Accountability, the Dilution Effect, and Conservatism in Auditors' Fraud Judgments

The Effect of Partner Communications of Fraud Likelihood and Skeptical Orientation on Auditors' 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.…”

“…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. Such accountability effects are explained by Hoffman and Patton (1997) to be the result of auditors' tendency to shift their judgments based on what they expect to be defensible to their superiors. Turner (2001) finds that perceived reviewer preferences affect the extent of skepticism in evidence search.…”

A Model and Literature Review of Professional Skepticism in Auditing

“…Although comparison of evidential outcomes to expectations is often a critical audit step, auditors may fail to form expectations or base expectations on client-provided evidence like book values (Kinney and Uecker 1982;Biggs and Wild 1985;Wild and Biggs 1990), view evidence that is in line with expectations as more persuasive than evidence that is not (Glover et al 2005), and fail to dig deeper when initial information is in line with expectations (Earley 2002) or when indications of aggressive reporting are received late in the process (Phillips 1999). Audit judgments can also be affected by irrelevant information (Hackenbrack 1992;Glover 1997;Hoffman and Patton 1997;Shelton 1999), with irrelevant information diminishing the extent to which auditors attend to fraud cues.…”

Unintended Consequences of Lowering Disclosure Thresholds: Proposed Changes to SFAS No. 5

“…Psychology theory suggests that adding low probability lawsuits could potentially decrease investors" perceptions of litigation risk for the disclosure by decreasing the influence of the higher probability lawsuits (Nisbett et al 1981;Tetlock and Boettger 1989;Hackenbrack 1992;Glover 1997;Hoffman and Patton 1997;Shelton 1999). That is, adding remote lawsuits to a disclosure may dilute, rather than add to, the impact of reasonably possible lawsuits if investors rely on the representativeness heuristic when judging the overall risk of loss due to disclosed litigation.…”