of clan controls to control audit quality (Pierce and Sweeney, 2005). However as audit partners are in the unique position of being owner/ managers of the firm, image management concerns may have influenced their responses (Pierce and Sweeney, 2005). In the audit setting, audit seniors perform the majority of the audit fieldwork and have been found in previous studies to exploit the weaknesses of formal controls (McNair, 1991; Sweeney and Pierce, 2004). Hence their perspective on the use of clan type controls is important and, therefore, the purpose of this research is to examine the existence and operation of clan type controls from the audit seniors' perspective. The next section sets out the background literature on clan controls and its application to the audit environment. Thereafter, the research objective is developed, followed by details of the research method and data analysis. Finally, the findings are presented, followed by a detailed discussion and conclusion.


Management Control Literature

Different categorisations of controls have been provided in the management control literature such as Ouchi's (1979) classification of market, bureaucratic and clan controls. Market and bureaucratic controls are types of formal control that require the efficient operation of a market and the rules of a bureaucracy to operate successfully (Ouchi, 1979). Ouchi argued that in the absence of the conditions necessary for these formal controls, a more subtle and illusive form of control, called clan control, which is based on social agreements, can operate. Clan controls are particularly applicable in an audit setting, as formal controls such as market and bureaucratic controls cannot operate easily in that environment, but the conditions necessary for clan controls are often present there (Macintosh, 1985).

Pre-Conditions Necessary for Clan Controls

Clan controls possess many distinctive and intangible qualities and require the existence of certain pre-conditions to operate successfully (Macintosh, 1985). Under a clan control system, members believe their own personal interests are best served by complete immersion in the interests of the whole and commitment towards organisational goals runs high (Macintosh, 1985). The members of the clan become so completely socialised that their personal goals become the same as the goals of the clan (Ouchi, 1980) and they instinctually make decisions that are in the best interests of the clan (Ouchi and Price, 1993). Clan members need to feel a sense of communion, solidarity and belonging and this enables them to act as close team members and helps to ensure overall loyalty to the clan (Alvesson and Lindkvist, 1993). The members of a clan share a profound common agreement on what constitutes appropriate behaviour and clans exercise authority that is based on traditions and rituals rather than strict legal form (Ouchi, 1979). Information in the clan is passed on using a combination of rituals, stories and ceremonies which members learn over time and therefore a clan cannot cope with diversity of membership or a high turnover (Ouchi, 1979). Finally, in a clan control system, performance evaluation takes place through subtle reading of signals, which is only possible among intimate co-workers and cannot be translated into explicit, verifiable performance (Ouchi, 1980).

Existence and Operation of Clan Controls

There have been relatively few empirical investigations of clan controls in general, and in particular of how they operate in audit firms. Covaleski, Dirsmith, Heian and Samuel (1998) focused on how clan controls operate over audit partners and Dirsmith and Covaleski (1985) investigated the role of communication in socialising audit staff. Pierce and Sweeney (2005) investigated audit partners' views of the operation of clan controls in the Big Four audit firms in Ireland. In that study, the audit partners unanimously agreed that less formal controls are used in addition to formal control procedures to provide an additional layer of comfort on the quality of audit work. These less formal controls were identified as clan controls and were found to be embedded in the procedures and routines through which audit partners gain assurance on audit quality. Pierce and Sweeney (2005) identified four types of clan controls present in audit firms: partner intuition, informal communication, image management, and selection and training procedures.

Partner Intuition

Intuition of audit partners or the notion of a 'sixth sense' was identified as a key form of clan control by Pierce and Sweeney (2005) and all the partners interviewed in that study referred to the importance of their experience and insight in the control of audit quality. As Power (2003) pointed out, hunch and intuition are still very much part of the audit process despite attempts to increase the degree of structure and control in audit firms. The reliance by audit partners on their instincts arises from the obscurity (even to auditors themselves) as to what constitutes a good audit (Power, 2003). Pierce and Sweeney (2005) contended that while some control procedures may appear to an outsider to be informal, these procedures do not happen by chance, but instead are activated through the instinct and intuition of partners, and this constitutes a major component of the firms' control network.

Informal Communication

The use of an informal communication network in audit firms was found to be a manifestation of clan control, and these networks are used to exchange information between management and staff on a range of performance-related issues (Pierce and Sweeney, 2005). Pierce and Sweeney found that informal communication networks between partners and managers were regularly used to provide information on suitable staffing for audit engagements and also to provide details of staff performance. Further insights into modes of communication in audit firms were provided by Dirsmith and Covaleski (1985), who found contrasting views from staff and management on the role of informal communication, which led to use of the term 'non-formal communication', an additional form of communication used for mentoring and socialisation purposes in audit firms. This type of communication is thought to be separate and distinct from informal communication, which is considered more social in nature and akin to gossip (Dirsmith and Covaleski, 1985).

Image Management

Pierce and Sweeney (2005) found evidence that some audit partners engaged in image management, which is a form of clan control. Audit firms are extremely image conscious (Power, 2003) and they consistently try to ensure that they are promoting a positive image both externally and internally to control perceived audit quality (Pierce and Sweeney, 2005). Presenting and maintaining the correct image is an integral part of becoming an accountant and learning how to do so is part of the socialisation process that trainee accountants undergo (Anderson-Gough, Grey and Robson, 1998). Anderson-Gough et al. (1998) concluded that in addition to performing formal, technical services for clients, the trainee auditor must also incorporate the values and norms of the profession into their identity and behaviour in order to become a successful professional. In a clan system, agreement on appropriate behaviour is a fundamental condition (Macintosh, 1985) and in the audit environment, learning appropriate behaviour and promoting the correct image is a key feature of an accountant's professional persona (Anderson-Gough et al., 1998).

Selection and Training Procedures

Recruiting the right type of person is an important aspect of clan control (Ouchi, 1979) and in the audit environment audit partners are directly involved in the recruitment process (Pierce and Sweeney, 2005). However, in practice, achieving a good job/person fit can be difficult and therefore formal training helps to redress this deficiency in the recruitment process (Ouchi, 1979). In conjunction with formal...

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