A Matter of Perspective: Mitigating the Outcome Effect in Auditor Performance Evaluations

49 Pages Posted: 1 Jan 2020 Last revised: 25 Feb 2021

Date Written: December 29, 2020

Abstract

Prior research shows that the outcome effect in auditor performance evaluations can create a disincentive to exercise professional skepticism by punishing auditors whose skeptical behavior does not identify a misstatement. We experimentally demonstrate that perspective taking improves this evaluation process by mitigating the influence of the outcome effect and increasing evaluator focus on decision process quality. In a common audit setting in which a staff auditor exhibits appropriate yet costly skeptical behavior that correctly identifies no misstatement, supervising auditors prompted to take the perspective of the staff auditor evaluate the staff’s performance more highly than unprompted auditors—performance ratings that align with the ratings provided to auditors who detect a misstatement. We provide confirming evidence that perspective taking successfully removes the outcome penalty for no-misstatement skeptical behavior by increasing supervisor attention toward information cues about the staff’s decision process quality and away from those about the non-diagnostic misstatement outcome. We also show that perspective taking increases evaluator consensus and reduces the “idiosyncratic rater effects” that often plague performance reviews. Overall, we demonstrate that perspective taking can improve attention to process quality and that audit firms can use perspective taking to help properly align reward structures with desired auditor behavior.

Keywords: Perspective taking, outcome effect, outcome bias, professional skepticism, decision quality, performance evaluation, audit

JEL Classification: M42

Suggested Citation

Brown, Owen and Millar, Melanie, A Matter of Perspective: Mitigating the Outcome Effect in Auditor Performance Evaluations (December 29, 2020). Available at SSRN: https://ssrn.com/abstract=3502394 or http://dx.doi.org/10.2139/ssrn.3502394

Owen Brown (Contact Author)

Baylor University ( email )

Waco, TX 76798
United States

Melanie Millar

Baylor University ( email )

Waco, TX 76798
United States

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