An Experimental Markets Investigation of Auditor Independence and Pricing: The Effect of Economic Incentives and Moral Reasoning
Posted: 7 Sep 2002
Date Written: Undated
This study investigates the impact of economic incentives and moral reasoning on auditor independence and pricing in a series of experimental markets. In each multi-period market, auditor subjects could either (a) impair their independence, i.e., cooperate with the client by misreporting low observed outcomes as high, and thereby reap economic advantages at the expense of third-party investors, or (b) maintain their independence, i.e., truthfully report low observed outcomes as low to third-party investors, but thereby forgo the economic advantages of cooperating with the client. We use the neo-Kohlbergian framework to investigate how moral reasoning influences market behavior under different levels of economic incentives. As predicted, subjects at all levels of moral reasoning impaired their independence significantly less often as the economic penalties for independence increased. Additionally, we document a significant effect of moral reasoning on auditor independence behavior in economic markets. However, contrary to prior accounting studies, subjects using lower levels of moral reasoning maintained their independence significantly more often than subjects at higher levels of moral reasoning.
JEL Classification: M49
Suggested Citation: Suggested Citation