If You Want My Advice: Status Motives and Audit Consultations About Accounting Estimates

Abstract

Effective consultation is critical for improving the audit of estimates. In an experiment where audit managers acted as consultants to other auditors, we examine conditions in which consultants either recommend estimates that differ substantially from advice-seekers’ assessments (contrariness) or recommend narrower reasonable ranges of estimates (precision). Psychology theory argues that both of these attributes can improve estimates. We examine whether these attributes depend on consultants' status motives, i.e., the desire to gain respect from or power over others. We find that active status motives lead consultants with higher specialized knowledge to provide recommendations that are less contrary, but more precise. However, consultants increase precision by tightening range bounds in a manner not counter to management’s preference and thus unlikely to prompt the audit team to challenge the estimate. Further, we find that higher consultant decision authority also constrains precision. Our findings suggest limits to consultation’s potential effectiveness in improving estimates. For instance, our findings suggest that firms and standard setters emphasize consultant scrutiny on the range bound that is most likely to constrain management opportunism.

Keywords: Status motives, Auditor consultation, Advice, Accounting estimates, Specialists, Evolutionary psychology

JEL Classification: M4, G18