The Effects of Prior Commitment, Risk of Material Misstatement and Type of Accountability on Auditors’ Evaluation of Subsequent Events

• In Event: Misstatement Risk and Value Creation

Abstract

Recent PCAOB and international inspection reports indicate that there are deficiencies in the audits of subsequent events. What is less well understood is why these deficiencies occur. In our two experiments, we find that auditors show escalation of commitment behavior by proposing a significantly smaller audit adjustment when subsequent events become known to them after they have provided an initial view to management. Auditors are however expected to be more skeptical when risk factors are present. Experiment one finds that auditors’ adjustments are less influenced by prior commitment to an initial view provided to management when the risk of material misstatement is high. Our second experiment examines how the type of accountability (process versus outcome accountability) can mitigate auditors’ escalation behavior in evaluating subsequent events. We find that auditors’ tendency to show escalation behavior is mitigated by the process accountability than outcome accountability. Our findings suggest a benefit of employing process accountability documentation in the audits of subsequent events.

Authors

• Soon-Yeow Phang, Australian National University

• Neil L Fargher, Australian National University