Difference – or Deficiency – in Judgment? Evaluations of Auditors, and the Joint Effects of Approach Punitiveness and Wise Thinking Disposition

Abstract

Evaluations of auditors’ professional judgments by persons outside of audit teams (e.g., PCAOB inspections, AICPA peer reviews, audit firms’ internal quality reviews) are a pervasive means of helping ensure audit quality. We examine how three important psychological factors jointly influence evaluators’ assessments, moderating whether bias and unwarranted inconsistency occur for evaluations of identical, plainly acceptable audit work. We test our theory in an abstract experiment in which we manipulate whether or not the judgments evaluated by participants happen to differ from the judgments they made during an earlier stage of the experiment. We also manipulate the punitiveness of the evaluation approach and measure evaluators’ disposition for wise thinking. Consistent with psychology theory, evaluators exhibit myside bias in that they less favorably assess judgments that differ from their own, relative to the control participants who also provide evaluations for those same judgments. On a more encouraging note, high wise thinkers exhibit less myside bias than low wise thinkers under a more punitive, inspection approach and, unlike low wise thinkers, logically recognize that judgments differing from their own simultaneously can be less reasonable than their own but still of sufficient quality to pass an inspection. Regulatory bodies and audit firms should be interested in these results, as bias and inconsistency for identical, acceptable audit judgments reduce the capacity of these evaluations to advance the public interest by ensuring audit quality.

Keywords: External Reviews of Audits; Professional Judgment; PCAOB Inspections; AICPA Peer Reviews; Internal Quality Reviews; Wise Thinking; Experience; Myside Bias

JEL Classification: M41; M42