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Realigning Auditors' Accountability: Experimental Evidence

40 Pages Posted: 10 Nov 2015 Last revised: 27 Oct 2017

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: October 26, 2017

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 removing auditors’ economic accountability to managers and replacing it with psychological accountability to investors significantly increases audit quality. This increase in audit quality occurs despite the independent third party randomly hiring auditors. In an additional treatment, we incorporate auditor accuracy into the third party hiring algorithm and find 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 (October 26, 2017). 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 Hurley (Contact Author)

Northeastern University - Accounting Group ( email )

360 Huntington Ave.
Boston, MA 02115
United States

Brian 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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