Does Professional Skepticism Affect Audit Quality?

• In Event: Mixed Methodologies

Abstract

This study investigates the relationship between professional skepticism and publicly observable audit outcomes at the individual auditor level. We combine privately gathered data on the level of an auditor’s professional skepticism, measured by the Hurtt Professional Skepticism Scale and Rotter’s Interpersonal Trust Scale, with publicly available archival data on individual auditor reporting behavior. Using a large sample of financially distressed companies in Belgium, we find that more skeptical auditors are more likely to issue a GCO. These results are corroborated when considering the likelihood of earnings management since we find that clients audited by more skeptical auditors have lower levels of discretionary accruals and a smaller magnitude of total accruals. Further, we also find that more skeptical auditors receive higher audit fees. However, when subdividing the sample in Big 4 versus non-Big 4 auditors, we find that the positive association between professional skepticism and audit quality is especially present in the non-Big 4 auditor sample, while only to a weak extent in the Big 4 auditor sample. Collectively, these results suggest that auditor professional skepticism is an important determinant of audit quality for non-Big 4 auditors, while Big 4 audit firms are better able to mitigate the risk that less skeptical auditors ultimately negatively affect publicly observable outcomes. Last, we also find that the effect of skeptical auditor characteristics is dependent on client characteristics. Our results contribute to the literature as one of the first studies examining the relationship between professional skepticism and audit quality in an empirical archival way, and complement prior experimental behavioral research.

Authors

• Kris Hardies, Universiteit Antwerpen

• Sanne Janssen, University of Antwerp

• Ann Vanstraelen, Universiteit Maastricht