The Outcome Effect and Professional Skepticism: A Replication and a Failed Attempt at Mitigation

Abstract

In this research note, we replicate Brazel, Jackson, Schaefer, and Stewart's (2016) study of how auditors evaluate skeptical behavior. Like the original study, we find that evaluators reward audit staff who exercise appropriate levels of skepticism and identify a misstatement (positive outcome). However, when no misstatement is identified (negative outcome), evaluators penalize staff who exercise appropriate levels of skepticism. One factor causing this outcome effect may be that exercising skepticism typically causes budget overages due to additional testing. Hence, we examine whether formally attributing the budget overage to skeptical judgments and actions in the audit budget file reduces outcome effects. However, while replicating the initial effect across three separate studies, we have been unable to reduce this effect. Thus, it is clear that the outcome effect in this context is very robust. Data Availability: Contact the authors.

Comments of the Auditing Standards Committee of the Auditing Section of the American Accounting Association on International Auditing and Assurance Standards Board Exposure Draft, Proposed International Standard on Auditing 220 (Revised): Quality Management for an Audit of Financial Statements

“…We support the material provided in ED-220 on the appropriate exercise of professional skepticism in managing quality at the engagement level. Research provides ample evidence that professional skepticism is a requirement for making appropriate professional judgments and quality decisions in audits (Carpenter and Reimers 2013;Hurtt, Brown-Liburd, Earley, and Krishnamoorthy 2013;Brazel, Jackson, Schaefer, and Stewart 2016;Harding and Trotman 2017;Brazel, Gimbar, Maksymov, and Schaefer 2018;Eutsler, Norris, and Trompeter 2018). We highlight a few expositional issues and offer a few minor suggestions for the Board's consideration.…”

Comments of the Auditing Standards Committee of the Auditing Section of the American Accounting Association on the Concept Release, Potential Approach to Revisions to PCAOB Quality Control Standards

“…Still other research suggests that audit staff who are "quality minded" and exercise greater professional skepticism may not be rewarded for their efforts, but instead may receive a poor performance evaluation (Brazel et al 2016;Brazel, Gimbar, Maksymov, and Schaefer 2019a;Brazel, Leiby, and Schaefer 2019b). 3 In other words, performance evaluations may incentivize some auditors to not exercise heightened skepticism, since auditors often feel that their procedures are not likely to uncover misstatements or problems (Carlisle, Gimbar, and Jenkins 2019).…”

The Outcome Effect and Professional Skepticism

“…We are suggesting that consultation between the skeptical judgment and the skeptical action may reduce outcome effects in the evaluation. 4 SeeBrazel, Gimbar, Maksymov, and Schaefer (2018) for a replication ofBrazel et al (2016) with a sample of more experienced audit seniors.…”

“…One factor causing this outcome effect may be that exercising skepticism typically causes budget overages due to additional testing. Hence, Brazel et al (2018) also examine whether formally attributing the budget overage to skeptical judgments and actions in the audit budget file reduces outcome effects. However, Brazel et al (2018) are unable to reduce the outcome effect by documenting the staff's skepticism alongside their budget overage.…”

“…Hence, Brazel et al (2018) also examine whether formally attributing the budget overage to skeptical judgments and actions in the audit budget file reduces outcome effects. However, Brazel et al (2018) are unable to reduce the outcome effect by documenting the staff's skepticism alongside their budget overage. Thus, it is clear that the outcome effect in the context of evaluating skepticism is very robust.…”