When Does Developing an Independent Estimate Reduce the Biasing Influence of Management Preferences?

• In Event: The Influence of Management and Boards on Audit Judgment and Processes

Abstract

For auditing accounting estimates, the Public Company Accounting Oversight Board (PCAOB) acknowledges that independent estimates likely reduce the influence of management bias. Using a series of experiments, we find evidence both confirming and contradicting the PCAOB’s assessment of independent estimates. We find that auditors developing an independent estimate after receiving management’s preference are, indeed, less susceptible to management bias. However, auditors developing an independent estimate before receiving management’s preference, remain susceptible to management bias. Order effects theory explains this behavior. We propose that independent estimates are distinct evidence events, causing step-by-step evidence processing and recency effects, whereby the most recent evidence dominates auditors’ final judgment. A supplemental experiment that withholds independent estimate development confirms our proposed theoretical process. Without an independent estimate, auditors switch to end-of-sequence processing and display primacy effects. Our research informs auditing accounting estimates, proposed PCAOB guidance, and the broad influence of audit evidence timing on audit quality.

Authors

• Brian C Fitzgerald, Northeastern University

• Christopher J Wolfe, Texas A&M University

• Kecia Williams Smith, Virginia Tech

• Brent A Garza, Texas A&M University