How Do Reward Versus Penalty Framed Incentives Affect Auditor Judgments and Actions in Diagnostic Tasks?

• In Event: Auditor JDM I

Abstract

To motivate auditors to increase audit quality, regulators primarily introduce penaltyframed incentives. Researchers propose that more reward-framed incentives are needed to
motivate auditors to supply high audit quality. We examine how incentive frames affect auditors’
risk judgments and testing actions in diagnostic tasks that are key to discerning whether a
misstatement is present. We find that participants are more likely to test a potential misstatement
under a reward versus penalty frame due to an action bias towards testing. However, participants
increase testing primarily when a misstatement is absent. Therefore, a reward versus penalty
frame results in more false alarms, with no improvement in misstatement detection. Our study
suggests that providing auditors reward- versus penalty-framed incentives can increase testing
but at the cost of audit efficiency.

Authors

• Bright (Yue) Hong, DePaul University

• Timothy W Shields, Chapman University