Why Are Auditors Blamed When an Accounting Fraud Is Unveiled? Experimental Evidence

• In Event: Continental Breakfast and Research & Education Forum
  In Roundtable Session: Table 16: Fraud

Abstract

In this study, we investigate the phenomenon that auditors are commonly used as the whipping boy when an accounting fraud is revealed. While we discuss the two main explanations put forth for this phenomenon by the auditing profession – the public’s poor knowledge of the auditing process and financial incentives to blaming auditors – we also analyze the auditing profession’s role in the “blame game.” We conduct a 2x2 between-subjects experiment with non-professional investors based on an actual fraud case. We manipulate the financial incentive for an investor to blame the auditing firm (audit firm with or without “deep pockets”) and the communication strategy of the auditing firm (active public watchdog communication vs. no such communication). Based on a questionnaire administered three weeks in advance to the experiment, we also test the influence of participants’ auditing knowledge on blaming behavior. Our results show that audit firms with deep pockets and audit firms that actively communicate their watchdog role receive significantly higher blame. Moreover, the less knowledge participants had of the auditing process, the more blame they were likely to assign to the audit firm. Our results support the profession’s explanations for blaming behavior but at the same time show that a “trust us” communication strategy fires back when something goes wrong.

Authors

• Emna Ben Saad, ISCCB University of Tunis Carthage

• Florian Hoos, HEC Paris

• Cedric Lesage, HEC Paris