Case: Hamilton Wong, In-Charge Accountant

Place yourself in Hamilton Wong’s position. Would you report all of your time worked on the Wille & Lomax audit? Why or why not? Do you believe that Lauren Hutchison behaved unethically by underreporting the time she worked on that engagement? Defend your answer.

If we were placed in Hamilton Wong’s position, we would feel compelled to report the entirety of our time spent working on the Wille & Lomax audit. Although the practice of under-reporting hours, otherwise known as “eating time”, commonly takes place on audit engagements, especially at the junior levels, it is an extremely unethical act that can result in negative consequences for the firm later down the road. In Hamilton Wong’s position, we would feel obligated to report all of our hours, as it is our ethical responsibility to behave with integrity in our line of work. Beyond maintaining our own principles, the practice of under-reporting hours violates the rules regarding integrity within the AICPA Code of Professional Conduct. In our opinion, the potential short-term benefits of under-reporting our hours do not outweigh the potential risks of suspension or losing our job. In this case, Lauren Hutchison behaved very unethically by underreporting her time worked on the audit engagement. The act of “eating time” was made for completely selfish reasons, which were to make herself look superior in comparison to her peers and to impress her supervisors in light of a possible promotion. Under-reporting her time worked on the engagement results in an inaccurate representation of her efficiency and performance. Although it benefits Lauren in the short term by making her appear as a top performer, it only hurts the team as a whole for future audits as they will continue receiving low budget times that they may not be able to keep up with.

Academic research suggests that underreporting time on audit engagements is a common practice. What are the key objectives of tracking hours worked by individual accounts or assignments on audit engagements? What implications does the underreporting of time have for individual auditors, their colleagues, and the overall quality of independent audits?

The key objectives of tracking hours are to show which accounts require more time, highlight which areas are high risk, and measure the efficiency of auditors in the firm. Tracking hours are highly important in assisting in the preparation of the budget for the next year, negotiating next year’s fee, allowing management to make accurate business and resource decisions, reviewing overall approach to current engagements, and building client additional fees. These factors allow the firm to gauge their positioning and expose liabilities in which they can further improve upon. When time is underreported, it has negative implications for the individuals, their colleagues, and the firm itself. Underreported time can have a slippery slope effect and lead to future unethical behavior, as employees who get away with falsifying their hours believe they can get away with other unethical behaviors. Underreported time can also have a snowball effect, as colleagues will be encouraged to under-report their hours in order to keep up with others who are currently doing so. These under-reporters will receive unfair promotions, which can lower overall morale and productivity, eventually leading to poor evaluations and turnover. In terms of billing, clients will be billed incorrectly, as they are paying much less than the amount of work the auditors are providing. It is evident that the implications of under-reporting affect more than the individual auditor, rather it negatively affects colleagues, clients, and the firm itself.

What measures can accounting firms take to ensure that time budgets do not interfere with the successful completion of an audit or become dysfunctional in other ways?

In order to ensure that time budgets do not interfere with the successful completion of an audit, accounting firms should first strive to create a corporate environment in which employees feel encouraged to have honest and open conversations about under-reporting time. Ethical behavior should be firmly engrained in the company culture to prevent any further instances of under-reporting, along with the negative consequences that arise from them. Secondly, the firm can also attempt to set more realistic budgets for audit engagements, given the knowledge that under-reporting is a common practice. If the budget for hours is expanded to a more realistic level, employees will be less eager to under-report since the budget reflects the expected amount of time that should be allocated to the engagement. Finally, the firm should also consider instituting new policies regarding budgetary violations to discourage the behavior of “eating time” from occurring any further. Currently, employees are actually being rewarded for this unethical behavior of under-reporting their hours in the form of potential promotions because the appearance of accomplishing an engagement in fewer hours results in better performance, at least in the eyes of their supervisors. In reality, if the firm creates firm policies that fairly punish employees who under-report hours, this will disincentivize employees from pursuing this behavior any further. If these measures are taken, the firm can ensure that issues related to time budgets do not prevent the successful completion of an audit.

What measures can accounting firms take to reduce the likelihood that personal rivalries among auditors of the same rank with become dysfunctional?

Accounting firms can take several measures to reduce the likelihood of dysfunctional rivalries. First, firms should have structured incentive and promotion policies in place. These policies would level the playing field by instilling meritocracy and ensuring that individuals get promoted based on their performance, rather than their relationship to the decision-maker. Wong’s dilemma in the case resulted from Hutchinson’s close relationship to Sun, who was likely to be the decision-maker when it came to the promotion. Hutchinson’s under-reporting was used primarily to impress Sun. If structured incentive and promotion policies were put in place, Wong would not be incentivized to underreport because of Sun and Hutchinson’s relationship and Hutchinson would not be encouraged to falsify hours in order to impress Sun. It is also important for companies to create and instill a culture that does not foster in-fighting, yet still rewards performance. Employees should be encouraged to work with their colleagues, rather than against to earn promotions. If the correct policies are in place, employees will receive fair opportunities to advance and will not harbor ill feelings against colleagues who receive promotions.