Critical Audit Matters: Unintended Consequences on Auditor Behavior?

• In Event: Continental Breakfast - RESEARCH INTERACTION FORUM
  In Roundtable Session: Research Interaction Forum

Abstract

The PCAOB promulgated changes to the audit report mandating disclosure of critical audit matters (CAMs). Practicing auditors report feeling proud of disclosing CAMs to investors. However, this strong sense of pride may lead to underperformance on other areas of the audit as a result of a psychological license effect. To investigate this issue, we conduct a 2 x 2 between-participants experiment with practicing auditors and find evidence consistent with psychological licensing after working on a CAM account. Specifically, we find that working on a CAM account, as opposed to no CAM reported, enhances auditors’ perceptions that their work forewarns investors about the uncertainty and complexity inherent in the account. These higher perceptions, in turn, decrease the amount of the auditor’s recommended audit adjustment on a non-CAM account than is potentially misstated. We also find evidence that psychological closure is an effective remedy for licensing behavior. Our research informs practice and theory regarding a potential unintentional consequence of the mandated reporting of CAMs and possible intervention to mitigate the effects.

Authors

• Peter Kipp, University of North Texas

• Andrea Seaton Kelton, Middle Tennessee State University

• Lisa Milici Gaynor, University of South Florida