tax practitioners willingness to trust clients

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

14'

0

o V

N

a

2 0

F .

V

6

s `ov

(C

2g

F .

> a

G

0

0

Q

7

C

u

ro

146

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


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


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 .


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


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


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)


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)


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


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 .

REFERENCES

American Institute of Certified Public Accountants (AICPA) (1999) . AICPA Professional Standards

(Vol . 2) . New York : AICPA .

Bandy, D ., Betancourt, L., & Kelliher, C. (1994) . An Empirical Study of the Objectivity of CPAs'

Tax Work. Advances in Taxation, 6, 1-23.

Boyle, R ., & Bonacich, P . (1970). The Development of Trust and Mistrust in Mixed-Motives

Games. Sociometry, 33, 123-139 .

Bums, J. 0., & Kiecker, P. (1995) . Tax Practitioner Ethics: An Empirical Investigation of

Organizational Consequences . The Journal of the American Taxation Association, 28(2),

20-49 .


163

Carnes, G . A ., Harwood, G. B ., & Sawyers, R. B . (1996) . The Determinants of Tax Professionals'

Aggressiveness in Ambiguous Situations . Advances in Taxation, 8, 1-26 .

Cloyd, C . B . (1995) . The Effects of Financial Accounting Conformity on Recommendations of Tax

Preparers. The Journal

ofthe American Taxation Association, 17(2), 50-70 .

Cuccia, A. D ., Hackenbrack, K

., & Nelson, M . W. (1995)

. The Ability of Professional Standards

to Mitigate Aggressive Reporting . The Accounting Review, 70(2), 227-248 .

Deutsch, M . (1958) . Trust and Suspicion . Journal of Conflict Resolution, 2, 265-279 .

Doucet, M . S ., & Hooks, K . L . (1999) . Toward an Equal Future. Journal of Accountancy (June),

71-76 .

Duncan, W. A., LaRue, D . W., & Reckers, P. M

. J . (1989) . An Empirical Examination of the

Influence of Selected Economic and Non-economic Variables in Decision Making by Tax

Professionals . Advances in Taxation, 2, 91-106 .

Fein, 5 . (1996) . Effects of Suspicion on Atributional Thinking and the Correspondence Bias .

Journal of Personality and Social Psychology, 70(6), 1164-1184 .

Hackenbrack, K ., & Nelson, M . W . (1996) . Auditors' Incentives and Their Application of Financial

Accounting Standards . The Accounting Review, 71(I), 43-59.

Hardin, R . (1993) . The Street-Level Epistemology of Trust .Politics and Society, 21(4), 505-529 .

Helleluid, R. T, (1989)

. Ambiguity and the Evaluation of Client Documentation by Tax

Professionals . The Journal of the American Taxation Association, 11, 22-36 .

Hilton, J. L., Fein, S ., & Miller, D . T . (1993) . Suspicion and Dispositional Inference .

Personality

and Social Psychology Bulletin, 19, 501-512 .

Kee, H . W., & Knox, R. E. (1970) . Conceptual and Methodological Considerations in the Study

of Trust and Suspicion. Journal of Conflict Resolution, 14, 357-366 .

Kramer. R. M. (1999) . Trust and Distrust in Organizations : Emerging Perspectives, Enduring

Questions . Annual Review of Psychology, 50, 569-598 .

Lagace, R . R ., & Gassenheimer, J . B . (1989) . A Measure of Global Trust and Suspicion : Replication .

Psychological Reports . 65, 473-474 .

LaRue . D ., & Reckers . P . M . J . (1989). An Empirical Examination of the Influence of Selected

Factors on Professional Tax Preparers' Decision Process . Advances in Accounting, 7,

37-50 .

Lindskold, S. (1978) . Trust Development, the GRIT Proposal, and the Effects of Conciliatory Acts

on Conflict and Cooperation . Psychological Bulletin, 85, 772-793.

Louwers, T. J

., Ponemon . L. A., & Radtke, R

. R . (1997). Examining accountants' ethical behavior :

A review and implications for future research . In : S . Sutton & V. Arnold (Eds), Behavioral

Accounting Research : Foundations and frontiers (pp . 188-221) . Sarasota FL: American

Accounting Association,

McDonald, A . P., Kessel, V . S ., & Fuller, J . B . (1972) . Self-Disclosure and Two Kinds of Trust .

Psychological Reports, 30, 143-148 .

Milliron, V . C . (1988) . A conceptual model of factors influencing tax preparers' aggressiveness .

In : 5 . Moriarity & .1 . H . Collins (Eds), Contemporary Tax Research (pp . 1-23). Norman

OK: The Center for Economic and Management Research, University of Oklahoma .

Pei, B . K. W., Reckers, P. M . J ., & Wyndelts, R . W. (1990). The Influence of Information

Presentation Order on Professional Tax Judgment . Journal of Economic Psychology, l1(I),

119-146 .

Pettigrew, T . F. (1958) . The Measurement and Correlates of Category Width as a Cognitive Variable .

Journal of Personality, 26, 532-544 .

Pilisuk . M ., Kiritz, S ., & Clampitt, S . (1971) . Undoing Deadlocks of Distrust : Hip Berkeley Students

and the ROTC . Journal of Conflict Resolution . 15, 81-95 .

164

WILLIAM SHAFER

Roberts, M. L

. (1998) . Tax Accountants' Judgment/Decision-Making Research : A Review and

Synthesis. The

Journalof the American Taxation Association, 20(l), 78-121 .

Rotter, J. B

. (1967). A New Scale for the Measurement of Interpersonal Trust.Journal

of

Personality, 35, 651-665.

Better, J. B . (1971) . Generalized Expectancies for Interpersonal Trust . American Psychologist, 26,

443-452 .

Rotter, J . B . (1980). Interpersonal Trust. Trustworthiness, and Gullibility . American Psychologist,

35, 1-7 .

Salterio, S ., & Koonce, L . (1997) . The Persuasiveness of Audit Evidence : The Case of Accounting

Policy Decisions . Accounting, Organizations and Society, 22(6), 573-587 .

Schisler, D . L. (1994) . An Experimental Examination of Factors Affecting Tax Preparers'

Aggressiveness: A Prospect Theory Approach . The Journal of the American Taxation

Association, 16(2), 124-142.

Schisler, D. L. (1995) . Equity, Aggressiveness, Consensus : A Comparison of Taxpayers and Tax

Preparers . Accounting Horizons, 9(4), 76-87 .

Shaub, M . K . (1996) . Trust and Suspicion: The Effects of Situational and Dispositional Factors on

Auditors' Trust of Clients . Behavioral Research in Accounting, 8, 154-174 .

Wrightsman, L . 5 . (1974) . Assumptions about human nature : A social-psychological approach .

Monterey CA : Brooks/Cole.

Wrightsman, L . S . (1991) . Interpersonal trust and attitudes toward human nature . In : J. Robinson,

P. Shaver & L. Wrightsman (Eds), Measures of Personality and Social Psychological

Attitudes (pp. 373-412) . London : Academic Press .

Yetmar, S. A., Cooper, R. W., & Frank, G . L . (1998) . Ethical Issues Facing CPA Tax Practitioners .

The CPA Journal (October), 29-33


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


Disagree Agree

1 2 3 4


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

tax practitioners willingness to trust clients

Documents

tax practice

issue of client reliance

tax return

tax reportingdecisions

tax literature

tax context

client data

issue of reliance