Top

Journal of Business Ethics

Published in:

11-05-2017 | Original Paper

Can Social Norm Activation Improve Audit Quality? Evidence from an Experimental Audit Market

Authors: Allen D. Blay, Eric S. Gooden, Mark J. Mellon, Douglas E. Stevens

Published in: Journal of Business Ethics | Issue 2/2019

Activate our intelligent search to find suitable subject content or patents.

search-config

AI-assisted search

Off

Abstract

We assert that audit quality can be improved to the extent that social norms for honesty and responsibility are activated in the auditor. To test this assertion, we use an experimental audit market setting found in the literature and manipulate factors expected to activate honesty and responsibility norms in the auditor. We find that auditor misreporting is reduced when the investor is another participant in the experiment rather than computer simulated, and thus, the interests of third-party investors are salient to the auditor. We also find that auditor misreporting is reduced when the auditor is required to sign-off on the audit report, but only when the investor is another participant in the experiment. Consistent with our underlying theory, we find that pre-experimental measures of sensitivity to honesty and responsibility norms help explain the effects of our manipulated variables. Finally, we find that these measures of social norm sensitivity are associated with the moral judgment that auditor misreporting is unethical. Our study helps explain previous anomalous findings in the literature and answers the call in Blay et al. (J Bus Ethics 2017. doi:10.1007/s10551-016-3286-4) for empirical researchers to use social norm theory to develop stronger tests of moral reasoning in the market for auditing services.

previous article Internally Reporting Risk in Financial Services: An Empirical Analysis

next article Professional Ethics in Banking and the Logic of “Integrated Situations”: Aligning Responsibilities, Recognition, and Incentives

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Available only for authorised users

We choose honesty and responsibility norms because of their importance to professional fields such as auditing, law, and medicine. For example, honesty and responsibility norms have been shown to be two of the primary norms in the medical profession (Bosk 1979). Similarly, honesty and responsibility are primary norms in the auditing profession due to indoctrination into the profession and the potential for severe consequences if these norms are violated.

As we discuss more fully below, the auditor’s name remains private and is never disclosed to managers or investors. Thus, we control for external accountability and examine internal accountability or social norm activation in the auditor.

The use of students in experimental tests of economic theory has a long history (See Smith 2008). In their discussion of effective and efficient research design in experimental accounting research, Libby et al. (2002) argue that experimenters should avoid using professional participants unless it is necessary to achieve their research goals. Given the research questions we examine and the fundamental theory we apply in economics (Magee and Tseng 1990) and social norms (Bicchieri 2006), our use of student participants appears appropriate.

See Blay et al. (2017) for a detailed discussion of the DIT P score.

To maintain participant anonymity, Davidson and Stevens (2013) had managers certify that they would follow the code of ethics by typing their participant number into the computer. In contrast, we have participants type their name into the computer and maintain anonymity by not disclosing their name to other participants.

We contacted the lead authors in Schatzberg et al. (2005) and asked for their original set of instructions. Their gracious willingness to provide us with their instructions allowed us to closely replicate their experimental audit market setting in our study.

The verifier’s price offers were required to be in the range between $0.00 and $4.00 but could vary from seller to seller. In other words, verifiers could offer different prices to different sellers and could make price offers below their cost if they so chose.

Note that this means that one verifier could be hired by all the sellers in the market.

The observed value was always low in the experiment to ensure the possibility of misreporting the value as high at the expense of investors. This experimental design feature was also present in Calegari et al. (1998) and Schatzberg et al. (2005).

Although the signature manipulation required verifiers to type in their name when presenting their verification report, verifier names were still not disclosed to other participants to avoid external accountability and other potential confounding effects. This lack of disclosure was known to all participants in markets with a signature requirement.

The seller’s hiring costs were waived in period two if the incumbent verifier was rehired.

Auditor learning costs were waived in period two if the incumbent auditor was rehired.

Schatzberg et al. (2005) manipulate the size of the auditor’s economic penalty across three levels ($0.25, $0.50, and $0.75); however, we hold the penalty constant at $0.25 as in Calegari et al. (1998). Schatzberg et al. (2005) find no evidence of misreporting when the penalty is high enough to prevent profitable collusion by the auditor. Because we are interested in the influence of a signature requirement on reducing misreporting, we choose their lowest penalty because it allows for profitable collusion.

If the asset was valued as high, there would be no ability for the verifier to misreport at the expense of the buyer. Therefore, consistent with prior research, the asset value was always low to maintain the potential for misreporting.

All participants responded to all manipulation check questions to provide assurance that all market participants understood the setting. Including the responses to these questions from only the verifiers does not change our conclusion that the manipulations were successful.

In addition to the strong theoretical motivation for focusing on misreporting behavior in period one, misreporting in period two is strongly correlated with misreporting in period one because the market group stays the same across the two periods. When both periods are averaged together, our results are generally consistent with our reported results for period one but weaker.

The results reported in Table 3 are inferentially identical if we analyze our dependent variable as a continuous variable.

We observe quantitatively similar results if we categorize high and low participants based on ± one standard deviation above the mean rather than using a median split. We also observe similar results if we examine the proportion of auditors who chose to misreport rather than the average misreporting.

American Institute of Certified Public Accountants (AICPA). (2017). AICPA Clarified Statements on Auditing Standards, AU-C Section 200: Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards. Retrieved from: http://www.aicpa.org/Research/Standards/AuditAttest/Pages/clarifiedSAS.aspx.

Bicchieri, C. (2006). The grammar of society: The Nature and dynamics of social norms. Cambridge, UK: Cambridge University Press.

Blay, A., Gooden, E., Mellon, M., & Stevens, D. (2017). The usefulness of social norm theory in empirical business ethics research: A review and suggestions for future research. Journal of Business Ethics (in press) doi:10.1007/s10551-016-3286-4.

Bosk, C. (1979). Forgive and remember: Managing medical failure. Chicago, IL: University of Chicago Press.

Calegari, M., Schatzberg, J., & Sevcik, G. (1998). Experimental evidence of differential audit pricing and reporting strategies. The Accounting Review, 73(2), 255–275.

Davidson, B., & Stevens, D. (2013). Can a code of ethics improve manager behavior and investor confidence? An experimental study. The Accounting Review, 88(1), 51–74.CrossRef

Fischbacher, U. (2007). Z-Tree: Zurich toolbox for ready-made economic experiments. Experimental Economics, 10(2), 171–178.CrossRef

Fisher, D., & Sweeney, J. (1998). The relationship between political attitudes and moral judgment: Examining the validity of the Defining Issues Test. Journal of Business Ethics, 17(8), 905–916.CrossRef

Green, S., & Weber, J. (1997). Influencing ethical development: Exposing students to the AICPA code of conduct. Journal of Business Ethics, 16(8), 777–790.CrossRef

Hobson, J., Mellon, M., & Stevens, D. (2011). Determinants of moral judgments regarding budgetary slack: An experimental examination of pay scheme and personal values. Behavioral Research in Accounting, 23(1), 87–107.CrossRef

Jackson, D. (1994). Jackson personality inventory-revised manual. Port Huron, MI: Sigma Assessment Systems Inc.

Jones, J., Massey, D., & Thorne, L. (2003). Auditors’ ethical reasoning: Insights from past research and implications for the future. Journal of Accounting Literature, 22, 45.

King, R., Davis, S., & Mintchik, N. (2012). Mandatory disclosure of the engagement partner’s identity: Potential benefits and unintended consequences. Accounting Horizons, 26(3), 533–561.CrossRef

Kline, R. (1998). Principles and practice of structural equation modeling. New York, NY: Guilford Press.

Kohlberg, L. (1969). Stage and sequence: The cognitive-developmental approach to socialization. In D. Goslin (Ed.), Handbook of socialization theory and research. Chicago, IL: Rand McNally.

Kohlberg, L. (1976). Moral states and moralization: The cognitive developmental approach. In T. Lickona (Ed.), Moral development and behavior (pp. 31–53). New York, NY: Holt, Rinehart & Winston.

Libby, R., Bloomfield, R., & Nelson, M. (2002). Experimental research in financial accounting. Accounting, Organizations and Society, 27(8), 775–810.CrossRef

Magee, R., & Tseng, M. (1990). Audit pricing and independence. The Accounting Review, 65(2), 315–336.

Miles, E. (2016). The past, present, and future of the business school. New York, NY: Palgrave Macmillan.CrossRef

Modgil, S., & Modgil, C. (1986). Lawrence Kohlberg: Consensus and controversy. Philadelphia: Falmer Press.

Ponemon, L. (1993). Can ethics be taught in accounting? Journal of Accounting Education, 11(2), 185–209.CrossRef

Rest, J. (1979). Development in judging moral issues. Minneapolis, MN: University of Minnesota Press.

Rest, J., Narvaez, D., Bebeau, M., & Thoma, S. (1999). Postconventional moral thinking: A neo-Kohlbergian approach. Minneapolis, MN: Center for the Study of Ethical Development, Lawrence Erlbaum Associates Inc.

Schatzberg, J., Sevcik, G., Shapiro, B., Thorne, L., & Wallace, R. (2005). A reexamination of behavior in experimental audit markets: The effects of moral reasoning and economic incentives on auditor reporting and fees. Contemporary Accounting Research, 22(1), 229–264.CrossRef

Smith, A. (1759; 6th ed., 1790). In D. D. Raphael & A. L. Macfie, (Eds.), The theory of moral sentiments, the Glasgow Edition Oxford: Clarendon Press, 1976.

Smith, V. (2008). Rationality in economics: Constructivist and ecological forms. New York, NY: Cambridge University Press.

Stevens, D. (2002). The effects of reputation and ethics on budgetary slack. Journal of Management Accounting Research, 14, 153–171.CrossRef

Title: Can Social Norm Activation Improve Audit Quality? Evidence from an Experimental Audit Market
Authors: Allen D. Blay
Eric S. Gooden
Mark J. Mellon
Douglas E. Stevens
Publication date: 11-05-2017
Publisher: Springer Netherlands
Published in: Journal of Business Ethics / Issue 2/2019
Print ISSN: 0167-4544
Electronic ISSN: 1573-0697
DOI: https://doi.org/10.1007/s10551-017-3561-z

Springer Professional

Abstract

Please log in to get access to your license.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Wirtschaft"

Other articles of this Issue 2/2019

“Monkey See, Monkey Do?”: The Effect of Construal Level on Consumers’ Reactions to Others’ Unethical Behavior

Actively Persuading Consumers to Enact Ethical Behaviors in Retailing: The Influence of Relational Benefits and Corporate Associates

Disclosure Responses to a Corruption Scandal: The Case of Siemens AG

Restricting Choices: Decision Making, the Market Society, and the Forgotten Entrepreneur

Going It Alone Won’t Work! The Relational Imperative for Social Innovation in Social Enterprises

The Mediating Role of Moral Elevation in Cause-Related Marketing: A Moral Psychological Perspective

Premium Partner