Research Seminars

Potential Actions Highly-Incentivized Client Managers Can Take to Secure Favorable Audit Judgments

Speaker: William F. Messier, Jr.
University of Nevada, Las Vegas

15 May 2012 - Room H004 - From 10:00am to 12:00noon

Given guidance that auditors should consider management incentives when determining audit
adjustments (e.g., SEC [1999, SAB 99]; Levitt [1998]), it is important to consider whether
managers with high incentives can take actions to minimize proposed audit adjustments and meet
earnings benchmarks. In a multi-task experiment using professional auditors, we investigate
whether managers with high incentives to overstate earnings can influence auditor judgments in
their favor. Our results indicate that when the manager takes an incentive-inconsistent action on
an initial proposed audit adjustment, auditors propose aggregate audit adjustments (across the
initial and a subsequent issue) of a smaller magnitude, and are more likely to allow the manager
to meet or beat the consensus analyst EPS forecast. We also find evidence of another clientfavorable
outcome regarding incentive-consistency: auditors put more trust in a manager who
initially takes an incentive-inconsistent action.

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