Client integrity concerns auditors when they plan new audit engagements because it is related to both fraud risk and the source credibility of clients. Auditors may increase audit work and fees when they judge integrity to be below normal. In an experiment, a sample of 63 Canadian audit partners read information about a prospective audit client, including information about the client's CFO. This information was manipulated to support a judgment of either high or low integrity. As hypothesized, judgments of client integrity were negatively related to risk judgments, audit evidence extent recommendations (indirectly through risk judgments), and fee recommendations (indirectly through risk judgments and extent recommendations).

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AbstracLThe credibility of individual commercial bonowers, which lendeis refer to as "character,'' affects lenders' use of accounting information. This effect of source credibility is subtle compared to the effect of external andits on the use of financial statements in other contexts. It is hypothesized that accounting facts must be positive (supporting loan approval) for character facts to influence lenders' judgments and loan decisions. Character facts will not affect judgments or loan decisions significantly when accounting facts are negative (supporting loan denial). This accounting/character interaction is predicted to become stronger as lendeis gain experience and develop criteria for evaluating character. In an experiment, lenders read a loan application that contained facts concerning accounting, character, and other information; the accounting and character facts were manipulated to bie either positive or negative, resulting in four versions of the application. The lenders recommended approval or denial of the loan and estimated die likelihood that the loan would be fully repaid (a risk estimate). Interactive effects of accounting and character facts on lenders' loan decisions and risk estimates were found, but the accounting/character interactions generally did not vaiy with experience level. One notable difference was that experienced lenders never approved loans when accounting facts were negative, but inexperienced lenders sometimes did. This disagreement between lenders and their critics suggests that the credibility of sources of accounting information may be a more in^rtant factor in commercial lending than attestation by independent auditors. The puipose of this paper is to show that the use of accounting information in commercial lending depends on source credibility communication that is subtle compared to the role of independent audits in other contexts. Prior accounting research has concentrated on the use of attestation by external auditors to establish credibility of accounting infomiation, rather than source credibility (e.g., DeAngelo 1981; Palmrose 1988; Scott 1988). When source credibility has been discussed, it has been from the point of view of auditors when they deal with clients. For example, Ponemon and Gabhart (1993) found that auditors' level of ethical reasoning affects their sensitivity to competent, low-integrity management ("competent crooks"). The motivation and practical benefits of such research, however, involve reducing litigation and reputation effects that auditors may incur by becoming involved with noncredible clients. The significance of source credibility from the perspective of users of financial statements, such as commercial lenders, has not been established. In the increasingly competitive commercial loan market in the UnitedIn asserting that they conibine accounting and source credibility information in their loan judgments, lenders claim to use a relatively complex information processing strategy. Maines (forthcoming) states that it has proven difficult to s...

Moods are low-intensity affective states that individuals bring to a decision, and may be especially important when the balanced scorecard (BSC) is used for performance evaluation purposes. We propose that financial incentives can motivate decision-makers to correct mood congruency biases, in which judgments and decisions are consistent with moods. In experiment 1, participants rated the performance of one division manager based on two accounting measures and another manager based on a 16-measure BSC; there were mood congruency biases at both levels of information load. Financial incentives to make benchmark-consistent judgments eliminated bias in the former condition but not in the BSC condition. In experiment 2, incentives were offered and performance evaluations were based on an eightmeasure BSC; mood congruency bias was eliminated. Results suggest that management control systems, specifically financial incentives, should be included in future affect correction research.

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