The effect of performance feedback and client importance on auditors' self- and public-focused ethical judgments

Purpose – The purpose of this paper is to investigate the effect of performance feedback and client importance on auditors' self- and public-focused ethical judgments. Design/methodology/approach – An experiment is conducted in which 71 auditors are assigned to one of four conditions created by fully crossing performance feedback (positive and negative) and client importance (high and low). Findings – Consistent with expectations, auditors who receive positive (negative) feedback make more (less) ethical judgments in a self-focused task (a judgment that produces consequences that are relevant for the auditor). Auditors also make more (less) ethical judgments in a public-focused task (a judgment that has consequences for both the auditor and the public) when auditing a less (more) important client. Finally, auditors who receive positive feedback and audit a less important client make more ethical judgments in both tasks than all other auditors. Practical implications – These findings suggest that auditors are susceptible to pressures from negative feedback and client importance, even in situations where their decisions will have public consequences, despite regulatory changes intended to enhance audit quality. Originality/value – This is the first paper that provides evidence that different sources of pressure (performance feedback and client importance) differentially affect ethical tasks differing in decision consequences (self- and public-focused). Such evidence suggests the importance of matching pressure source to ethical task type.Auditors, Ethics, Feedback, Performance appraisal

Integrating business risk into auditor judgment about the risk of material misstatement: The influence of a strategic-systems-audit approach

Auditing standards direct auditors to consider business risk and other risk factors when they evaluate the overall risk of material misstatement during the planning phase of an audit. Large audit firms generally use either a strategic-systems approach (SSA) or a transaction-focused approach (TFA) to evaluate misstatement risk. This study used data from a laboratory experiment to examine whether (1) being trained to use either SSA or TFA and (2) analyzing information organized in an SSA or TFA format influence the extent to which auditors integrate knowledge of business risk into their judgment about the likelihood of financial misstatement. Only auditors trained to use SSA who analyzed information provided in an SSA format effectively integrated business risk assessments with their assessment of the risk of material misstatement.