In a previous study reported here Moriarity and Barron [1976] used conjoint measurement to model the materiality judgment process of audit partners. They did so following the approach suggested by Krantz and Tversky [1971] in which axiomatic conjoint measurement (ACM) is used to identify the functional form of the decision maker's judgment model, and then numerical conjoint measurement (NCM) is applied to find the best-fitting scale values (part-worth functions).' Shortly thereafter, the American Accounting Association's Committee on Human Information Processing (AAA [1978]) suggested that conjoint measurement would be useful in the study of certain aspects of human information processing in accounting research, particularly for testing alternative composition rules which uses only ordinal properties of the data [1978, p. 32]. Composition rules refer to the functional forms (e.g., additive, multiplicative, etc.) of decision makers' judgment models.2 In a later paper, Moriarity and Barron [1979] examined the preaudit materiality judgments of audit partners, in which they assumed an additive model and used a holistic orthogonal parameter estimation procedure (Barron and Person, [1979]). Swieringa [1979] criticized this

A between-subjects experiment was used to examine the effects of a decision aid in the AICPA's Audit Sampling Audit Guide on the magnitude and variability of auditor sample size judgments. Audit seniors were given background case information for a hypothetical audit task and were randomly assigned to one of three experimental groups: (1) an intuitive judgment group, (2) a decision aid group who calculated sample sizes using the AICPA Guide formula, or (3) a group who provided only the formula parameters from which the researchers later computed implied sample sizes. It was hypothesized that the sample sizes of group 2 would be larger than those of group 1 (due to insensitivity to power considerations), and that the implied sample sizes for group 3 would exceed those of group 2 (due to a tendency for auditors to ‘work backwards’ toward an intuitive sample size). Both of these hypotheses were supported by the data. However, a test for differences in variability indicated that the decision aid led to a greater degree of inconsistency in sample size judgments. Results were consistent over two levels of internal control.

In recent years, standard setters worldwide have considered how to enhance financial statement users’ understanding of the estimation uncertainty contained in many financial statement items. Our study examines two disclosures expected to help investors evaluate the reliability of subjective fair value estimates: a quantitative sensitivity analysis (QSA) and the auditor’s quantitative materiality threshold. Using an experiment, we predict and find that investors judge the reliability of a reported estimate to be higher and are more willing to invest when a QSA disclosure is indicative of low sensitivity (i.e., greater precision) compared to high sensitivity (i.e., greater imprecision), but only if the auditor’s materiality threshold is also disclosed. When materiality is not disclosed, investors fail to recognize differences in reliability between the two levels of sensitivity, even though the amount of imprecision in the low sensitivity condition represents a fraction of materiality, while in the high sensitivity condition, this amount exceeds materiality multiple times over. Furthermore, when both disclosures are absent and only a qualitative description of sensitivity is provided—as required by current standards—investors perceive the disclosure to be relatively uninformative and respond to the ambiguous disclosure by decreasing their willingness to invest. The results of our study should be informative to accounting and auditing standard setters as they continue to consider the types of disclosures that may help investors understand the most complex and subjective aspects of financial reporting.

Recent reviews of the academic literature indicate that little is known regarding how users evaluate the materiality levels auditors use or respond to quantitative materiality disclosure. Regulators around the world have taken different stances on whether materiality should, or should not, be disclosed in the auditor’s report. In response to the dearth of research on these policy decisions, we examine the effect of audit materiality disclosures, or lack thereof, on professional investors’ decision making across different investment contexts (debt vs. equity, public vs. private). Our study is designed to test global audit public policy and as such our hypotheses are motivated by assertions made by regulators, auditing standards, and audit theory. Among a sample of 246 professional investors in our main experiment and 91 professional investors in two supplemental experiments, we find no consistent evidence that investors incorporate materiality disclosures into their investment decisions. Most importantly, we find evidence that investors’ understanding of materiality is not in line with regulator assertions. For example, investors fail to make consistent connections between the amount of disclosed audit materiality and the level of auditor effort. Our results hold across debt and equity investment settings for both public and private companies. In sum, our findings suggest that disclosures of audit materiality are not well understood by professional investors and are not viewed as decision relevant. This research informs practitioners, regulators, and academics regarding the effect of materiality disclosure on investor decision making as well as stakeholders’ views and expectations of overall materiality.

This study examines how using the internal audit function (IAF) as a management training ground (MTG) affects external audit fees and the external auditors' perceptions of the IAF. Over half of all companies that have an IAF specifically hire internal auditors with the purpose of rotating them into management positions (or cycle current employees into the IAF for a short stint before promoting them into management positions). Using archival data, we find that external auditors charge higher fees to companies that use the IAF as a MTG. Using an experiment, we provide evidence as to why fees are higher. Specifically, we find that external auditors perceive internal auditors employed in an IAF used as a MTG to be less objective but not less competent than internal auditors employed in an IAF not used as a MTG. These results have important implications for the many companies that use their IAF as a MTG. Data Availability: Contact the authors. Data provided by the Institute of Internal Auditors Research Foundation are subject to restrictions.

Financial analysts are required to disclose conflicts of interest (COI) in their research reports, but there is limited evidence on the effectiveness of COI disclosures. We investigate whether the influence of disclosing COI in analyst reports on investors' decision making depends on investment horizon. Experimental results show that short-term investors who view a COI disclosure are significantly less willing to invest in the recommended stock compared to short-term investors who do not view such a disclosure, while the presence of a COI disclosure does not significantly affect long-term investors' willingness to invest. Results further demonstrate that the COI disclosure decreases short-term investors' willingness to invest by reducing their perception of analysts' trustworthiness and expertness. This study provides evidence on when and how the COI disclosure can influence investors' behavior and enhances our understanding of investors' reactions to cautionary disclaimers. Data Availability: Contact the authors.