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TAX PRACTITIONERS' WILLINGNESS
TO TRUST CLIENTS: EFFECTS OF
PRIOR EXPERIENCE, SITUATIONAL
AND DISPOSITIONAL VARIABLES
William Shafer
ABSTRACT
This study investigates professional tax preparers' willingness to include
questionable client-provided data in a tax return without verifying the
information. Although a recent survey of tax practitioners by Yetmar et al.
(1998) found that the issue of reliance on client data is a significant ethical
problem in practice, a very limited amount of previous research has
investigated the factors that influence tax practitioners' reliance decisions .
In the current paper, the issue of client reliance is viewed as a problem of
trust and suspicion, and the general model of trust and suspicion proposed
by Kee and Knox (1970) is adopted as a conceptual framework for
addressing this issue. Based on this model and previous research findings,
it was hypothesized that client reliability, the client's year-end tax payment
status, the general propensity to trust others, and tax practitioners' attitudes
toward risk would influence reliance decisions. The findings, based on
a study of CPA tax practitioners, indicate that client reliability and
tax payment status each had a significant impact on client reliance .
However, contrary to expectations, the general tendency to trust others did
Advances in Taxation, Volume 13, pages 141-167.
Copyright2001 by Elsevier Science Ltd .
All rights of reproduction in any form reserved.
ISBN: 0.7623-0774-9
141
142
WILLIAM SHAFER
not influence client reliance decisions in a tax context . The results provide
mixed support for the hypothesized effects of tax preparers' risk attitudes
on decisions. The findings of the study also raise questions regarding the
appropriateness of tax practitioners' client reliance decisions .
INTRODUCTION
Although many studies in the tax literature have investigated professional tax
preparers' willingness to advocate aggressive return positions, very little empir-
ical research has examined the issue of reliance on questionable data supplied
by clients . However, recent evidence reported by Yetmar et al . (1998) suggests
that the latter issue is one of the most significant ethical issues in tax practice .
They surveyed a random sample of AICPA Tax Division members to determine
the extent to which 54 issues were perceived as significant ethical problems .
The results indicated that two of the top three ethical issues related to reliance
on client-provided information . The highest rated issue was "accepting a client's
deduction amount with partial or no documentation," while the third highest
rated issue was "not determining the accuracy of oral or written representations
made by the client." Based on a factor analysis of data obtained from twelve
tax managers and partners, Milliron (1988) also found that the perceived quality
of client records and client dependability significantly affect tax reporting
decisions. Taken together, these findings suggest that perceptions of client
(un)reliability can pose a significant dilemma in tax practice .
Despite the apparent significance of client reliability in tax reporting
decisions, very little empirical evidence relating to this issue has been reported .
Helleloid (1989) appears to be the only study that has addressed the effects of
client dependability on tax reporting decisions. His study investigated the effects
of the ambiguity associated with a client's auto mileage records on tax preparers'
recommended mileage deductions, reporting mixed results .
The current research extends the study of client reliance to explicitly address
the issue of trust and suspicion in a tax setting . In contrast to the Helleloid
(1989) study, which investigated the effects of perceived ambiguity of an
(apparently) honest client's records, the current study investigates CPAs'
willingness to rely on client data when the CPA has reason to question the
client's honesty or credibility, and the client has an incentive to cheat on
the tax return. To address these issues, the paper adopts the formal model of
trust and suspicion proposed by Kee and Knox (1970) . Based on this model,
it was hypothesized that perceptions of taxpayer reliability or trustworthiness,
based on prior experience in dealing with the client, would have a significant
impact on practitioners' willingness to include data in a tax return without
Tax Practitioners' Willingness to Trust Clients
1 43
examining supporting documentation . In addition, it was hypothesized that a
client's tax payment status would affect CPA trust and suspicion, through its
effect on perceived incentives to cheat . Finally, two dispositional or personality
traits : (I) the general predisposition toward trusting behavior, and (2) CPA risk
attitude, were hypothesized to influence client reliance decisions .
The data were obtained by mailing instruments to a random sample of AICPA
members in tax practice, who responded to two cases involving client reliance
issues. The results indicate that, as hypothesized, perceptions of taxpayer trust-
worthiness based on client-specific experience significantly affected reliance
decisions. Also, consistent with the research hypotheses, CPAs were more likely
to require supporting documentation for deductions claimed by taxpayers who
were in a tax due position at year-end, which suggests that tax practitioners
recognize the incentive effects created by the client's year-end payment status .
Contrary to expectations, the measure of propensity to trust others did not have
a significant impact on reliance decisions, and mixed support was obtained for
the hypothesized effects of risk attitudes on client trust .
The results of this study suggest that the Kee and Knox (1970) model may
provide a useful theoretical framework for the investigation of trust and
suspicion among tax preparers . The findings also raise questions regarding
the appropriateness of CPAs' client reliance decisions . Even in cases where the
client had overstated deductions or understated revenues in the past and
had current incentives to cheat, participants' mean estimate of the likelihood
of relying on questionable data ranged from approximately 30 to 40%. It is
suggested that future studies should try to obtain a better understanding of the
factors that affect client trust in tax preparation settings, and attempt to assess
the appropriateness of CPA tax practitioners' client reliance decisions .
The next section provides a review of relevant literature and develops the
research hypotheses . This is followed by discussions of the research method
and empirical findings . The final section of the paper contains a discussion of
the findings and limitations of the study, as well as suggestions for future
research .
LITERATURE REVIEW AND HYPOTHESIS
DEVELOPMENT
General Model of Trust and Suspicion
The problem of reliance on questionable client data may be viewed as an issue
of trust and suspicion . Rotter (1971 : 444) defined trust as :
144
WILLIAM SHAFER
. ., an expectancy held by an individual or a group that the word, promise, verbal or written
statement of another individual or group can be relied upon .
Suspicion, on the other hand, may be viewed as the complement of trust (Shaub,
1996). Kee and Knox (1970) defined a trust situation, broadly, as a scenario
involving two parties who are interdependent with respect to certain outcomes
defined by their joint choices . One of the parties (P) is confronted with the
choice of either trusting or not trusting the other (0), who in turn has a choice
of being either trustworthy or untrustworthy . Kee and Knox's basic conceptu-
alization of trust and suspicion is presented in Fig . 1 .
The model makes an explicit distinction between subjective and behavioral
trust or suspicion. Subjective trust refers to P's assessment of the probability
that 0 will be trustworthy, while behavioral trust refers to the manifest act of
trust. According to Kee and Knox, a person may manifest complete trust in
another until the assessed probability of trustworthiness falls below a critical
threshold, at which point the probability of trusting behavior will decline . The
level of this threshold will depend on situational variables, such as the risks
and rewards associated with trusting behavior. Subjective trust or suspicion
will be determined by P's perception of O's motives and/or competence . The
model recognizes three types of independent variables that may influence these
perceptions : (1) structural and situational factors, (2) dispositional factors, and
(3) previous experience .
Structural and situational variables include factors such as incentives, power,
and characteristics of the trusted party . Rational choice models of trust recognize
the influence of situational variables on trusting behavior . For example, Hardin
(1992) suggested that a critical element of a trusting relationship is the incentive
of the trustee to honor the trust . According to Hardin, a person will trust another
only if he/she believes it will be in that person's best interest to be trustworthy .
The influence of incentives on trust also is supported by research indicating
that suspicion is often triggered by situational cues that raise questions about
the motives of the trustee (Fein, 1996 ; Hilton et al ., 1993) . A rational choice
model of trust would also suggest that the relative power of the parties will
influence trusting behavior . For example, P will have a greater incentive to trust
0 if 0 is in a position of power relative to P. A number of studies also have
found that general characteristics of a trustee, such as their membership in
various social categories, influence trust (Kramer, 1999) .
Dispositional factors refer to characteristics of P, such as motivational
orientation, personality factors, and attitudes . According to Kramer (1999),
evidence from both laboratory experiments and field research indicates there are
significant individual differences in the predisposition to trust others, and the
predisposition toward trusting behavior is correlated with other dispositional
ctitioners' Willingness to Trust Clients
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WILLIAM SHAFER
orientations such as beliefs about human nature. Based on the results of several
studies, Rotter (1971, 1980) also concluded that individual differences in the
propensity to trust can be reliably measured and used to predict differences in
trusting behavior. Dispositional traits also include factors such as a person's
attitude toward risk . According to Kee and Knox (1970), the likelihood of trusting
behavior will be influenced by perceptions of the relative rewards and risks
associated with trust and betrayal . Thus, a person who is more tolerant of the risks
associated with betrayal should be more likely to engage in trusting behavior .
Kee and Knox (1970) acknowledged the importance of previous experience
in the development of trusting relationships by positing that experience affects
P's perceptions of O's trustworthiness directly as well as indirectly, through its
influence on situational and dispositional factors . Kramer (1999) also concluded
that perceptions of others' trustworthiness and the willingness to engage in
trusting behavior are largely dependent on past experience . Here a distinction
should be made between personalized or knowledge-based trust and generalized
trusting behavior. A great deal of research has demonstrated that interactional
histories between two parties serve a critical role in establishing personalized
trusting relationships (e.g. Deutsch, 1958 ; Boyle & Bonacich, 1970 ; Pilisuk et
al., 1971 ; Lindskold, 1978). In the context of the Kee and Knox model, the
interactional history between the two parties should directly affect P's percep-
tions of O's motives and/or competence, thus serving as a basis for personalized
trust between P and O .
Previous experience also may influence generalized trusting behavior through
its influence on dispositional and situational factors . For example, Rotter (1971,
1980) proposed that a person's early trust-related experiences will serve as a
basis for the development of general beliefs about the trustworthiness of others .
Such beliefs provide the basis for a person's predisposition toward trusting
behavior, which according to Rotter is a relatively stable personality trait.
Previous experience also may influence a person's perception of various
situational variables . For example, positive experiences with individuals from
a certain social category may carry over to future relationships, providing the
basis for "category-based trust" (Kramer, 1999) .
Applicability to Tax Practitioners
The Kee and Knox (1970) model has been applied to the study of trust and
suspicion among professional auditors (Shaub, 1996), and also provides a useful
framework for the study of client reliance decisions in tax practice . However,
due to important differences between auditing and tax practice, the willingness
to trust clients, as well as the variables that explain this trust, are likely to differ
Tax Practitioners' Willingness to Trust Clients
147
between the two contexts . For example, auditors have a professional responsi-
bility to be skeptical or suspicious of management assertions (AICPA, 1999,
AU 230.07), while tax preparers have both a right and a responsibility to serve
as advocates for their clients (AICPA, 1999, TX 112.04) . Thus, tax preparers
should be more likely than auditors to accept client-provided data at face value .'
Although tax preparers are not required to audit or otherwise verify data
supplied by their clients, if the preparer suspects that client-provided data are
incomplete or incorrect, then the preparer should make reasonable inquiries
to substantiate the information (AICPA, 1999, TX 132.02) . Thus, if a client
provides questionable information, tax professionals are faced with a choice of
either trusting the client and relying on the data, or attempting to verify the
propriety of the information . If the practitioner trusts the client but the client
betrays that trust by providing fraudulent data, both parties may face potential
penalties. The survey results reported by Yetmar et al . (1998) indicate that the
issue of client trust and reliance is perceived as a serious ethical dilemma by
professional tax practitioners, yet very little empirical research relating to this
issue has been reported .
A number of variables recognized in the Kee and Knox (1970) model may
influence tax practitioners' willingness to rely on client data . For example, prior
experience with the taxpayer potentially affects reliance through its influence
on perceptions of client dependability . As observed by Roberts (1998) . tax
practitioners should consider client dependability when evaluating the risks
involved in tax reporting . Based on interview data, client dependability was
identified by Milliron (1988) as one of several factors that affect tax preparers'
reporting decisions, but Helleloid (1989) is the only study that has attempted
to assess the effects of client dependability on tax reporting judgments .
Helleloid (1989) examined the effects of the ambiguity of a client's automobile
mileage records, operationalized as the frequency with which the auto mileage
log was updated, on tax professionals' recommended mileage deductions . The
results of an initial experiment indicated that the frequency with which the log
was updated had no significant effect on recommended mileage deductions . In
a follow-up experiment, the frequency of update had a statistically significant,
but rather small effect on recommended deductions . Helleloid (1989) concluded
that, overall, his subjects exhibited very limited sensitivity to the quality or
dependability of client records .
Although Helleloid's (1989) findings provide limited support for the effect of
client dependability on reporting decisions, his study did not address the issue of
CPAs' willingness to trust clients when they may have reason to suspect client
dishonesty, or the effects of the perceived incentives of the client to cheat on the
tax return . Based on the Kee and Knox (1970) model, the current study proposes
148
WILLIAM SHAFER
that prior experience with a client will influence subsequent client reliance
decisions through its effect on perceptions of the client's trustworthiness . The
effects of prior experience on CPAs' willingness to rely on client-provided data
is an important issue that has not been addressed by previous research .
Although the issue of client credibility or trustworthiness has received very
little attention in the tax literature, several studies have investigated the effects
of client aggressiveness, or client risk preferences, on CPAs' advice (e.g . Cloyd,
1995; Cuccia et al ., 1995; Schisler, 1994; Duncan et al ., 1989) . The results of
these studies generally have indicated that CPAs attempt to accommodate the
risk preferences of their clients ; i .e . they are more (less) likely to make aggres-
sive reporting decisions for aggressive (conservative) clients (Roberts, 1998) .
Analogous reasoning might suggest that CPAs will be more likely to rely on
questionable data supplied by more aggressive or untrustworthy clients ;
however, there are important differences between the two situations. According
to the AICPA Statements on Responsibility in Tax Practice, it is permissible
for a tax practitioner to advocate an aggressive tax return position for a client,
provided the practitioner has a good faith belief that there is a realistic possibility
the position will be sustained on its merits if challenged by the IRS (AICPA,
1999, TX 112 .05) . Thus, advocating an aggressive (but not fraudulent) position
to accommodate the risk preferences of a client does not violate the CPA's
ethical standards, provided the realistic possibility standard has been met . In
contrast, if the CPA believes that a client has supplied fraudulent data,
completing the return without making reasonable inquiries regarding the data
would be a clear violation of professional standards . Accordingly, CPAs should
be less willing to accommodate their clients' preferences if they feel they have
supplied unreliable or fraudulent data .'
This reasoning is consistent with recent studies in the auditing literature, which
have shown that client preferences influence auditor judgment for accounting
issues that are in the "gray area," but not for issues that represent clear violations
of GAAP (e.g. Salterio & Koonce, 1997). Thus, if past experience with a client
raises credibility questions, then tax practitioners should be less willing to rely
on the data without verification, as reflected in the following hypothesis .
Hypothesis 1 . Tax practitioners will be more (less) willing to rely on
questionable data provided by a client whose information has been reliable
(unreliable) in the past .
An important situational variable recognized in the Kee and Knox (1970) model
is the effect of incentives for dishonest behavior . Several studies in the tax
literature have suggested that a client's year-end tax payment status affects
Tax Practitioners' Willingness to Trust Clients
149
incentives to adopt aggressive positions (e .g . Duncan et al ., 1989; LaRue &
Reckers, 1989 ; Schisler, 1994, 1995) . Specifically, an underwithheld client
should have a greater incentive to engage in aggressive or fraudulent reporting .
This incentive effect may be explained by the potentially disruptive conse-
quences of having to make an unexpected payment, or more formally based on
Prospect Theory, which suggests that the potential-loss framing effect for the
unexpected payment would result in risk-seeking behavior (Roberts,l998) . It
has been suggested that tax practitioners also will make more aggressive
decisions for clients who are in an underwithheld position, in an effort to satisfy
the client (LaRue & Reckers, 1989) .
Based on a review of the empirical findings on this issue, Roberts (1998)
concluded that year-end payment status alone does not appear to affect tax
preparers' decisions, but payment status does interact with other variables such
as client risk preferences to affect the likelihood of aggressive reporting . For
example, Schisler (1994, 1995) found that payment status increased the
likelihood of aggressive recommendations when the client was described as
aggressive, but not when the client was described as conservative . These findings
suggest that tax practitioners recognize the incentive effects arising from the
client's year-end payment status, and attempt to make reporting decisions that
are consistent with the client's preferences (Roberts, 1998) .
In situations involving decisions of whether to rely on questionable data, tax
practitioners also should recognize the incentive effects of the client's year-end
payment status . The current study proposes that recognition of the incentive
created by underwithholding will reduce the likelihood that the CPA will rely
on questionable client data without verification . This proposal may appear
inconsistent with previous findings that CPAs will attempt to satisfy their clients
by making aggressive reporting decisions . However, as previously explained,
there are important qualitative differences between the two situations . If the
CPA suspects that the client has provided incorrect or fraudulent data, accepting
such data without documentation will be difficult to rationalize on the basis of
"client preferences." Thus, the following hypothesis is proposed :
Hypothesis 2. Tax practitioners will be less (more) willing to rely on
questionable data provided by clients who are in an underwithheld (over-
withheld) position .
Dispositional factors, or personal characteristics of tax preparers, also should
influence their willingness to rely on client data . Kee and Knox (1970)
acknowledged the potential effects of variables such as motivational orientation,
personality factors, and attitudes on trust. The CPA's propensity to trust others
1 5 0
WILLIAM SHAFER
is one personality trait that potentially influences their willingness to rely on
their clients .
Although individual differences in trusting behavior appear to be widely
acknowledged, very little research has investigated whether such differences
influence behavior in a professional context such as tax preparation . Rotter
(1971) suggested that dispositional trust is a relatively stable personality trait,
which indicates that its influence may carry over to professional decision making
contexts. Shaub (1996) tested the relationship between dispositional trust,
measured using the Wrightsman (1974) trustworthiness scale, and auditors'
judgments regarding the reliability and accuracy of client data . Subjects' propen-
sity for trusting behavior did not significantly influence their professional
judgments in any of the eight cases examined . Shaub (1996) suggested this lack
of significant results may have been due to the fact that all his subjects were
seniors or managers who worked for the same public accounting firm ; thus,
firm training and socialization may have produced a relatively homogeneous
set of subjects who were more influenced by firm policy than by personal dispo-
sitions . Thus, in a less homogeneous subject group, dispositional trust should
be more likely to influence judgments, as reflected in the following hypothesis .
Hypothesis 3 . Tax practitioners' who have a higher (lower) propensity
to trust others will be more (less) willing to rely on questionable client
data .
Another dispositional factor that potentially affects client reliance decisions is
the tax preparer's attitude toward risk in tax matters . CPAs who are risk averse
should be less willing to risk the potential preparer penalties and other sanc-
tions that could result from improper reliance on questionable client data.
Although relatively few studies have investigated the effects of CPAs' risk atti-
tudes on tax reporting decisions, they have generally found support for their
influence (Roberts, 1998) . For example, Pei et al. (1990) found that tax prac-
titioners' self-assessments of their aggressiveness affected reporting judgments .
Carnes et al. (1996) reported that preparers' risk attitude was the only variable
that consistently influenced the aggressiveness of their recommendations across
both low and high ambiguity tax cases . Finally, Schisler (1994) found that prac-
titioners' risk preferences had a significant impact on their estimates of the
probability that they would recommend a questionable deduction. Based on
these research findings, the following hypothesis is proposed .
Hypothesis 4 . Tax practitioners' who are more (less) risk averse in tax
matters will be less (more) willing to rely on questionable client data .
Tax Practitioners' Willingness to Trust Clients
151
RESEARCH METHOD
The data for this study were obtained by mailing instruments to a random
sample of AICPA members whose membership information indicated that they
were in public accounting practice, and that they had an interest in taxation .
This section describes the research instrument and the participants .
Instrument
The research instrument included: (1) a cover letter, (2) two tax cases, (3) the
MacDonald et al . (1972) Self-Report Trust Scale, and (4) a supplemental data
sheet.' To enhance external validity, two separate tax cases were used . Client
reliability and tax payment status were manipulated on a between-subjects basis
for both cases, which are illustrated in Appendix 1 .
In the Low Reliability conditions, the case indicated that in the past the client
had been unable to provide documentation relating to certain deductions (Case
1), or that the CPA had discovered several errors in the client's records in the
past (Case 2) . In the High Reliability conditions, the case indicated that
all information supplied by the client in the past had proven to be reliable . 4
Tax payment status was manipulated by indicating that the client either had a
significant amount of tax due, or should receive a significant tax refund . The
cases were reviewed by three CPA firm partners, who indicated that they seemed
realistic, and that they had encountered similar situations in the past . Taxpayer
aggressiveness and payment status were crossed to create four versions of each
case, and each potential subject was randomly assigned to one of the four
versions of each case .
To assess their willingness to rely on client-provided data, participants were
asked to estimate the likelihood that they would prepare the client's tax return
without attempting to verify the propriety of reported expenses . Responses
were provided on an eleven-point Likert scale anchored on "0%" and "100%" .
Several additional questions served as manipulation checks and provided data
for supplemental analyses. To assess the effectiveness of the client reliability
manipulation, subjects were asked to rate the reliability of the information
supplied by the client on an eleven-point scale anchored on "very unreliable"
and "very reliable". To test the manipulation of tax payment status, participants
estimated the strength of the client's incentives to overstate deductions on an
eleven-point scale anchored on "very weak incentive" and "very strong incen-
tive" . Finally, to assess the realism of the cases, subjects were asked to estimate
the likelihood of encountering similar situations in their tax practice . Responses
152
WILLIAM SHAFER
to this question were provided on an eleven-point scale anchored on "0%" and
"100%d' .
The McDonald et al . (1972) Self-Report Trust scale was used to measure
respondents' predisposition toward trusting behavior. This scale was developed
based on Rotter's (1967) Interpersonal Trust Scale . Reliabilities for this scale
reported in previous studies have ranged from 0 .70 (Lagace & Gassenheimer,
1989) to 0 .84 (McDonald et al., 1972). The scale, which is illustrated in
Appendix 2, consists of ten items, each of which is scored on a scale of one
to four, where four indicates more trusting behavior . A total score for each
subject is obtained by summing responses to the ten items .
To obtain a measure of risk attitudes, the supplemental data section included
a question that asked participants to assess their own attitude toward risk.
Following Carnes et al . (1996) and Schisler (1994), risk preferences were
obtained using a single measure of risk propensity in tax matters .' Responses
were provided on an eleven-point Likert scale anchored on "very conservative"
and "very aggressive ."
Participants
Instruments were mailed to a random sample of 1,000 AICPA members . After
a follow up mailing, a total of 256 usable responses were obtained, providing
a response rate of approximately 25% . A comparison of the responses to the
tax case and demographic data for the early and late respondents indicated no
significant differences . A demographic profile of participants is provided in
Table 1 . As indicated in the table, 81% of the respondents were male, and
approximately 98% were either partners or managers in public accounting firms .
Since most respondents were partners or managers, it is not surprising that the
sample was predominantly male. Data reported by Doucet and Hooks (1999)
indicated that in 1997, males accounted for 84% of all partners in public
accounting firms . Thus, the gender composition of the sample appears to be
approximately representative of this population . The fact that virtually all
respondents were either partners or managers suggests that higher level
employees may be more likely to respond to surveys ; however, this was
not considered a cause for concern because these are the employees who are
most likely to make the ultimate decision regarding reliance on client-provided
information .
Approximately 95% of the participants were employed by local or regional
accounting firms . All respondents indicated a taxation interest in their AICPA
membership information, and on average they spent approximately 60% of their
time in the tax area . Since both cases dealt with small tax clients, it appears
Tax Practitioners' Willingness to Trust Clients
153
Table 1. Demographic Profile of Participants .
' Scores could range from 10 (least trusting) to 40 (most trusting) .
2
Responses were provided on an eleven-point scale where 0 = "Very conservative" and 10="Very
aggressive".
Number Percent
Sample Size 256
Gender:
Male 208 81 .3
Female 48 18 .7
Position :
Partner 196 76 .6
Manager 56 21 .9
Supervisor and below4
1 .5
Firm size :
NationalJlnternational 12 4.7
Regional/Local 244 95 .3
Highest Degree :
Bachelors 160 62 .5
Masters 88 34 .4
Other (e.g. JD, Ph.D .)
83 .1
Age:
Mean 46 .3
Standard deviation 10 .3
Public accounting experience (years) :
Mean 19 .6
Standard deviation 10.8
Percentage of time spent doing tax work :
Mean 58%
Standard deviation 25
Responses to Self-Report Trust Scale :
Mean' 26 .6
Standard deviation2 .9
Attitude toward risk in tax matters :
Mean 5 .1
Standard deviation 2 .0
154
WILLIAM SHAFER
that they were appropriate for this participant group . However, it should be
recognized that the findings of this study may not be generalizable to employees
of national or international accounting firms . The majority of respondents had
not earned a graduate degree . The average participant was 46 years old and
had almost 20 years of public accounting experience .
Table 1 also reports information on participants' dispositional trust and tax
risk attitude. The reliability of the Self-Report Trust Scale, based on coefficient
alpha, was 0 .72, which appears to be acceptable . The mean value for self-
reported trust was approximately at the midpoint of the scale, which is
comparable to the results reported by Lagace and Gassenheimer (1989) based
on a sample of 242 adults . The standard deviation of trust scores was small
in relation to the mean, which indicates that participants were relatively homo-
geneous in terms of dispositional trust . Responses to the tax risk attitude measure
indicate that participants in the current study were slightly more conservative
than those included in prior studies in the tax literature, and that significant
individual differences in context-specific risk attitudes existed
. 6
RESULTS
Responses to Tax Cases and Preliminary Analysis
A summary of responses to the tax cases is provided in Table 2 . As the data
indicate, participants' mean estimates of the likelihood they would include the
questionable deductions in the client's tax return without examining supporting
documentation or otherwise verifying them ranged from approximately 42 (32)
to 73 (55) percent for Case 1 (2). For both cases, the lowest estimates were
obtained for the Low Reliability, Tax Due condition, and the highest estimates
were for the High Reliability, Refund condition, which is consistent with
the research hypotheses . The responses also indicate significant variation in
participants' willingness to rely on questionable client data, based on the
relatively large standard deviations of the estimates .
Responses to the manipulation checks are summarized in Table 3 . The
estimated reliability of the client-provided data was used to test the effectiveness
of the reliability manipulation. One-way ANOVA models with estimated
reliability as the dependent variable and manipulated reliability as the independent
variable indicated that the effects of the manipulation were significant at the
0.0001 level for both cases, although the effect appears to be more pronounced
for Case 1 . Participants' estimates of the strength of the hypothetical client's
incentives to overstate their reported expenses served as a check for the payment
Tax Practitioners' Willingness to Trust Clients
1 5 5
Table 2 . Responses to Tax Cases : Estimated Likelihood of Client Trust .
I Reported numbers are mean responses. Numbers in parentheses represent standard deviations .
2
All responses were provided on an eleven-point scale where 0="0%" and 10="100%" .
status manipulation. One-way ANOVA models with estimated incentives as the
dependent variable and payment status as the independent variable indicated that
the effects of this manipulation also were significant at the 0 .0001 level for both
cases. To assess the realism of the cases, respondents were asked to estimate
the probability that they could encounter similar situations in their tax practice .
The mean estimates reported in Table 3 ranged from 64 (61) to 75 (72) percent
for Case 1 (2), which indicates that the hypothetical scenarios were perceived as
Reliability
Low High Pooled
Case l :
Payment Status :
Tax Due'4.21 6.08 5 .05
(3 .07) (3.41)
(3 .32)
n=68n=56 n=124
Refund 5 .75 7 .29 6 .54
(2 .79) (2 .45) (2 .70)
n=64 n=68 n=132
Pooled 4.96 6.74 5 .82
(3 .04) (2 .90) (3 .13)
n=132 n=124 n=256
Case 2 :
Payment Status :
Tax Due 3.23 4.20 3 .73
(2.14) (3 .05) (2.88)
n=66 n=70 n=136
Refund 4.20 5 .53 4 .91
(2 .62) (2 .83) (279)
n=56 n=64 n=120
Pooled3.67 4.84 4.28
(2 .55) (2 .97) (2.93)
n=122 n=134 u=256
' Reported numbers are mean responses . Numbers in parentheses represent standard deviations.
2
Responses were provided on an eleven-point scale where 0 ="very unreliable" and 10 ="very
reliable" .
3 Responses were provided on an eleven-point scale where 0="very weak" and 10="very strong" .
4 Responses were provided on an eleven-point scale where 0 = "0%" and 10 = "100%" .
relatively realistic. Consistent with the findings of Yetmar et al . (1998), these
results also suggest that the problem of reliance on questionable client data is a
significant ethical issue in tax practice .
Univariate ANOVA and regression models were used to test for possible
effects of various demographic factors on participants' willingness to rely on
client data . Univariate ANOVA models indicated that neither gender, position
(partner vs. manager), education level (bachelors vs. masters), nor firm type
(nationallinternational vs . regional/local) had a significant influence on reliance
decisions. Linear regression models also revealed that age, years of experience,
156 WILLIAM SHAFER
Table 3 . Manipulation Checks and Supplemental Data .
Reliability
Low High
Refund Tax Due Refund Tax Due
Case 1 :
Reliability'' 4.25 4 .00 8 .55 6 .67
(1 .90) (2.25) (1 .03) (2 .41)
Incentives' 3.89 8 .21 1 .82 6 .29
(1 .96) (1 .43) (1 .18) (1 .63)
Likelihood of similar simations 4 7 .21 7 .46 6 .42 7 .05
(1 .36) (1 .13) (1 .47) (1 .25)
Case 2 :
Reliability' 3 4.33 3 .03 5 .60 4 .39
(2.77) (2 .23) (1 .68) (1 .69)
Incentives 3 4.33 7 .10 4 .07 7 .20
(2 .50) (1 .81) (1 .73) (1 .57)
Likelihood of similar situations 4 6.48 7 .19 6 .14 6 .78
(1 .11) (1 .36) (1 .35) (1 .04)
Tax Practitioners' Willingness to Trust Clients
1 57
and the percentage of time spent doing tax work generally did not affect
reliance
.7
Based on the lack of significant influence of demographic factors on
client reliance decisions, these variables were excluded from subsequent
analyses .
Hypothesis Tests
The hypotheses were tested using analysis of covariance (ANCOVA) models .
The results of the models for both cases are included in Table 4 . Both models
include client reliability and year-end tax payment status as between subjects
variables, and self-reported trust and risk attitude as covariates
s
The model
for Case I indicates that the effects of both client reliability and payment
status were highly significant, while their interaction was not .' These results
Table 4. ANCOVA Results .
' Reported significance levels are based on one-tailed tests .
Sum of
Squares F-value
Significance
Level'
Case 1 :
Between-subjects effects :
Reliability 178 .8 22.3 0.000
Payment status 108 .4 13 .1 0.000
Reliability*Payment status 0 .7 0 .1 0.770
Covariates :
Self-reported trust 0 .1 0 .0 0.947
Risk attitude 87 .9 10.9 0.001
Model R2
0.19
Case 2-
Between-subjects effects:
Reliability 40.1 4 .8 0.030
Payment status 39.0 4 .6 0
.032
Reliability*Payment status 10.21.2 0 .270
Covariates :
Self-reported trust 21 .3 2 .5 0 .112
Risk attitude 11 .3 1 .3 0.246
Model R 2
0.06
158
WILLIAM SHAFER
provide support for Hypotheses 1 and 2. Participants' tax risk attitude also had
a significant effect on their reliance judgments . As indicated in Hypothesis 4,
subjects who rated themselves as more aggressive were more likely to accept
questionable data without verification . Contrary to Hypothesis 3, the effects of
self-reported trust on reliance decisions did not approach significance .
The results for Case 2 also indicate that the effects of reliability and payment
status were significant, although to a lesser degree than for Case 1 . These find-
ings also support Hypotheses 1 and 2 . As in Case 1, the interaction of reliability
and payment status did not approach significance . For Case 2, neither of the
covariates were significant . Thus, the results for Case 2 failed to support
Hypotheses 3 and 4 .
DISCUSSION, LIMITATIONS, AND SUGGESTIONS
FOR FUTURE RESEARCH
The results of this research support the hypothesized effects of client reliability
on practitioners' willingness to accept questionable client-provided data . The
effects of reliability on CPAs' reliance decisions were significant for both of
the cases examined . Thus, CPAs' willingness to trust clients appears to be
dependent on prior history in dealing with the client . This result is consistent
with prior research on trust and suspicion, which has demonstrated that trust is
largely a history-dependent process (Kramer, 1999) . The findings also support
the hypothesized effects of the client's year-end tax payment status on CPAs'
acceptance of questionable data. Apparently, tax preparers recognize the incen-
tive effects of the client's payment status, and act more cautiously when the
client has an incentive to "cheat" on the return .
The study failed to support the hypothesized effects of the predisposition
toward trusting behavior on client reliance . The lack of significant results
may be due to the fact that participants' attitudes toward trust were relatively
homogeneous, as reflected in the small standard deviation of responses to the
Self-Report Trust Scale . This explanation is consistent with Shaub's (1996)
speculation that the lack of significance of dispositional trust in his study was
a result of the high degree of homogeneity of his sample . Although the sample
in the current study was less homogeneous than that of Shaub (1996) in the
sense that participants did not work for the same firm, individual differences
in dispositional trust appeared to be relatively small . The lack of significance
for dispositional trust also may be attributable to the fact that context-specific
information, such as the prior history of dealings with a particular client, over-
rides the general predisposition toward trusting behavior . Rotter (1971)
Tax Practitioners' Willingness to Trust Clients
1 5 9
suggested that general tendencies toward trust will be most effective in
predicting behavior in unusual or novel situations . This may explain why this
personality trait was not an effective predictor of trusting behavior in familiar
professional contexts such as those examined in this study and in the Shaub
(1996) study .
The findings of this study provide mixed support for the hypothesized effects
of tax preparers' risk attitudes on their willingness to accept questionable data .
The effects of risk attitude were significant for Case 1, but not for Case 2 . The
lack of significance for Case 2 appears inconsistent with recent research findings .
In a study that employed 18 different tax scenarios, Carnes et al . (1996) found
that contextual differences had a significant effect on tax preparers' willingness
to support clients' return positions ; however, practitioners' risk propensity was
a significant explanatory variable across all the scenarios tested .
The primary difference between the two cases is that Case I dealt with the
taxpayers' personal tax return, while Case 2 dealt with the corporate tax return
for a small business . If most subjects perceived a low level of risk associated
with Case 2, this could explain why risk attitude was not a salient determinant
of client reliance . However, the data indicate that, compared to Case 1, subjects
estimated a lower likelihood of client reliance, rated the reliability of the client's
data lower, and generally felt that the client had a greater incentive to cheat
in Case 2 . These results suggest that there was a significant amount of risk
associated with Case 2 and, accordingly, that risk attitude should have affected
judgments . One possibility for the differential results may be that participants
perceived the threat of IRS audit or penalties to be lower in Case 2 than in
Case 1 . Due to the lack of a clear explanation for the inconsistent results, future
research should attempt to clarify the effects of risk attitude on tax practitioners'
client reliance decisions .
The current study was an attempt to gain a better understanding of CPAs'
willingness to rely on questionable client data, and the factors that influence such
reliance decisions . The findings of the study are subject to a number of limitations
and should be interpreted with caution . For example, most respondents were
employed by local CPA firms. If systematic differences exist between the
judgments of tax practitioners employed in large and small firms due to
differences in such things as selection, training or socialization, then the findings
of the current study may not be generalizable to employees of national or inter-
national firms . Also, although the response rate was comparable to that typically
obtained in this type of study (e.g. Bandy et al., 1994 ; Schisler, 1994), there is
a chance that the results were affected by nonresponse bias . The generalizability
of the findings to practice settings also is an open question . An attempt was made
to capture some of the key contextual influences on CPAs' reliance decisions in
160
WILLIAM SHAFER
the hypothetical cases ; however, client reliance decisions in practice may be
affected by factors not addressed in the current study, such as economic
incentives .
The findings of this study have implications for tax compliance and profes-
sional ethical standards . From a public policy perspective, an important issue
is whether professional tax preparers are in effect aiding noncompliance by
failing to question client data that appear suspect.
Previous research has demonstrated that, given an incentive to do so, tax
professionals are willing to exploit the ambiguity provided by either vague
professional standards or weak evidential support in order to justify a client's
aggressive reporting position (Cuccia et al ., 1995) . The results of the current
study suggest that, at least in some cases, practitioners may also choose to ignore
suspicions of client improprieties rather than demand supporting documentation.
The AICPA Statements on Responsibility in Tax Practice (SRTPs) (AICPA,
1999) stipulate that if a paid preparer has reason to suspect that client data is
incorrect or incomplete, then further inquiries should be made to substantiate
the validity of the information . In the current study, even when participants
felt that the hypothetical taxpayer was relativley unreliable and had a strong
incentive to cheat, they estimated a 30 to 40% likelihood that they would accept
the client's deduction amounts without asking for any supporting documentation .
The results also suggest a general lack of consensus among CPA tax practi-
tioners regarding when client reliance is justified .
Thus, future research should attempt to establish a baseline for what consti-
tutes reasonable client reliance, and address the issue of the appropriateness of
reliance by CPAs and other professional tax preparers . 10 One possible approach
for addressing the issue of whether CPAs' willingness to rely on client data
is reasonable would be to compare CPA tax practitioners' reliance judgments
with those of IRS agents or other professional groups such as attorneys and
non-licensed tax preparers . If future studies conclude that CPA tax practitioners
appear too eager to rely on questionable data, then perhaps professional stan-
dards should be modified to clarify the tax preparer's professional responsibility
to verify such data.
Future research also should attempt to obtain a better understanding of the
factors that influence tax practitioners' client reliance judgments . The current
study addressed the effects of only one situational and two dispositional
variables on client trust, and the relatively low RI values for the ANCOVA
models suggests that other variables may play an important role in explaining
variation in professional judgments .
Roberts (1998) recognized the potential influence of numerous situational or
environmental variables on tax practitioner judgment . For example, factors such
Tax Practitioners' Willingness to Trust Clients
161
as client importance, client tenure, and client sophistication may influence
reliance decisions . Kee and Knox (1970) also recognized the potential influence
of variables such as the relative power of the parties involved on trust and
suspicion . In a tax preparation context, the relative power of the parties will be
influenced by economic considerations such as client importance. Previous
studies have shown that economic incentives of this nature may influence CPA
tax practitioners' ethical judgments (e .g . Burns & Kiecker, 1995) ; thus, such
incentives may play a role in client reliance decisions. Other potential situational
influences include factors such as the perceived IRS audit probability and
perceived likelihood of monetary penalties or other sanctions (Roberts, 1998).
Other dispositional traits also could be examined. The current study generally
found no evidence that demographic variables such as age, years of experience,
gender, or education level affect client trust . However, other personality
characteristics such as ethical attitudes or ethical development may influence
client reliance. For example, studies in the auditing literature have found that
individual differences in cognitive moral development can have a significant
influence on professional judgment (Louwers et al ., 1997). The influence of
such factors on client reliance in a tax setting also could be investigated.
NOTES
I . Of course, one could question whether auditors do actually exercise the level of
skepticism toward client assertions that is required by professional standards . For
example, recent research suggests that auditors' reporting judgments may be biased by
their economic incentives (Hackenbrack & Nelson, 1996) . An inherent bias toward
supporting the client's position is likely to be present in both auditing and tax practice .
Nevertheless, the fundamental differences in professional responsibilities between the
two contexts should produce differences in trusting behavior .
2 . This discussion is not intended to imply that economic considerations, such as the
fear of losing the client, will not influence tax practitioners' judgments . Previous research
by Bums and Kiecker (1995) indicated that tax practitioners are more likely to encourage
their clients to overstate their deductions when their firm benefits from such actions .
However, the current study proposes that, ceteris paribus, knowledge that the client is
not trustworthy should cause the CPA to be more cautious in relying on data that appear
suspect .
3. The two tax cases were presented first, followed by the Self-Report Trust Scale
(STS) and the supplemental data sheet. To test for possible effects of completion of the
experimental cases on the general propensity toward trust, responses to the STS were
compared for participants who received : (I) the low reliability version of both cases, (2)
the high reliability version of both cases, and (3) a mixture of low and high reliability
cases . There were no significant differences in the mean responses to the STS among these
three groups; thus, it appears that completion of the experimental cases did not have a
significant impact on the measure of general propensity toward trusting behavior.
162
WILLIAM SHAFER
4. As illustrated in the Appendix, in the low (high) reliability version of Case 1, the
taxpayer was described as aggressive (conservative) . These terms were intended to
convey the general idea of a taxpayer who is more (less) willing to take risks . As
observed by Helleloid (1989), more aggressive taxpayers are more likely to be viewed
as possessing low credibility or trustworthiness .
5 . Schisler (1994) also measured risk preferences using the Pettigrew (1958) Category-
Width instrument . However, the measure of risk preferences provided by this instrument
had no significant impact on tax practitioners judgments, while self-reported risk in tax
matters did have a significant influence .
6 . On average, Schisler's (1994) subjects rated themselves at 63 on a 100-point scale
of tax aggressiveness, where 50 represented the "average tax preparer ." Similarly, the
mean response for tax risk preferences in the Carnes et al . (1996) study was 4 .77 on a
7-point scale where 1 (7) represented "very risk averse" ("very risk prone") . The mean
risk attitude in the current study was approximately at the midpoint of the scale . The
standard deviation of tax risk attitude scores was approximately 40% of the mean
response in the current study, compared with 32% in the Schisler (1994) study . Standard
deviations were not reported by Carnes et al . (1996) .
7. Years of experience had a marginally significant effect (0 .05 level) on reliance
decisions for Case 1, but not for Case 2 . For Case 1, more experienced subjects estimated
slightly higher probabilities of relying on the client-provided data .
8 . The two covariates were not significantly correlated (Pearson r = 0 .03, two-tailed
significance level of 0.627) . Two alternative models that included only one of the two
covariates also were run for both cases . All substantive results and conclusions based
on these models were the same as those reported in Table 4 (i .e. the self-report trust
measure was not significant for either case, and tax risk attitude was significant for Case
I but not for Case 2) .
9. Interaction terms were included in the models to control for possible interaction
effects, although interactions were not formally hypothesized. None of the reported
results are significantly different when the terms are excluded from the models .
10. Client trust or the appropriateness of reliance on questionable data should be viewed
distinctly from the issue of recommending aggressive tax return positions . CPAs may
recommend "aggressive" positions if they have a good faith belief that such positions have
a "realistic possibility" of being sustained on their merits if challenged by the IRS .
However, intentional overstatements of expense or understatements of revenue reported by
a client obviously have no "merits," and would never be sustained if detected by the IRS .
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Tax Practitioners' Willingness to Trust Clients
165
APPENDIX 1
Experimental Cases
Case No. 1
Low Reliability, Tax Due :
Bob Jenkins and his wife Diane have been tax clients of your firm for several
years. Bob is president of a large local bank, and Diane is a partner in a local
law firm. Based on prior experience, you have found that the Jenkins are
aggressive taxpayers . In fact, on a few occasions they were unable to provide
documentation you requested relating to certain deductions they were claiming
on their return, such as charitable contributions and medical expenses .
Last week, you had a meeting with the Jenkins to discuss the current year's
tax return . Based on preliminary analysis of the data they provided, you
informed them that they had approximately $10,000 tax due . The Jenkins were
noticeably upset that their underpayment was so large. This week, Bob Jenkins
called you to say that he had overlooked a number of expenses relating to rental
properties they own . He faxed you a list of the additional expenses, which
included a variety of repair and maintenance items and other miscellaneous
expenses. The additional expenses totaled approximately $12,000 .
High Reliability, Tax Refund :
Bob Jenkins and his wife Diane have been tax clients of your firm for several
years. Bob is president of a large local bank, and Diane is a partner in a local
law firm . Based on prior experience, you have found that the Jenkins are very
conservative taxpayers, and that the information they have supplied you with
has been very reliable .
Last week, you had a meeting with the Jenkins to discuss the current year's
tax return . Based on preliminary analysis of the data they provided, you
informed them that they should receive a substantial refund . This week,
Bob Jenkins called you to say that he had overlooked a number of expenses
relating to rental properties they own . He faxed you a list of the additional
expenses, which included a variety of repair and maintenance items and other
miscellaneous expenses . The additional expenses totaled approximately $12,000 .
Case No. 2
Low Reliability, Tax Due :
For the past five years, you have prepared the personal tax returns for Richard and
Mary Cooper, as well as the corporate return for their family-owned advertising
166
WILLIAM SHAFER
agency, Advertising Solutions, Inc . Due to its small size, Advertising Solutions
has never been required to have a CPA associated with its financial statements .
The company submits its internally prepared statements to the local bank and to
your firm for tax return preparation . Not surprisingly, on several occasions in the
past you have noticed apparent errors in the Advertising Solutions financial state-
ments, which generally turned out to be either understatements of revenues or
overstatements of expenses .
Based on recent discussions with Richard Cooper, you expected Advertising
Solutions' profitability to increase significantly in the current year, since the
company performed a great deal of work for two large new clients during the
fourth quarter . Consequently, you informed Mr . Cooper that the company would
have a significant amount of tax due. However, when the Coopers submitted
the current year financial statements to you, you noticed that net income was
approximately the same as in the prior year . Although revenue did increase
significantly, the increase was largely offset by increases in travel, advertising
and promotion, and miscellaneous expenses . The Coopers were not able to
provide you with a specific explanation for the increase in these expenses .
High Reliability, Tax Refund:
For the past five years, you have prepared the personal tax returns for Richard
and Mary Cooper, as well as the corporate return for their family-owned adver-
tising agency, Advertising Solutions, Inc . Due to its small size, Advertising
Solutions has never been required to have a CPA associated with its financial
statements . The company submits its internally prepared statements to the local
bank and to your firm for tax return preparation . Despite the fact that the
Advertising Solutions financial statements have not been audited or reviewed,
they have appeared to be very reliable in the past .
Based on recent discussions with Richard Cooper, you expected Advertising
Solutions' profitability to decrease in the current year, due to the loss of two
large clients during the fourth quarter . Consequently, you informed Mr . Cooper
that the company should receive a substantial tax refund . When the Coopers
submitted the current year financial statements to you, you noticed that reported
net income was even lower than you anticipated . The decrease in income was
due to the loss of the two clients, as well as the fact that travel, advertising
and promotion, and miscellaneous expenses significantly increased . The Coopers
were not able to provide you with a specific explanation for the increase in
these expenses .
Tax P ct otters' Willingness to Trust Clients
167
APPENDIX 2
Self-Report Trust Scale
Please respond to each of the following statements by circling the number that
corresponds most closely with your personal attitudes :
I, 1 expect other people to
be honest and open .
(reverse scored)
2 . I am less trusting than
the average person.
(reverse scored)
3. 1 am more trusting than
the average accountant .
4 . 1 am suspicious of other
people's intentions .
5 . 1 am less trusting than the
average CPA in my area of
concentration . (reverse scored)
6. I have faith in human nature .
7 . 1 feel that other people can be
relied upon to do what they say
they will do .
8 . 1 feel that other people are out
to get as much as they can for
themselves .
9 . 1 have faith in the promises or
statements of other people .
(reverse scored)
Ip. I am cynical (pessimistic) .
I 2 4
Strongly Agree Disagree Disagree
Agree Strongly
1 2 3 4
Strongly Disagree AgreeStrongly
Disagree Agree
I 2 1 4
Strongly Disagree Agree Strongly
Disagree Agree
I 21
4
Often Sometimes Seldom Never
I 2 3 4
Strongly Disagree Agree Strongly
Disagree Agree
1 2 3 4
Strongly Disagree Agree Strongly
Disagree Agree
1 2 1 4
Nobody A few some Most
people people people
I 2 3 4
Most Some A few Nobody
people people people
I 2 3 4
Very Much Little Very
much little
1 2 3 4
Strongly Agree Disagree Strongly
AgreeDisagree