Believe Who You Trust: Auditor Source Credibility, PCAOB Inspection Outcomes, and Non-Professional Investor Judgments

46 Pages Posted: 10 Jun 2022 Last revised: 23 Dec 2022

See all articles by Dereck Barr-Pulliam

Dereck Barr-Pulliam

University of Louisville

Stephani Mason

DePaul University - School of Accountancy and Management Information Systems (MIS)

Leah Muriel

Oklahoma State University - Stillwater - Spears School of Business

Date Written: December 8, 2022

Abstract

PCAOB inspection reports are one of the few sources of public information regarding audit quality and may offer signals of an auditor’s credibility consistent with source credibility theory. We conducted an experiment with non-professional investors, manipulating the auditor’s inspection deficiency rate (low versus high) and whether they attempted to breach the inspection (absent versus present). We find a negative association between deficiency rate and perceived expertise and between breaching the inspection and perceived trustworthiness. We observe that lower perceived expertise and trustworthiness are jointly associated with lower perceived auditor due care, lower perceived financial statement accuracy, and a lower likelihood of maintaining investment holdings. Inferences are similar for a second experiment measuring auditor trustworthiness as improperly revising materiality. In a third experiment, non-professional investors perceive the investment as less risky when the accounting firm communicates decisive actions to rectify the breach of trust, particularly when the deficiency rate is high.

Keywords: PCAOB, expertise, trust, due care, source credibility, materiality

JEL Classification: M41, M42

Suggested Citation

Barr-Pulliam, Dereck and Mason, Stephani and Muriel, Leah, Believe Who You Trust: Auditor Source Credibility, PCAOB Inspection Outcomes, and Non-Professional Investor Judgments (December 8, 2022). Available at SSRN: https://ssrn.com/abstract=4126780 or http://dx.doi.org/10.2139/ssrn.4126780

Dereck Barr-Pulliam (Contact Author)

University of Louisville ( email )

110 West Brandeis Avenue
Louisville, KY 40208
United States
502-852-4834 (Phone)

HOME PAGE: http://https://business.louisville.edu/faculty-research/faculty-directory/14229/

Stephani Mason

DePaul University - School of Accountancy and Management Information Systems (MIS) ( email )

Chicago, IL 60604
United States

Leah Muriel

Oklahoma State University - Stillwater - Spears School of Business ( email )

201 Business
Stillwater, OK 74078-0555
United States

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