The Effect of Moods on Auditors' Inventory Valuation Decisions

Abstract

This paper investigates the effect of different mood states¿specifically positive, neutral, and negative mood¿on inventory valuation decisions. Psychological research suggests that different mood states can lead to different professional judgments in the performance of an ambiguous task. Compared with neutral- and negative-mood individuals, positive-mood individuals have the lowest consensus and make the least conservative judgment (i.e., the highest inventory valuation) and negative-mood individuals have the highest consensus and make the most conservative judgment (i.e., the lowest inventory valuation). An experiment conducted with 102 Australian audit professionals found that, consistent with the literature, mood states affect the dispersion and extent of conservatism in the inventory valuation judgment. A follow-up experiment conducted with 170 final year Australian auditing students suggests that the effect of moods on judgment may be due to the mood congruent retrieval of information by the participants. Implications for practice and research are also provided.

Keywords: Moods, Inventory valuation judgments, Auditors' conservatism, Consensus

JEL Classification: M49, M41, M44