Predecisional Distortion of Evidence as a Consequence of Real-Time Audit Review

Abstract

With the current shift toward real-time audit review, subordinates become aware of supervisors' views earlier in the audit process. I use an experiment to examine whether earlier knowledge of supervisors' views increases subordinates' tendencies to agree with those views because subordinates predecisionally distort evidence. In a going-concern task, I find that auditors who learn the partner's view before evaluating evidence (1) evaluate individual evidence items as more consistent with the partner's view, and (2) make going-concern judgments that are more consistent with the partner's view, than do auditors who learn the same partner's view after evaluating evidence. In a second experiment, I examine whether auditors anticipate the distortion's effect on subordinates' judgments. I find that auditors expect subordinates to make judgments that agree with supervisors' views, but auditors do not expect subordinates to agree even more with those views when subordinates learn those views earlier in the audit process.

The Effect of Partner Communications of Fraud Likelihood and Skeptical Orientation on Auditors' Professional Skepticism

“…The above result is different from that reported in some previous social psychology and auditing research, which suggests that the partner giving their own view would result in a partner alignment effect (Tetlock 1983;Peecher 1996;Wilks 2002). One explanation is that when faced with multiple accountabilities (Bagley 2010), including regulators and inspectors who have warned of the need to maintain an appropriate level of professional skepticism, the influence of the partner's view may not be as pronounced, especially when that view may encourage a lower level of professional skepticism.…”

“…Research in accounting has supported this theory and shows that subordinates tend to agree with reviewers' and supervisors' views (Peecher 1996;Hoffman and Patton 1997;Turner 2001;Wilks 2002). Peecher (1996) finds that reviewer preferences affect both the level of skepticism in auditors' likelihood assessments and the weight auditors assign to client integrity when making such assessments.…”

“…Turner (2001) finds that perceived reviewer preferences affect the extent of skepticism in evidence search. While the above discussion suggests that auditors tend to make judgments that strategically support the views of superiors, Wilks (2002) finds that this tendency is even more prominent because auditors unconsciously interpret evidence items as more consistent with the partner's view and this results in judgments more consistent with the partner's view.…”

“…We expect, therefore, that auditors will exhibit greater levels of professional skepticism toward management's view, rather than the partner's view, that there is a low likelihood of fraud. As elaborated upon below, two effects contribute to this expected difference in professional skepticism, that is, a partner alignment effect (Peecher 1996;Turner 2001;Wilks 2002) and a review perspective effect (Libby and Trotman 1993). As both the partner alignment and review perspective effects predict different mechanisms by which partner attribution impacts professional skepticism, we subsequently compare the partner view and management view conditions with a no view condition in order to investigate the contribution of the partner alignment and review perspective effects to the differences in professional skepticism.…”

“…Our theoretical development of this independent variable emphasizes that the partner attribution effect can result from either a partner alignment effect and/or a review perspective effect contributing to the differences in professional skepticism when the partner varies what is communicated to the audit team. A partner alignment effect proposes that, with knowledge of the partner's view, auditors will consciously and/or subconsciously align their judgments with that view (Peecher 1996;Turner 2001;Wilks 2002). A review perspective effect proposes that, with knowledge of management's view, auditors find themselves in a review mindset, which affects the processing of evidence that contradicts management's view (Libby and Trotman 1993).…”