A Matter of Perspective: Mitigating the Outcome Effect in Auditor Performance Evaluations

• In Event: Managing Auditor Behavior

Abstract

Prior research shows that the outcome effect in auditor performance evaluations can create a disincentive to exercise professional skepticism. We experimentally demonstrate that perspective taking improves this evaluation process by significantly reducing the influence of the outcome effect. In a common audit setting in which a staff auditor exhibits appropriate skeptical behavior but identifies no misstatement, supervising auditors prompted to take the perspective of the staff auditor prior to conducting a performance review evaluate the staff’s performance higher than auditors not prompted to consider the staff’s perspective. Importantly, we also find that perspective taking equalizes auditors’ propensity to appropriately rate staff performance as “above expectations” when proper skepticism is exhibited, regardless of the audit outcome (misstatement present or absent) resulting from the skeptical behavior. We provide confirming evidence that perspective taking has the cognitive effect of increasing supervisor attention to the staff’s decision process and the affective effect of increasing supervisor empathic concern for skeptical staff who identify no misstatement. However, it is the cognitive effect of perspective taking, not the affective effect, that serves to mitigate the outcome effect. Overall, we demonstrate that audit firms can use perspective taking to help properly align reward structures with desired auditor behavior.

Authors

• Owen Brown, Baylor University

• Melanie I Millar, Baylor University