Reexamining the Outcome Effect: Are Auditors Penalized for Exercising Professional Skepticism?

• In Event: Auditor Advice, Skepticism, and Liability

Abstract

Prior research suggests audit firms’ evaluation systems inhibit professional skepticism. Specifically, supervisors “penalize auditors who employ an appropriate level of skepticism, but do not identify a misstatement” (Brazel et al. 2016, p. 1577), thereby discouraging future instances of professional skepticism. Across two experiments using practicing auditors, we empirically advance the understanding of this outcome effect by disaggregating the evaluation process. Specifically, our design isolates the effects of an auditor’s skeptical action, outcome of the skeptical action (i.e., misstatement identification or not), and budget overage of the skeptical action on supervisors’ evaluations. While we identify a fact pattern consistent with prior research (i.e., evaluations of auditors who identify a misstatement are higher than those who do not), contrary to prior interpretations of this fact pattern, we find supervisors reward auditors who identify a misstatement and do not penalize auditors who do not identify a misstatement. We also find auditors who do not identify a misstatement are not penalized for budget overages. Collectively, our findings suggest auditors benefit, and are not penalized, for undertaking skeptical actions, which should be of interest to audit firms, regulators, and academics concerned with improving the auditor evaluation process and its impact on professional skepticism.

Authors

• Mary Elizabeth Marshall, Louisiana Tech University

• Curtis Mullis, Georgia State University

• Kristen Kelli Saunders, University of Nebraska-Lincoln

• Chad Matthew Stefaniak, University of South Carolina