Do Rewards Encourage Professional Skepticism? It Depends
48 Pages Posted: 5 Feb 2018 Last revised: 28 Apr 2021
Date Written: April 28, 2021
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: Suggested Citation