Prompting the Benefit of the Doubt: The Joint Effect of Auditor-Client Social Bonds and Measurement Uncertainty on Audit Adjustments

48 Pages Posted: 11 Apr 2016 Last revised: 5 Sep 2017

See all articles by Steven J. Kachelmeier

Steven J. Kachelmeier

University of Texas at Austin - Department of Accounting

Ben W. Van Landuyt

University of Arizona - School of Accountancy

Multiple version iconThere are 2 versions of this paper

Date Written: March 3, 2017

Abstract

We design an incentivized experiment to test whether measurement uncertainty elevates the risk that social bonds between auditors and reporters compromise audit adjustments. Results indicate that, when audit evidence is characterized by some residual uncertainty, the adjustments our auditor-participants require are sensitive to whether auditors have an opportunity to form a modest but friendly social bond with reporters. In contrast, although auditors do not adjust fully even when misstatements are known with certainty, social bonding has no effect in this scenario. Accordingly, our experiment contributes beyond the main effects of social bonding and measurement uncertainty demonstrated in prior research by showing that these forces interact. A practical implication is that regulators and practitioners should consider both the technical and the social challenges facing audits of complex estimates.

Keywords: auditor independence, social bonds, measurement uncertainty, accounting estimates, specialists, leniency, social identity, experimental economics

JEL Classification: C92, D81, M41, M42

Suggested Citation

Kachelmeier, Steven J. and Van Landuyt, Ben W., Prompting the Benefit of the Doubt: The Joint Effect of Auditor-Client Social Bonds and Measurement Uncertainty on Audit Adjustments (March 3, 2017). Journal of Accounting Research 55 (4): 963-994, 2017. Available at SSRN: https://ssrn.com/abstract=2760091 or http://dx.doi.org/10.2139/ssrn.2760091

Steven J. Kachelmeier

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
512-471-3517 (Phone)
512-471-3904 (Fax)

Ben W. Van Landuyt (Contact Author)

University of Arizona - School of Accountancy ( email )

Tucson, AZ 85721
United States

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