Machiavellian Traits as a Signal of Bad Seeds or Opportunists

• In Event: Auditor Characteristics

Abstract

Source credibility theory suggests that those with less credibility (as expressed through trustworthiness and expertise) are generally less convincing. We examine perceptions when auditors may be perceived to exhibit higher or lower expertise (via inspection deficiency rates) and higher or lower trustworthiness (by the presence or absence of a breach in the PCAOB inspection process). Non-professional investors are less likely to continue investing in a company audited by a firm that has a higher deficiency rate. We also find evidence of an interactive effect between the deficiency rate and a breach in the inspection process. We also identify that individuals who exhibit higher or lower Machiavellianism react differently to the effect of a breach in public trust, particularly in the setting where the auditor has the most to gain from subverting the inspection process (a high deficiency rate). In a supplementary analysis, we examine another breach of public trust - the manipulation of materiality in order for a client to pass on booking a large overstatement. Results are consistent with our primary analysis. We also find marginal evidence that investors may perceive the second type of breach of public trust as more influential to investment decisions. Our findings should be of interest to auditors, audit committees, and management, as the PCAOB inspection process is an annual event for all large public accounting firms, and absentee owners must rely on publicly available information in their investment decision making, which includes the use of audited financial statements.

Authors

• Dereck D Barr-Pulliam, University of Louisville

• Stephani A. Mason, DePaul University

• Leah Elena Muriel, Oklahoma State University