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Do changes in audit actions and attitudes consistent with increased auditor scepticism deter aggressive earnings management? An experimental investigation


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  • Chen, Qiu
  • Kelly, Khim
  • Salterio, Steven E.
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    Audits are claimed to not only enhance the detection of fraud but also the deterrence of fraud. This study examines whether different audit procedures and attitudes conveyed to management deter aggressive earnings management that may be fraudulent, and whether such different procedures and attitudes conveyed influence managers’ perceptions about the ethicality of any anticipated earnings management. In an experiment with 171 senior corporate managers, we find that compared to the condition where the audit proceeds the same as last year, managers anticipate that there would be less earnings management when the nature of evidence collected has increased probative value; and when the auditor conveys a more sceptical attitude via more critical inquiry combined with either an increase in the evidence extent (increased sample size) or the nature of the evidence. However, this reduction in anticipated earnings management is not found with either the increased extent of evidence collected alone or more critical inquiry alone, suggesting that a combination of action and attitude changes compared to a change in either action alone or attitude alone better signals to managers the heightened scepticism that enhances the effectiveness of auditor deterrence. We also find, after controlling for the underlying ethical disposition of managers, that the different audit procedures and attitudes conveyed to management affect managers’ perceptions of the ethicality of anticipated earnings management. Interestingly, the conditions that engender greater earnings management also paradoxically increase managers’ perceived unethicality of the anticipated earnings management. Together these findings have implications for how different changes in audit approaches may result in differential managerial responses about their intention to commit fraud and its appropriateness. This study is one of the first papers to provide experimental empirical evidence that specific audit actions conveying heightened scepticism have significant influence on managerial judgments and behaviours with respect to committing aggressive earnings management.

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    Article provided by Elsevier in its journal Accounting, Organizations and Society.

    Volume (Year): 37 (2012)
    Issue (Month): 2 ()
    Pages: 95-115

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    Handle: RePEc:eee:aosoci:v:37:y:2012:i:2:p:95-115

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    1. Knapp, Carol A. & Knapp, Michael C., 2001. "The effects of experience and explicit fraud risk assessment in detecting fraud with analytical procedures," Accounting, Organizations and Society, Elsevier, Elsevier, vol. 26(1), pages 25-37, January.
    2. Asare, S. K. & Wright, A., 1997. "Hypothesis revision strategies in conducting analytical procedures," Accounting, Organizations and Society, Elsevier, Elsevier, vol. 22(8), pages 737-755, November.
    3. Fisher, Robert J, 1993. " Social Desirability Bias and the Validity of Indirect Questioning," Journal of Consumer Research, University of Chicago Press, University of Chicago Press, vol. 20(2), pages 303-15, September.
    4. McCracken, Susan & Salterio, Steven E. & Gibbins, Michael, 2008. "Auditor-client management relationships and roles in negotiating financial reporting," Accounting, Organizations and Society, Elsevier, Elsevier, vol. 33(4-5), pages 362-383.
    5. Gary S. Becker, 1974. "Crime and Punishment: An Economic Approach," NBER Chapters, National Bureau of Economic Research, Inc, in: Essays in the Economics of Crime and Punishment, pages 1-54 National Bureau of Economic Research, Inc.
    6. Lance Lochner, 2003. "Individual Perceptions of the Criminal Justice System," NBER Working Papers 9474, National Bureau of Economic Research, Inc.
    7. Peecher, Mark E. & Schwartz, Rachel & Solomon, Ira, 2007. "It's all about audit quality: Perspectives on strategic-systems auditing," Accounting, Organizations and Society, Elsevier, Elsevier, vol. 32(4-5), pages 463-485.
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    Cited by:
    1. Marisa Agostini & Giovanni Favero, 2012. "Accounting fraud, business failure and creative auditing: A micro-analysis of the strange case of Sunbeam Corp," Working Papers 12, Department of Management, Università Ca' Foscari Venezia, revised Mar 2013.
    2. Dan Dacian Cuzdriorean, 2013. "Most Recent Findings In Earnings Management Area: Interesting Insights From Traditionally Top 5 Leading Accounting Journals," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 2(15), pages 5.


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