The Negative Impact of Investigation Effort on Auditor Adjustments

• In Event: Auditor Biases

Abstract

We explore whether audit effort impairs auditor willingness to impose accounting adjustments. We theorize that investigation effort creates a mental investment that imposes a loss mindset when evidence is unfavorable. This loss framing makes the auditors more willing to forego adjustments. We test this theory with a laboratory experiment in which student participants make an effort choice to discover underlying risk information. We present the same risk information to participants who do not make an effort choice, with both groups given the opportunity to reduce risk. We find that participants who exert effort adjust risk less than participants who receive the same information without effort. Separating the effort and adjustment decision between a pair of auditors eliminates this difference, although it reduces adjustment overall because participants are averse to imposing the cost of adjustment on another auditor. These findings should be of interest to audit firms and regulators.

Authors

• Steven J Kachelmeier, University of Texas at Austin

• Dan Rimkus, University of Texas at Austin