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

See all articles by Ann G. Backof

Ann G. Backof

University of Virginia - McIntire School of Commerce

E. Michael Bamber

University of Georgia

Tina Carpenter

University of Georgia - C. Herman and Mary Virginia Terry College of Business

Date Written: March 2016

Abstract

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

Backof, Ann G. and Bamber, E. Michael and Carpenter, Tina, Do Auditor Judgment Frameworks Help in Constraining Aggressive Reporting? Evidence under More Precise and Less Precise Accounting Standards (March 2016). Accounting, Organizations and Society, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1982041 or http://dx.doi.org/10.2139/ssrn.1982041

Ann G. Backof

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

E. Michael Bamber (Contact Author)

University of Georgia ( email )

Athens, GA 30602
United States
706-542-3601 (Phone)
706-542-3630 (Fax)

Tina Carpenter

University of Georgia - C. Herman and Mary Virginia Terry College of Business ( email )

230 Brooks Hall
Athens, GA 30602-6254
United States
706-542-3619 (Phone)

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