Does Artificial Intelligence Deter Artificial Reporting? How Client Perceptions of Auditor Objectivity Influence Misreporting Behaviors

• In Event: Reporting Honesty

Abstract

While audits improve financial reporting quality, they are not always effective at preventing fraud. A frequently cited reason for such audit failures is a lack of objectivity on the part of the auditor that allows management to engage in overly aggressive reporting practices. Therefore, in this study, we examine two factors that influence managers’ perceptions of their auditor’s objectivity, and, in turn, affect managers’ propensity to misreport. Specifically, we investigate how the level of independence in the auditor-client relationship and the auditor’s use of innovative technologies such as data analytics and artificial intelligence (AI) influence management’s (mis)reporting decisions. We conduct an experiment in which manager participants decide whether or not to misreport an accounting estimate to meet a bonus target. We manipulate the extent of independence present in the auditor-client relationship as well as whether or not the auditor uses data analytics and AI to conduct the audit. We predict and find that managers reduce their level of misreporting if the auditor-client relationship is more independent or if the auditor uses data analytics and AI to conduct the audit, indicating that innovative technologies can serve as a substitute for independence in terms of influencing management’s perceptions of auditor objectivity.

Authors

• Alex Johanns, University of Illinois at Urbana-Champaign

• Kimberly Ikuta Mendoza, University of Illinois at Urbana-Champaign

• Ryan David Sommerfeldt, Washington State University