Examining the Impact of Industry Norms on Management Perceptions of Audit Quality under Ambiguous Accounting Guidance

• In Event: Continental Breakfast - Research and Education Forum
  In Roundtable Session: Table 10: Audit Quality Indicators

Abstract

I investigate whether an auditor’s use of industry norms as a justification method under ambiguous accounting standards increases management perceptions of audit quality. Using accounting alumni from a large public university as management participants, I find evidence that, although management views industry norms to be a more credible justification method than an auditor’s individual professional judgment, management evaluates audit quality based on underlying accounting attributes when ambiguity in the accounting standards is low. When ambiguity in the accounting standards is high, however, an auditor’s use of industry norms increases management perceptions of audit quality. Thus, in ambiguous settings, auditors are incentivized to engage in herding behavior by defaulting to the use of industry norms, which is especially important as the United States moves towards the use of a more principles-based accounting framework. This study contributes to our understanding auditor incentives, since management perceptions of auditors can influence audit decisions. Additionally, I provide evidence that accounting alumni can be a good source of experimental participants to proxy as members of management.

Author

• Erik S. Boyle, The University of Utah