A reexamination of behavior in experimental audit markets: The effects of moral reasoning and economic incentives on auditor reporting and fees

Jeffrey W. Schatzberg, Galen R. Sevcik, Brian P. Shapiro, Linda Thorne, R. S.Olusegun Wallace

Research output: Contribution to journalArticle

18 Scopus citations

Abstract

This study uses experimental markets to investigate how moral reasoning influences auditor reporting under different levels of economic incentives. In each multiperiod market, auditor subjects could either (1) misreport low observed outcomes as high and thereby reap economic advantages at the expense of third-party investors, or (2) truthfully report low observed out-comes as low but thereby forgo the economic advantages of misreporting. We extend the Calegari, Schatzberg, and Sevcik 1998 experimental-markets setting to incorporate moral reasoning, and test hypotheses based on the economic model of Magee and Tseng 1990 and the neo-Kohlbergian moral reasoning framework of Rest, Narvaez, Bebeau, and Thoma 1999. We document a significant effect of moral reasoning on auditor behavior. Specifically, we find that misreporting and premium fees are more likely with higher than with lower moral reasoning subjects, and the moral reasoning effect diminishes as economic penalties increase in the market. These findings provide valuable insights for specifying the determinants of auditor misreporting, the observable behaviors that signal its existence, and the institutions that can prevent its occurrence in the market. We conclude that the relation between moral reasoning and behavior is more complex than commonly assumed in the accounting literature, and identify directions for future research.

Original languageEnglish (US)
Pages (from-to)229-264
Number of pages36
JournalContemporary Accounting Research
Volume22
Issue number1
DOIs
StatePublished - Mar 1 2005

Keywords

  • Audit fee
  • Auditor reporting
  • Cooperation
  • Moral reasoning

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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