How Do Reward Versus Penalty Framed Incentives Affect Auditor Judgments and Actions in Diagnostic Tasks?

• In Event: Audit Regulation and Inspection

Abstract

To motivate auditors to increase audit quality, regulators primarily introduce penalty-framed incentives. Researchers propose that more reward-framed incentives are needed to motivate auditors to supply high audit quality (Peecher, Solomon, and Trotman 2013). We examine how the incentive frame affects auditors’ risk judgments and testing actions in diagnostic tasks that are key to discerning whether a misstatement is present. We find that participants are more likely to test a potential misstatement under a reward versus penalty frame due to an action bias towards testing. However, participants increased testing primarily when a misstatement was absent. Therefore, a reward versus penalty frame resulted in more false alarms, with no improvement in misstatement detection. Our study suggests that providing auditors reward- versus penalty-framed incentives can increase testing but at the cost of audit efficiency.

Authors

• Bright (Yue) Hong, DePaul University

• Timothy W Shields, Chapman University