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Client Ethical Behavior Contrast Effects on Auditors’ Evaluations of Real Earnings Management

Research on Professional Responsibility and Ethics in Accounting

ISBN: 978-1-78441-164-0, eISBN: 978-1-78441-163-3

Publication date: 15 September 2014

Abstract

This study investigates whether exposure to a previous client’s earnings management behavior will impact experienced auditors’ judgments of the risk that a current client’s financial statements are materially misstated. Contrast theory predicts the context of previous information can have a priming effect on a current judgment scenario, where the information for the current judgment is contrasted with the previous information. Guided by contrast theory, we exposed auditors to either positive or negative client ethical earnings management behavior. We found the existence of contrast effects, with the positive (negative) context of the previous client resulting in auditors judging a higher (lower) likelihood of material misstatement in the current client’s financial statements. The results have implications for the effectiveness and efficiency of auditors’ judgments as well as provide insight into auditor training efforts.

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Acknowledgements

Acknowledgments

We gratefully thank Ernst & Young and the California Society of CPA’s for financial support. We also thank the auditors who participated in this research.

Citation

Anderson, J.C. and Fleming, D.M. (2014), "Client Ethical Behavior Contrast Effects on Auditors’ Evaluations of Real Earnings Management", Research on Professional Responsibility and Ethics in Accounting (Research on Professional Responsibility and Ethics in Accounting, Vol. 18), Emerald Group Publishing Limited, Leeds, pp. 69-87. https://doi.org/10.1108/S1574-076520140000018002

Publisher

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Emerald Group Publishing Limited