How Do Risk-Based Inspections Impact Auditor Behavior? Experimental Evidence on the PCAOB's Process

The Accounting Review, Doi/pdf/10.2308/tar-2016-0007

Posted: 14 Sep 2017 Last revised: 18 Dec 2019

See all articles by Lori Shefchik Bhaskar

Lori Shefchik Bhaskar

Indiana University - Kelley School of Business - Department of Accounting

Date Written: December 16, 2019

Abstract

I provide theory-based causal evidence on the effects of risk-based regulatory inspections, modeled after the PCAOB’s, on auditor behavior in a multi-client setting where clients with relatively higher misstatement risk (“higher-risk” clients) have a higher risk of being inspected than clients with relatively lower misstatement risk (“lower-risk” clients). I predict and find inspections increase auditor effort, but only for higher-risk clients. Inspections impair auditors’ decision performance for lower-risk clients relative to a regime without inspections and relative to higher-risk clients within an inspections regime, ceteris paribus. Theory-based process model results show inspections increase auditors’ perceived inspection risks, which increase auditor effort for higher-risk clients, but also increase auditors’ task-related anxiety resulting in decreased decision performance for lower-risk clients. Notwithstanding the previously-identified benefits, this study identifies potential unintended consequences of riskbased regulatory inspections.

Keywords: Auditor Behavior; Audit Regulation; Audit Quality; Client Risk; PCAOB Inspections

JEL Classification: M40; M41; C91

Suggested Citation

Bhaskar, Lori Shefchik, How Do Risk-Based Inspections Impact Auditor Behavior? Experimental Evidence on the PCAOB's Process (December 16, 2019). The Accounting Review, Doi/pdf/10.2308/tar-2016-0007. Available at SSRN: https://ssrn.com/abstract=3036137 or http://dx.doi.org/10.2139/ssrn.3036137

Lori Shefchik Bhaskar (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
1,328
PlumX Metrics