The Cascading of Contrast Effects on Auditors' Judgments in Multiple Client Audit Environments

Abstract

Accounting decisions often involve similar types of judgments regarding different clients, projects, or employees. These tasks may use similar information items and be performed within the same work session. While independent consideration of the information for each respective decision may be desired, psychology research on contrast effects suggests that the information from a previous decision may be retained and compared to the information provided for a current judgment. Such contrast effects are potentially critical to accounting judgments because they suggest that the information associated with a given decision task will be evaluated differently depending on the nature of the prior contextual information. Using a multi-client audit context, we find that auditors are susceptible to contrast effects such that their judgments on a current client are influenced by their exposure to similar judgment information on a prior client. We also extend prior psychology and accounting research by examining and finding that for a current client, the magnitude of the contrast effect from an initial judgment task cascades to influence indirectly related subsequent judgment tasks for which no information from the prior client is available for comparison. We also find auditors' documentations of evidence are systematically affected by the contrast and cascading of contrast effects. Thus, our results provide support for contrast effects and, most important, the cascading of contrast effects to subsequent decisions.

Auditors' Judgment Errors When Working on Multiple Tasks and in Multiple Client Environments: A Research Summary and Practice Implications

“…Thus, prior client information not only directly affected auditors' judgments for similar tasks on the current client, but also indirectly (and similarly) affected subsequent unrelated audit tasks. From a practice perspective, Bhattacharjee et al (2007) show that recognizing the potential for contrast effects is critical to accounting judgment processes in multiple client environments because the information associated with a given audit task will be evaluated differently depending on the nature of the information from a prior client. The results also demonstrate that the impact of these errors can have pervasive implications for the audit as subsequent, unrelated tasks also can be impacted.…”

“…On the other hand, if auditors recall more negative information than is accurate, unnecessary, additional audit work may be performed, resulting in audit inefficiencies. Bhattacharjee et al (2007) examine how contrast effects impact auditor decision-making in a multiple client audit setting. Contrast effects occur when individuals do not independently process information when performing evaluation tasks (Slovic and MacPhillamy 1974).…”

“…Auditors may work on multiple clients in a single, uninterrupted work session with little time elapsed between them. In fact, data indicate that auditors deal with issues related to two or more audit clients in 75 percent of their work sessions and on a single client in just 25 percent (Bhattacharjee et al 2007). Research reveals that an important consequence of this audit reality is that working on multiple audit tasks and clients, either simultaneously or in the same work session, can cause auditors to make certain types of information processing and memory-related errors.…”

“…To determine the potential for such effects, Bhattacharjee et al (2007) examined whether auditors' judgments regarding a current client are affected by their immediate, prior exposure to and work on similar audit judgments for a different audit client. The study also examines whether exposure to a prior client will affect judgments on a current client for unrelated tasks.…”

“…We then discuss two research studies (Lindberg and Maletta 2003;Bhattacharjee et al 2007) that examine issues related to auditors working on two different audit clients sequentially. All three studies reveal the potential for auditors to inappropriately carry over information, from either prior tasks or prior clients to current tasks, when making multiple decisions one after the other.…”