Do Rewards Encourage Professional Skepticism? It Depends
“Do Rewards Encourage Professional Skepticism? It Depends,” with Justin Leiby and Tammie Schaefer. The Accounting Review, 2022, Volume 97 (4): 131-154.
Posted: 13 Aug 2022
Date Written: July 2022
In three experiments, we find that rewarding professional skepticism can backfire and decrease skepticism on future audit tasks where red flags are present. We focus on rewards for costly skepticism: skepticism that is ex ante appropriate, but generates incremental ex post costs and does not identify a misstatement. Auditors interpret a reward for costly skepticism as a better-than-expected outcome and view subsequent tasks from a risk-averse gain frame. As a result, auditors seek to avoid the downside risk of skeptical action, which decreases auditors' sensitivity to red flags and their willingness to communicate severe red flags to their managers, compromising audit quality. However, we also find that a supervisor consistently rewarding costly skepticism decreases auditors' risk aversion and increases their skepticism. In sum, auditors believe skeptical action has downside risk. A cultural shift toward credible, consistent rewards for appropriate skepticism likely helps ensure that rewards have their intended effect.
Keywords: incentives, performance evaluation, professional skepticism, risk aversion; rewards
JEL Classification: M40, M42, M48
Suggested Citation: Suggested Citation