Offsetting Misstatements: The Effect Of Client Pressure And Materiality On Auditors’ Judgments

• In Event: Materiality

Abstract

This study examines the effect of client pressure and materiality on auditors’ judgments of detected misstatements that have offsetting effects on the client’s income. One hundred and forty-three experienced German auditors completed a case that varied the distribution of offsetting misstatements, client pressure, and materiality. The results show: First, for misstatements contained in two different accounts: client pressure lowers the proportion of auditors requiring full correction of the detected misstatements and the proportion of auditors who prevent client management from meeting the bonus constraint is higher when the net effect of the offsetting misstatements is more quantitatively material compared to when the quantitative materiality is small. Second, when two misstatements are contained in the same account, neither client pressure nor quantitative materiality impacts the proportions. Third, we find that audit experience, audit experience with listed clients, and the level of the team member impact the results. Finally, in spite of the statistical results, the overall findings show that the auditors in our study are less subject to client pressure and the effects of motivated reasoning than in prior studies. These results have important implications for researchers, practitioners and regulators.

Author

• William F Messier, University of Nevada-Las Vegas