Difference – or Deficiency – in Judgment? Evaluations of Auditors, and the Joint Effects of Approach Punitiveness and Wise Thinking Disposition

43 Pages Posted: 14 Aug 2018

See all articles by Tim Brown

Tim Brown

University of South Carolina - Department of Accounting

Tracie M. Majors

University of Southern California

Mark E. Peecher

University of Illinois at Urbana-Champaign; University of Illinois College of Law

Date Written: July 29, 2018

Abstract

Evaluations of auditors’ professional judgments by persons outside of audit teams (e.g., PCAOB inspections, AICPA peer reviews, audit firms’ internal quality reviews) are a pervasive means of helping ensure audit quality. We examine how three important psychological factors jointly influence evaluators’ assessments, moderating whether bias and unwarranted inconsistency occur for evaluations of identical, plainly acceptable audit work. We test our theory in an abstract experiment in which we manipulate whether or not the judgments evaluated by participants happen to differ from the judgments they made during an earlier stage of the experiment. We also manipulate the punitiveness of the evaluation approach and measure evaluators’ disposition for wise thinking. Consistent with psychology theory, evaluators exhibit myside bias in that they less favorably assess judgments that differ from their own, relative to the control participants who also provide evaluations for those same judgments. On a more encouraging note, high wise thinkers exhibit less myside bias than low wise thinkers under a more punitive, inspection approach and, unlike low wise thinkers, logically recognize that judgments differing from their own simultaneously can be less reasonable than their own but still of sufficient quality to pass an inspection. Regulatory bodies and audit firms should be interested in these results, as bias and inconsistency for identical, acceptable audit judgments reduce the capacity of these evaluations to advance the public interest by ensuring audit quality.

Keywords: External Reviews of Audits; Professional Judgment; PCAOB Inspections; AICPA Peer Reviews; Internal Quality Reviews; Wise Thinking; Experience; Myside Bias

JEL Classification: M41; M42

Suggested Citation

Brown, Tim and Majors, Tracie McDonald and Peecher, Mark E., Difference – or Deficiency – in Judgment? Evaluations of Auditors, and the Joint Effects of Approach Punitiveness and Wise Thinking Disposition (July 29, 2018). Available at SSRN: https://ssrn.com/abstract=3222207 or http://dx.doi.org/10.2139/ssrn.3222207

Tim Brown

University of South Carolina - Department of Accounting ( email )

The Francis M. Hipp Building
1705 College Street
Columbia, SC 29208
United States

Tracie McDonald Majors (Contact Author)

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

Mark E. Peecher

University of Illinois at Urbana-Champaign ( email )

Gies College of Business
1206 South Sixth Street
Champaign, IL 61820
United States
217-333-4542 (Phone)
217-244-0902 (Fax)

University of Illinois College of Law ( email )

504 E. Pennsylvania Avenue
Champaign, IL 61820
United States

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