Reducing Underreporting by Aggregating Budgeted Time

Forthcoming, The Accounting Review

44 Pages Posted: 14 Jun 2018 Last revised: 21 Oct 2019

See all articles by Kim I. Mendoza

Kim I. Mendoza

University of Illinois at Urbana-Champaign - Department of Accountancy

Date Written: September 8, 2019

Abstract

Underreporting, or reporting fewer hours than actually worked, is a prevalent behavior among auditors at all levels. Underreporting can result in negative consequences such as tight budgets and reductions in future audit quality. In this paper, I propose a low-cost budget formatting procedure that reduces underreporting. Using an experiment, I document that individuals with higher underreporting incentives, underreport less when given an aggregated budget relative to a disaggregated budget. When individuals have lower underreporting incentives, aggregating the budget has a smaller effect on underreporting. I also provide evidence of the process by performing a mediation analysis. In a second experiment, I examine a budget formatting procedure that reduces underreporting while also mitigating the loss of data richness that results from aggregation. This study provides important insights to audit firms, partners, managers, and regulators who rely on audit hours for budgets, measures of staff efficiency, and measures of audit quality.

Keywords: Auditor Underreporting, Aggregation, and Mental Accounting

JEL Classification: M41, M42

Suggested Citation

Mendoza, Kim I., Reducing Underreporting by Aggregating Budgeted Time (September 8, 2019). Forthcoming, The Accounting Review, Available at SSRN: https://ssrn.com/abstract=3185578 or http://dx.doi.org/10.2139/ssrn.3185578

Kim I. Mendoza (Contact Author)

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

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