Reducing Management's Influence on Auditors' Judgments: An Experimental Investigation of SOX 404 Assessments

44 Pages Posted: 23 Nov 2008 Last revised: 27 Apr 2009

See all articles by Christine E. Earley

Christine E. Earley

Providence College -School of Business

Vicky B. Hoffman

University of Pittsburgh - Katz Graduate School of Business

Jennifer R. Joe

Virginia Tech - Department of Accounting and Information Systems; University of Delaware - Accounting & MIS

Date Written: July 1, 2008

Abstract

Auditors often receive summary information or conclusions from management about account balances or internal controls. They must then gather evidence to assess whether this information is fairly stated. In such situations, management can be considered the first mover and the auditor the second mover. When auditors are the second mover they are vulnerable to the curse of knowledge bias - the inability to ignore previously processed information (Fischhoff 1977). Specifically, because information from management could be incorrect or biased, auditors must arrive at an independent evaluation of the item in question (e.g. year end book values, accounting estimates or internal controls). This study examines the general issue of auditors being second movers by investigating how their awareness of management's severity classifications of internal control problems influences auditors' initial assessments of internal control over financial reporting (ICFR) under Auditing Standard No. 2. Our experimental design allows us to determine that management's first mover influence on auditors' judgments is an unintentional cognitive effect, rather than an intentional use of management's classifications. We further examine whether cognitively restructuring the ICFR assessment task reduces management's influence on auditors' judgments by asking auditors to evaluate and explicitly document the likelihood and magnitude of the effect of an ICFR problem on the financial statements. We find that cognitively restructuring the task mitigates management's first mover influence on auditors' judgments.

Keywords: Internal control assessments, auditor curse of knowledge bias, management's influence on auditors, auditor judgment

JEL Classification: M49, G34, C91

Suggested Citation

Earley, Christine E. and Hoffman, Vicky B. and Joe, Jennifer R., Reducing Management's Influence on Auditors' Judgments: An Experimental Investigation of SOX 404 Assessments (July 1, 2008). Available at SSRN: https://ssrn.com/abstract=1304292 or http://dx.doi.org/10.2139/ssrn.1304292

Christine E. Earley

Providence College -School of Business ( email )

1 Cunningham Square
Providence, RI 02918-0001
United States
401-865-2056 (Phone)
401-865-2978 (Fax)

Vicky B. Hoffman (Contact Author)

University of Pittsburgh - Katz Graduate School of Business ( email )

Pittsburgh, PA 15260
United States
412-648-1627 (Phone)

Jennifer R. Joe

Virginia Tech - Department of Accounting and Information Systems ( email )

Pamplin College of Business
Blacksburg, VA 24061
United States

University of Delaware - Accounting & MIS ( email )

Alfred Lerner College of Business and Economics
Newark, DE 19716
United States

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