The Effect of Framing on Information Search and Information Evaluation in Auditors’ Fair Value Judgments

47 Pages Posted: 8 May 2015 Last revised: 12 Feb 2016

See all articles by Jeffrey R. Cohen

Jeffrey R. Cohen

Boston College - Department of Accounting

Lisa Milici Gaynor

University of South Florida - School of Accountancy

Norma R. Montague

Wake Forest University - School of Business

Julie Wayne

Wake Forest University

Date Written: February 10, 2016

Abstract

Fair values and other accounting estimates (FVOEs) are common in financial reporting (IAASB, 2009) and regulators are concerned that auditors are insufficiently skeptical in their evaluations of FVOEs (PCAOB, 2009, 2015a, b; IFIAR, 2014). Utilizing an experiment with auditors as participants, we examine the effects of different audit guidance frames (i.e., positive: “support” management’s assertions, balanced: “support and oppose” management’s assertions, and negative: “oppose” management’s assertions) on fair value estimates and examine the processes by which these effects occur. Our results indicate that providing a balanced frame (versus a positive or negative frame) influences auditors’ fair value estimates by affecting the manner in which they evaluate information such that they use relatively more evidence opposing than supporting management’s assertions. This, in turn, results in perceptions of a greater risk of material misstatement which thereby results in lower fair value estimates. Because current audit guidance provides a positive frame, our results point to the need to adopt audit guidelines that promote more balanced search strategies and, in turn, potentially could lead to more conservative (i.e., more skeptical) auditor judgments.

Keywords: Framing, Confirmation Bias, Professional Skepticism, Fair Value, Decision Making

JEL Classification: C91, G18, M42

Suggested Citation

Cohen, Jeffrey R. and Gaynor, Lisa Milici and Montague, Norma R. and Wayne, Julie, The Effect of Framing on Information Search and Information Evaluation in Auditors’ Fair Value Judgments (February 10, 2016). Available at SSRN: https://ssrn.com/abstract=2602783 or http://dx.doi.org/10.2139/ssrn.2602783

Jeffrey R. Cohen

Boston College - Department of Accounting ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617-552-3165 (Phone)
617-552-2097 (Fax)

Lisa Milici Gaynor

University of South Florida - School of Accountancy ( email )

4202 E. Fowler Avenue, BSN 3403
Tampa, FL 33620-5500
United States

Norma R. Montague (Contact Author)

Wake Forest University - School of Business ( email )

P.O. Box 7659
Winston-Salem, NC 27109
United States

Julie Wayne

Wake Forest University ( email )

2601 Wake Forest Road
Winston-Salem, NC 27109
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
315
Abstract Views
1,147
rank
95,680
PlumX Metrics