Realigning Auditors' Incentives: Experimental Evidence

Hurley, Patrick J.; Mayhew, Brian W.; Obermire, Kara M.

doi:10.2139/ssrn.2688417

Cited by 2 publications

(8 citation statements)

References 58 publications

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“…Further, experimental evidence consistently finds that auditors favor client‐preferred positions when there is accounting ambiguity and auditor alignment with management (Mayhew, Schatzberg, and Sevcik [], Kadous, Kennedy, and Peecher [], Mayhew and Pike [], Church et al. [], Hurley, Mayhew, and Obermire []).…”

Section: Background and Literature Reviewmentioning

confidence: 99%

“…The audit market is derived from Mayhew and Pike [] and Hurley, Mayhew, and Obermire []: 1)Each manager hires an auditor. In Baseline and NAS‐separate , any auditor can be hired.…”

Section: Experimental Designmentioning

confidence: 99%

“…After the manager decides which auditor to hire, the manager and auditor make simultaneous decisions in a manner similar to a prisoner's dilemma, with the added role of the investor player affecting payoffs. The game‐theoretic equilibriums for the audit market, as described in prior research (Mayhew [], Mayhew, Schatzberg, and Sevcik [], Hurley, Mayhew, and Obermire [], Hurley and Mayhew []), are the Lemons and Reputation equilibriums…”

Section: Game Theoretic Equilibriums and Predictionsmentioning

confidence: 99%

“…We expect norms to influence which equilibrium participants play. Prior research suggests the Reputation equilibrium is difficult to achieve when there is accounting uncertainty (Mayhew, Schatzberg, and Sevcik []), and is influenced by institutional features that draw the auditor's attention toward investors or managers (Mayhew and Pike [], Hurley, Mayhew, and Obermire []).…”

Section: Game Theoretic Equilibriums and Predictionsmentioning

confidence: 99%

“…We employ a 1 × 3 design where we manipulate the provision of a consulting project and the rules governing the managers’ choice of auditor. The Baseline condition consists of an audit market similar to previous audit market experiments (Mayhew [], Mayhew and Pike [], Hurley, Mayhew, and Obermire []). In this market, managers produce and sell assets to buyers, and hire auditors to verify the manager's report of the asset's value .…”

Section: Introductionmentioning

confidence: 99%

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The Impact of Consulting Services on Audit Quality: An Experimental Approach

Kowaleski

Mayhew

Tegeler

2018

J of Accounting Research

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We use experimental markets to examine whether providing consulting services to a non-audit client impacts audit quality. Our paper directly addresses concerns raised by the Public Company Accounting Oversight Board that the largest public accounting firms' growth in their consulting practices threatens audit quality. We conduct an experiment proposed using a registration-based editorial process. We compare a baseline where the auditor does not provide consulting services to conditions where auditors provide consulting to audit clients or where auditors only provide consulting services to non-audit clients. Our unique design provides evidence on whether providing consulting to non-audit clients strengthens the salience of a client-cooperative social norm that reduces audit quality. We do not find differences in audit quality by condition in our planned analysis, however we find greater variation in audit quality in the conditions where auditors provide consulting services compared to the baseline. In unplanned analyses, our results suggest providing consulting services increases auditor cooperation with managers, increasing audit quality when managers prefer high audit quality and decreasing audit quality when managers prefer low audit quality. JEL codes: G41; M42

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Section: Background and Literature Reviewmentioning

confidence: 99%

“…The audit market is derived from Mayhew and Pike [] and Hurley, Mayhew, and Obermire []: 1)Each manager hires an auditor. In Baseline and NAS‐separate , any auditor can be hired.…”

Section: Experimental Designmentioning

confidence: 99%

Section: Game Theoretic Equilibriums and Predictionsmentioning

confidence: 99%

Section: Game Theoretic Equilibriums and Predictionsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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The Impact of Consulting Services on Audit Quality: An Experimental Approach

Kowaleski

Mayhew

Tegeler

2018

J of Accounting Research

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Audit fees via an indirect payment channel and professional skepticism

Kim

Pae

et al. 2018

MAJ

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Purpose This paper aims to examine the merit of an indirect payment system for audit fees, a system where an intermediary collects fees from the auditee and then pays this audit fee to the auditor. Design/methodology/approach Big 4 auditors and professional analysts in South Korea participated in an experiment and survey to investigate whether the change in the payment channel (from direct to indirect) of audit fees positively impacts auditors’ decision-making. Findings The authors find evidence that the indirect payment of audit fees is positively associated with professional skepticism. Research limitations/implications This paper, by highlighting the potential for alternate auditor payment channels to improve the quality of auditor judgments, motivates future research in this area. Practical implications Qualified by the need for further research, the potential merit in an indirect payment system may have implications for audit regulators. Social implications An indirect payment channel has the potential to improve public perceptions of the audit function, thereby elevating society’s confidence in auditor opinions and improving the effectiveness and efficiency with which scarce resources are distributed within society. Originality/value This study is one of the first that looks into a systematic change in audit fee payment channel and how an indirect payment system of audit fees impacts professional skepticism.

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Realigning Auditors' Incentives: Experimental Evidence

Cited by 2 publications

References 58 publications

The Impact of Consulting Services on Audit Quality: An Experimental Approach

The Impact of Consulting Services on Audit Quality: An Experimental Approach

Audit fees via an indirect payment channel and professional skepticism

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