Auditing, Analytical review judgement, Hypothesis set size, Time efficiency

When subject matter experts are consulted during an audit, the quality of the expert's advice depends upon their ability to fully understand and incorporate client‐specific facts into their advice. Public Company Accounting Oversight Board (PCAOB) inspection reports suggest that auditors are neglecting to perform the required work to assess the quality of experts' recommendations. This study examines how characteristics of the audit, notably staffing decisions, can impede auditors' ability to discern advice quality. In an experiment, we examine how receiving advice of different levels of quality (lower or higher incorporation of relevant client facts) and awareness at the planning stage of the use of a subject matter expert (a priori aware or unaware) impacts auditors' effort, utilization of the advice, and judgment accuracy. We find that awareness of an expert being employed led to a social facilitation effect such that auditors who were a priori aware put forth more effort prior to receiving the expert advice and were initially in less agreement with management's aggressive revenue recognition position than auditors who were unaware. Upon receiving the expert advice, auditors who were a priori aware were more accurate than auditors who were unaware. These results should interest both audit regulators and practitioners by demonstrating how the timing and communication of consulting decisions affect auditors' assessments of advice received from subject matter experts.

While accounting research has demonstrated the role of a decision maker's own emotions during judgments, psychology research proposes that others’ emotions provide an informational signal to assess an opponent's limits, cooperativeness, and toughness during bargaining. We examine how a bargaining opponent's emotions provide information signals that can be used by a selling division manager during transfer pricing decisions and whether informal control system choices by corporate management to foster cooperation can create a context that influences how managers react to these signals. In an experiment, when informal controls to encourage cooperation were absent (less collaborative environment), managers’ selling price estimates were more conciliatory when the opponent was described as displaying negative emotions than when described as displaying positive emotions. However, when informal controls to cooperate were present (more collaborative environment), managers’ selling price estimates were more conciliatory when the opponent displayed positive rather than negative emotions. Path analyses suggest that managers’ perception of their opponents’ signals is the mechanism by which opponents’ emotions influence transfer‐price decisions. This study highlights the role of others’ emotions as information signals during accounting bargaining and provides insight into the context dependency of opponents’ emotions under various control system structures.

Concerns over “revolving door” practices of companies hiring directly from their external auditor led to a Sarbanes-Oxley Act provision mandating a one-year cooling-off period before such hires can occur. Yet little is known as to whether these alumni affiliations, still prevalent today, actually impair audit quality. Drawing on Social Identity Theory, we conduct an experiment to examine whether auditors experience heightened identification with an alumni-affiliated client manager and, if so, how this perceived relationship affects their professional skepticism in response to a management persuasion attempt. As predicted, absent the use of a management persuasion tactic, auditors identify more with an alumni-affiliated manager than a non-alumnus with equal professional experience, and this perceived social bond enhances the manager's influence. However, the use of a common persuasion tactic, while effective at influencing auditor judgment when used by an unaffiliated manager, “backfires” when used by an alumni-affiliated manager, leading to diminished persuasion and increased professional skepticism. Evidence suggests that auditors are better able to identify the inappropriateness of the persuasion attempt when the tactic is used by an alumni-affiliated manager.

As remote auditing remains widespread, the profession is concerned that decreased auditor-client interactions and remote supervision challenges can reduce audit quality. In response, some firms have increased supervisor monitoring of remote auditors. We experimentally examine how two key remote audit factors, the spatial distance between auditors and clients and the frequency of supervisor monitoring, influence auditors’ judgments in creative tasks. We predict and find that working remotely facilitates auditors’ higher-level cognition that enhances creative hypothesis generation and improves decision quality when uncovering a seeded error if monitored less frequently than more frequently. More frequent monitoring constrains auditors, which squashes effort and creativity, diminishing the benefits of working remotely. Working onsite at the client location reduces the sense of psychological distance, thereby diminishing the difference between monitoring frequencies. These findings have implications for audit practice as working remotely can enhance performance on creative problem-solving tasks, but only when monitored less frequently.

Accounting decisions often involve similar types of judgments regarding different clients, projects, or employees. These tasks may use similar information items and be performed within the same work session. While independent consideration of the information for each respective decision may be desired, psychology research on contrast effects suggests that the information from a previous decision may be retained and compared to the information provided for a current judgment. Such contrast effects are potentially critical to accounting judgments because they suggest that the information associated with a given decision task will be evaluated differently depending on the nature of the prior contextual information. Using a multi-client audit context, we find that auditors are susceptible to contrast effects such that their judgments on a current client are influenced by their exposure to similar judgment information on a prior client. We also extend prior psychology and accounting research by examining and finding that for a current client, the magnitude of the contrast effect from an initial judgment task cascades to influence indirectly related subsequent judgment tasks for which no information from the prior client is available for comparison. We also find auditors' documentations of evidence are systematically affected by the contrast and cascading of contrast effects. Thus, our results provide support for contrast effects and, most important, the cascading of contrast effects to subsequent decisions.

Auditors frequently use benchmarking analysis to evaluate the appropriateness of a client's estimates. Client management may strategically select benchmark data, making an auditor's evaluation task more difficult. Psychology research suggests that the composition of the benchmark set can lead to contrast effects, because evaluations of an option in a choice set can change based on the inclusion of other options in the set. In Experiment 1, we examine and find that auditors' judgments of the reasonableness of a client-preferred discount rate for a Level 3 investment are inappropriately influenced by the set of peer companies provided by the client as justification. In Experiment 2, audit managers performing the same task similarly exhibited contrast effects. However, as managers' investment experience increased, the influence of contrast effects from the benchmark set decreased. Given the widespread use of benchmark data, contrast effects from benchmark set composition have implications for accounting and auditing contexts.