Do Auditor Judgment Frameworks Help in Constraining Aggressive Reporting? Evidence under More Precise and Less Precise Accounting Standards
Posted: 9 Jan 2012 Last revised: 25 Mar 2016
Date Written: March 2016
We experimentally investigate whether alternative judgment frameworks help Big 4 audit managers and partners constrain management’s aggressive financial reporting under accounting standards that differ in their precision. We find that a framework based on the SEC’s Advisory Committee on Improvements to Financial Reporting’s (CIFiR’s) recommendation that auditors critically evaluate the pros and cons of alternative accounting methods helps auditors constrain aggressive reporting under less precise standards. While our results highlight a limitation of counterfactual reasoning on its own at enhancing auditors’ constraint of aggressive reporting, this study provides evidence on how structured thinking can overcome this limitation. In particular, we find that combining this consideration of the alternatives with a structured thought process that encourages auditors to think about the issue at increasing levels of abstraction effectively shifts auditors’ focus away from client considerations and towards substance-over-form considerations, thereby incrementally enhancing auditors’ constraint of aggressive reporting across different levels of accounting standard precision. These results should be of interest to academics, regulators, standard-setters, and auditors as they continue to contemplate ways to improve auditors’ professional judgments under different levels of accounting standard precision.
Keywords: auditing, accounting standard precision, judgment frameworks, psychological distance and abstract mindsets
JEL Classification: M41
Suggested Citation: Suggested Citation