Do Rewards Encourage Professional Skepticism? It Depends

48 Pages Posted: 5 Feb 2018 Last revised: 28 Apr 2021

See all articles by Joseph F. Brazel

Joseph F. Brazel

North Carolina State University - Poole College of Management - Department of Accounting

Justin Leiby

University of Illinois at Urbana-Champaign

Tammie Rech Schaefer

University of Missouri at Kansas City

Multiple version iconThere are 2 versions of this paper

Date Written: April 28, 2021

Abstract

Providing auditors with credible incentives to exercise professional skepticism is a longstanding problem. We focus on costly skepticism: the common situation in which skepticism is ex ante appropriate based on available evidence, but generates incremental ex post costs and does not identify a misstatement. Auditors expect and receive no rewards for this action. In three experiments, we theorize and find that rewarding costly skepticism may backfire and decrease skepticism on future audit tasks where evidential red flags are present. Auditors interpret the reward as a non-credible, better-than-expected outcome and view subsequent tasks from a risk-averse gain frame. As a result, auditors seek to avoid the downside risk of additional skeptical action, which decreases auditors’ sensitivity to red flags and their willingness to inform their manager about severe red flags, likely compromising audit quality. However, we also find that a supervisor consistently rewarding costly skepticism decreases auditors’ risk aversion and increases their professional skepticism. Overall, our results suggest that auditors believe skeptical action carries downside risk, and a cultural shift towards credible, consistent rewards for appropriate skepticism may be a step towards rewards yielding their intended effects.

Keywords: incentives, performance evaluation, professional skepticism, risk aversion

JEL Classification: M40, M41, M42

Suggested Citation

Brazel, Joseph F. and Leiby, Justin and Schaefer, Tammie Rech, Do Rewards Encourage Professional Skepticism? It Depends (April 28, 2021). Available at SSRN: https://ssrn.com/abstract=3111466 or http://dx.doi.org/10.2139/ssrn.3111466

Joseph F. Brazel (Contact Author)

North Carolina State University - Poole College of Management - Department of Accounting ( email )

Campus Box 8113
Nelson Hall
Raleigh, NC 27695
United States
919-513-1772 (Phone)

Justin Leiby

University of Illinois at Urbana-Champaign ( email )

1206 S 6th St
Champaign, IL 61822
United States
2173007825 (Phone)

Tammie Rech Schaefer

University of Missouri at Kansas City ( email )

5100 Rockhill Road
Kansas City, MO 64110-2499
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
422
Abstract Views
2,315
rank
98,374
PlumX Metrics