Once Bitten, Twice Shy: Auditor Experience and Audit Behavior

Abstract

Consistent with the literature in psychology and sociology, we predict that auditors’ experience with one client could have a profound impact on their audit behavior toward other clients. We test this theory with a mixed-methods research design using archival data and survey data. The results from archival data show that accident auditors, defined as those who have audited a client that has been involved with a major environmental accident, work harder, as proxied by audit fees and audit report lags, on auditing their other clients after that experience. The survey data indicate that after experiencing an environmental accident, accident auditors increase their environmental risk awareness and perform more audit procedures aimed at environmental risk reduction. Our further analysis on the influence of Auditing Standard No. 1631, The Consideration of Environmental Matters in the Audit of Financial Statements, on audit behaviors provides additional evidence for the importance of the role of auditor experience on audit behavior. Together, the results of this study offer a psychological account for audit behavior, showing that the experience of an auditor with one client influences subsequent auditing of other clients by influencing risk awareness and altering their approach to the assessment of business and inherent risk.

Keywords: auditor experience, audit behavior, environmental accident, risk awareness

JEL Classification: M42