Do Prosocial Activities Influence Auditor-Client Negotiations? An Experimental Assessment

• In Event: Auditor-Client Interactions

Abstract

We draw on moral licensing theory to examine the effect of auditor involvement with client managers’ prosocial activities on the outcomes of auditor-client negotiations over the amount to report for estimates subject to uncertainty. Specifically, we expect prosocial activities to increase managers’ financial reporting aggressiveness, auditors’ leniency, and ultimate reporting bias, but only if auditors are involved in an assurance capacity with the prosocial activity. To test this premise, we conduct an interactive laboratory experiment with student participants and financial incentives that map into the setting of interest. In Part 1 of the experiment, we manipulate between-participants whether individuals in the role of a manager answer trivia questions with correct answers resulting in either a donation to charity or a personal gain to the manager. We also manipulate whether or not individuals in the role of an auditor observe and verify managers’ Part 1 efforts. In Part 2 of the experiment, auditor/manager pairs negotiate to determine an estimate for an uncertain amount, with higher estimates increasing managers’ (auditors’) likelihood of incurring a bonus (penalty). Consistent with moral licensing, we find evidence consistent with auditor-observed prosocial activities triggering higher manager estimates and more aggressive negotiation outcomes than when the auditor is not involved with the reporter’s prosocial activity or in the absence of prosocial activity.

Authors

• Jeremy Douthit, University of Arizona

• Steven J Kachelmeier, University of Texas at Austin

• Ben W Van Landuyt, University of Arizona