Effects of Regulatory Enforcement Style and Audit Firm Remedial Actions on Investors’ Perceptions of Auditors’ Professional Skepticism

• In Event: Professional Skepticism

Abstract

Professional skepticism has an influence on the level of audit quality, which is likely to affect investors’ reliance on the information provided by auditors in their decision-making. Our study examines how investors perceive auditor skepticism when regulators adopt different enforcement styles in communicating audit inspection findings, and when the audit firm takes various actions to respond to inspection findings. In an experiment, we find that investors perceive a relatively high level of auditor skepticism when the audit firm chooses to take remedial actions, regardless of regulators’ enforcement styles, but investors perceive a relatively low level of auditor skepticism only when the audit firm chooses to take defensive actions in response to regulators that impose a critical enforcement style. Additional analyses show that investors’ perception of auditor skepticism mediates the joint effects of regulatory enforcement style and audit firm actions on willingness to invest. Our findings suggest the unintended consequences of the ways regulators enforce inspection, and should be of interest to audit practitioners, as they show the potential consequences of different firm response strategies to inspection findings.

Authors

• John Chi Wa Ko, Monash University - Caulfield

• Soon-Yeow Phang, Monash University - Caulfield

• Xiaowen Huang, Monash University