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Do auditor judgment frameworks help in constraining aggressive reporting? Evidence under more precise and less precise accounting standards

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  • Backof, Ann G.
  • Bamber, E. Michael
  • Carpenter, Tina D.

Abstract

We experimentally investigate whether alternative judgment frameworks help Big 4 audit managers and partners constrain management's aggressive financial reporting under accounting standards that differ in their precision. We find that a framework based on the SEC's Advisory Committee on Improvements to Financial Reporting's (CIFiR's) recommendation that auditors critically evaluate the pros and cons of alternative accounting methods helps auditors constrain aggressive reporting under less precise standards. While our results highlight a limitation of counterfactual reasoning on its own at enhancing auditors' constraint of aggressive reporting, this study provides evidence on how structured thinking can overcome this limitation. In particular, we find that combining this consideration of the alternatives with a structured thought process that encourages auditors to think about the issue at increasing levels of abstraction effectively shifts auditors' focus away from client considerations and towards substance-over-form considerations, thereby incrementally enhancing auditors' constraint of aggressive reporting across different levels of accounting standard precision. These results should be of interest to academics, regulators, standard-setters, and auditors as they continue to contemplate ways to improve auditors' professional judgments under different levels of accounting standard precision.

Suggested Citation

  • Backof, Ann G. & Bamber, E. Michael & Carpenter, Tina D., 2016. "Do auditor judgment frameworks help in constraining aggressive reporting? Evidence under more precise and less precise accounting standards," Accounting, Organizations and Society, Elsevier, vol. 51(C), pages 1-11.
    • Handle: RePEc:eee:aosoci:v:51:y:2016:i:c:p:1-11
    DOI: 10.1016/j.aos.2016.03.004
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    References listed on IDEAS

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    Cited by:

    1. Stéphane Lhuillery & Marion Tellechea & Stéphanie Thiery, 2021. "Open innovation in managerial innovation: the case of internal audit," Working Papers of BETA 2021-19, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    2. Yingwen Deng & Ole‐Kristian Hope & Cyndia Wang & Min Zhang, 2022. "Capital market liberalization and auditors' accounting adjustments: Evidence from a quasi‐experiment," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 49(1-2), pages 215-248, January.
    3. Carolyn Mactavish & Susan McCracken & Regan N. Schmidt, 2018. "External Auditors' Judgment and Decision Making: An Audit Process Task Analysis," Accounting Perspectives, John Wiley & Sons, vol. 17(3), pages 387-426, September.
    4. Dennis D. Fehrenbacher & Anis Triki & Martin Michael Weisner, 2021. "Can multitasking influence professional scepticism?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(1), pages 1277-1306, March.
    5. Fred Phillips & Regan N. Schmidt, 2016. "Accounting Students’ Planning, Writing, and Performance on a Time‐Constrained Case Analysis: Effects of Self‐Talk and Prior Achievement," Accounting Perspectives, John Wiley & Sons, vol. 15(4), pages 311-329, December.
    6. Bucaro, Anthony C., 2019. "Enhancing auditors' critical thinking in audits of complex estimates," Accounting, Organizations and Society, Elsevier, vol. 73(C), pages 35-49.
    7. Christopher J. Wolfe & Brant E. Christensen & Scott D. Vandervelde, 2020. "Intuition versus Analytical Thinking and Impairment Testing†," Contemporary Accounting Research, John Wiley & Sons, vol. 37(3), pages 1598-1621, September.
    8. Lhuillery, Stéphane & Tellechea, Marion & Thiéry, Stéphanie, 2023. "Innovation in lieu of compliance: Internal audit departments’ standardized and non-standardized knowledge sources," Technovation, Elsevier, vol. 123(C).

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