Reward Structure to Enhance Professional Skepticism

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Abstract

Based on their audit firm inspections, the PCAOB (2012) suggested that the application of auditor professional skepticism can be enhanced by appraisal, promotion, and compensation processes. This suggestion fits into prior research in psychology and management, arguing that the behavior of individuals is an interaction between personality traits and situational characteristics. Accordingly, my study examines whether a reward structure can help less skeptical auditors to apply professional skepticism in their judgment and decision making. The reward structure is collapsed based on the manipulations of type of audit partner profit sharing and relative client importance. Professional skepticism is measured based on the personality trait of Openness, indicating curiosity, imagination, and creativity. Results among 567 auditors, with experience ranging from the audit partner to the manager level, indicate that less skeptical auditors become more skeptical in their judgments when they have a reward structure. Therefore, audit firms may use their performance evaluation and compensation policies in enhancing professional skepticism of their less skeptical professionals.

Author

• Herman Van Brenk, Nyenrode Business University