Archival Evidence on Bias in Auditors’ Assessment of Client Risk and the Consequences for Audit Fees and Auditor Changes

• In Event: Continental Breakfast and Research & Education Forum
  In Paper Session: Table 3: Audit Fees I

Abstract

In the 1970’s researchers began to show that individuals’ judgments about uncertain quantities can be biased in the presence of salient benchmark values. This phenomenon, referred to as “anchoring and insufficient adjustment”, has proven to be extremely robust and has been documented in a large variety of experimental settings. This paper provides archival evidence on the effect of anchoring on auditors’ assessments of client risk. Controlling for clients’ actual risk levels, the evidence suggests that auditors act more conservatively when clients appear more risky relative to other clients of the same office, consistent with auditors anchoring on the risk levels of other clients in their office. Moreover, clients subject to increased scrutiny due to auditors’ anchoring biases are charged higher audit fees and are more likely to switch auditors in the following period.

Author

• Nicholas Jennings Hallman, University of Missouri-Columbia