An Experimental Markets Investigation of Auditor Independence and Pricing: The Effect of Economic Incentives and Moral Reasoning

Posted: 7 Sep 2002

See all articles by Jeffrey W. Schatzberg

Jeffrey W. Schatzberg

University of Arizona - Department of Accounting

Galen R. Sevcik

Georgia State University

Linda Thorne

York University - Schulich School of Business

R. S. Olusegun Wallace

King Fahd University of Petroleum & Minerals (KFUPM) - Department of Management Information System & Accounting (MISAC)

Brian P. Shapiro

University of St. Thomas - Department of Accounting

Date Written: Undated

Abstract

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

Schatzberg, Jeffrey W. and Sevcik, Galen R. and Thorne, Linda and Wallace, Segun and Shapiro, Brian P., An Experimental Markets Investigation of Auditor Independence and Pricing: The Effect of Economic Incentives and Moral Reasoning (Undated). Available at SSRN: https://ssrn.com/abstract=316979

Jeffrey W. Schatzberg (Contact Author)

University of Arizona - Department of Accounting ( email )

McClelland Hall 301
Tucson, AZ 85721
United States
520-621-2238 (Phone)
520-621-3742 (Fax)

Galen R. Sevcik

Georgia State University ( email )

P.O. Box 3989
Atlanta, GA 30302-3989
United States
404-413-7231 (Phone)
404-413-7203 (Fax)

Linda Thorne

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
416-736-2100, x30223 (Phone)

Segun Wallace

King Fahd University of Petroleum & Minerals (KFUPM) - Department of Management Information System & Accounting (MISAC) ( email )

Dhahran 31261
Saudi Arabia

Brian P. Shapiro

University of St. Thomas - Department of Accounting ( email )

1000 LaSalle Avenue
Minneapolis, MN 55403-2005
United States

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