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

See all articles by Joseph F. Brazel

Joseph F. Brazel

North Carolina State University - Poole College of Management - Department of Accounting

Justin Leiby

University of Illinois at Urbana-Champaign

Tammie Rech Schaefer

University of Missouri at Kansas City

Multiple version iconThere are 2 versions of this paper

Date Written: July 2022

Abstract

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

Brazel, Joseph F. and Leiby, Justin and Schaefer, Tammie Rech, Do Rewards Encourage Professional Skepticism? It Depends (July 2022). “Do Rewards Encourage Professional Skepticism? It Depends,” with Justin Leiby and Tammie Schaefer. The Accounting Review, 2022, Volume 97 (4): 131-154. , Available at SSRN: https://ssrn.com/abstract=4177091

Joseph F. Brazel (Contact Author)

North Carolina State University - Poole College of Management - Department of Accounting ( email )

Campus Box 8113
Nelson Hall
Raleigh, NC 27695
United States
919-513-1772 (Phone)

Justin Leiby

University of Illinois at Urbana-Champaign ( email )

1206 S 6th St
Champaign, IL 61822
United States
2173007825 (Phone)

Tammie Rech Schaefer

University of Missouri at Kansas City ( email )

5100 Rockhill Road
Kansas City, MO 64110-2499
United States

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