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Realigning Auditors' Accountability: Experimental Evidence

32 Pages Posted: 10 Nov 2015 Last revised: 16 Nov 2016

Patrick J. Hurley

Northeastern University - Accounting Group

Brian W. Mayhew

University of Wisconsin, Madison - Department of Accounting and Information Systems

Kara Obermire

Oregon State University; Oregon State University

Date Written: November 15, 2016

Abstract

We use experimental economic markets to examine the impact of changing institutional design features on audit quality. Specifically, we manipulate auditors’ economic accountability to managers by altering who hires the auditor – a manager or an independent third party – and auditors’ psychological accountability to investors by explicitly stating that the auditor is hired on the investors’ behalf. Our design shifts auditors’ accountability from managers, who have directional goal preferences, to investors, who prefer judgment accuracy. We find that auditors supply higher quality audits when they are both less accountable to managers and more accountable to investors. Importantly, this increase in audit quality occurs despite the third party randomly hiring auditors. In an additional treatment, we incorporate auditor accuracy into the third party hiring algorithm resulting in even higher audit quality. Our results suggest that altering auditors’ accountability relationships can significantly enhance audit quality.

Keywords: audit quality, accountability, market structure, incentives, auditor hiring

JEL Classification: M42, M48

Suggested Citation

Hurley, Patrick J. and Mayhew, Brian W. and Obermire, Kara, Realigning Auditors' Accountability: Experimental Evidence (November 15, 2016). Northeastern U. D’Amore-McKim School of Business Research Paper No. 2688417. Available at SSRN: https://ssrn.com/abstract=2688417 or http://dx.doi.org/10.2139/ssrn.2688417

Patrick J. Hurley (Contact Author)

Northeastern University - Accounting Group ( email )

360 Huntington Ave.
Boston, MA 02115
United States

Brian W. Mayhew

University of Wisconsin, Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States
608-262-2714 (Phone)
608-263-0477 (Fax)

Kara Obermire

Oregon State University ( email )

Corvallis, OR 97331
United States

Oregon State University ( email )

Bexell Hall 200
Corvallis, OR 97331
United States

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