The Impact of Anecdotal Data in Regulatory Audit Firm Inspection Reports

Posted: 24 Mar 2010 Last revised: 24 Sep 2015

James Wainberg

Florida Atlantic University - School of Accounting

Thomas Kida

University of Massachusetts at Amherst

M. David Piercey

University of Massachusetts Amherst

James F. Smith

University of Massachusetts Amherst

Date Written: October 22, 2013

Abstract

A critical and pervasive component of firm-specific audit firm inspection reports is the inclusion of detailed descriptions of the deficiencies uncovered by inspection teams. Prior research in psychology indicates that people are likely to focus on such anecdotal information without adequately considering the statistical context provided (e.g., the number of audits that the regulator inspected to find those deficiencies), thereby leading to misperceptions regarding audit firm quality. In this study, managers and other business professionals assumed the role of an audit committee member tasked with evaluating two audit firms. Participants were provided with firm-specific inspection reports where we manipulated both the number of deficiencies reported as well as the number of audits that were inspected at each firm. Our results indicate that participants made decisions consistent with having ignored, or underweighted, the implications of the statistical data provided. That is, participants exhibited an anecdotal bias by focusing on the number of deficiencies reported without appropriately considering the statistical context. This finding is important as it indicates that the common practice of including lists of deficiencies in firm-specific statutory inspection reports can lead to misperceptions of audit firm quality. In addition, we test and provide evidence that two easily implemented decision aids can help to mitigate this problem. Our findings should be of particular interest to audit regulators that currently include, or are considering including, lists of deficiencies in firm-specific reporting. Our study should also be of interest to investors, audit firms, audit committees, managers, researchers, and other stakeholders interested in auditor oversight, auditor reputation and measures of auditor quality.

Keywords: PCAOB, Auditor Quality, Anecdotal Bias, Judgment Orientation

JEL Classification: M41, M49

Suggested Citation

Wainberg, James and Kida, Thomas and Piercey, M. David and Smith, James F., The Impact of Anecdotal Data in Regulatory Audit Firm Inspection Reports (October 22, 2013). Accounting, Organizations and Society, Volume 38, Issue 8, pp. 621-636, November 2013. Available at SSRN: https://ssrn.com/abstract=1571279 or http://dx.doi.org/10.2139/ssrn.1571279

James Wainberg (Contact Author)

Florida Atlantic University - School of Accounting ( email )

University Tower
220 SE 2 Avenue
Boca Raton, FL 33431
United States

Thomas Kida

University of Massachusetts at Amherst ( email )

Isenberg School of Management
Amherst, MA 01003
United States
413-545-5650 (Phone)
413-545-3858 (Fax)

M. David Piercey

University of Massachusetts Amherst ( email )

Isenberg School of Management
121 Presidents Drive
Amherst, MA 01003
United States

James F. Smith

University of Massachusetts Amherst ( email )

Department of Operations and Information Managemen
Amherst, MA 01003
United States

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