Believe Who You Trust: Auditor Source Credibility, PCAOB Inspection Outcomes, and Non-Professional Investor Judgments
46 Pages Posted: 10 Jun 2022 Last revised: 23 Dec 2022
Date Written: December 8, 2022
Abstract
PCAOB inspection reports are one of the few sources of public information regarding audit quality and may offer signals of an auditor’s credibility consistent with source credibility theory. We conducted an experiment with non-professional investors, manipulating the auditor’s inspection deficiency rate (low versus high) and whether they attempted to breach the inspection (absent versus present). We find a negative association between deficiency rate and perceived expertise and between breaching the inspection and perceived trustworthiness. We observe that lower perceived expertise and trustworthiness are jointly associated with lower perceived auditor due care, lower perceived financial statement accuracy, and a lower likelihood of maintaining investment holdings. Inferences are similar for a second experiment measuring auditor trustworthiness as improperly revising materiality. In a third experiment, non-professional investors perceive the investment as less risky when the accounting firm communicates decisive actions to rectify the breach of trust, particularly when the deficiency rate is high.
Keywords: PCAOB, expertise, trust, due care, source credibility, materiality
JEL Classification: M41, M42
Suggested Citation: Suggested Citation