Download Judgment and Decision Making Research in Accounting: A Person

Judgment and Decision Making Research in Accounting: A Person, Task and
Environment Perspective
Rajni Mala and Parmod Chand
Department of Accounting and Finance
Macquarie University
Sydney, NSW 2109
Australia
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Abstract
The discipline of accounting and auditing has increasingly recognized judgment and decision
making (JDM) as important and significant attributes in the profession because individuals
such as managers, auditors, financial analysts, accountants and standard setters make
important judgments and decisions. Many studies undertaken in this domain of research also
substantiate the significance of JDM in accounting and auditing. This paper evaluates all the
papers published in ten leading accounting journals during 1980 – 2010 that fall within the
domain of JDM research. The categorization of the studies reviewed in this paper is based on
Bonner’s (1999) three major determinants of JDM: ‘Person’, ‘Task’ and ‘Environment’
variables. The review highlights the progress in literature over the past three decades and also
identifies the theoretical and methodological strengths and limitations of previous research.
The identified limitations would be useful to improve the research method, theory
development and hypothesis formulation of future studies.
1.0
Introduction
Professional judgment “has been considered the cornerstone of accounting and auditing for
well over 50 years” (Trotman, 2006, p.6). The creation of the Research Opportunities in
Auditing Program (Peat, Marwick and Mitchell (PMM), 1976) and the publication of the
influential American Accounting Association Report (Committee on Human Information
Processing, 1977) brought accounting and auditing judgment and decision making research
into the scholarly limelight (Solomon and Trotman, 2003, p.395). As a field of research,
‘judgment and decision making’ (JDM) examines the judgments and decisions of individuals
and groups (Trotman, 2006, p.8). The discipline of accounting and auditing has increasingly
recognized JDM as important and significant attributes in the profession because individuals
such as managers, auditors, financial analysts, accountants and standard setters make
important judgments and decisions. The need for auditors to ‘exercise professional judgment’
emerge 244 times in the international standards on auditing (Pillar, 2005) and the
International Financial Reporting Standards (IFRS), being principles-based, require the use of
professional judgment as a norm.
Many studies undertaken in this field of research also substantiates this significance of JDM
in accounting and auditing. Audit monographs and reviews on JDM studies, for example,
include Libby (1981), Libby and Lewis (1982), Ashton (1982), (1983), Libby and Luft
(1993), Ashton and Ashton (1995), Bell and Wright (1995) Solomons and Shields (1995)
Trotman (1996), Solomon and Trotman (2003), Nelson and Tan (2005) and Humphrey
(2008). These reviews vary in relation to how prior research in JDM is categorized. For
example, Libby and Luft (1993) has shown how the literature has progressed in terms of the
effects of knowledge, ability, motivation and environment on performance, while Solomon
and Shields (1995) and Solomon and Trotman (2003) categorized the literature into multiperson judgment, heuristics and biases, knowledge and memory, probabilistic judgment,
environment and motivation, and policy capturing. Nelson and Tan (2005) divided the
auditing JDM literature as covering three broad areas: the audit task, the auditor and his/her
attributes, and the interaction between the auditor and other stakeholders in task performance.
Primarily, JDM research in accounting examines two major issues. First is the examination of
the quality of an individual or group’s JDM, i.e. the measurement of individuals’
performances when they are engaged in tasks requiring judgment and decision-making.
Secondly, JDM research examines the determinants of both high and lower quality
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judgments, i.e. the factors that affect JDM (Bonner, 1999, p.386). This paper focuses on
reviewing the studies that have examined the determinants of JDM, in particular the factors
that affect the JDM of individuals.
The studies reviewed here are categorized on the basis of Bonner’s (1999) three major
determinants of JDM: ‘Person’, ‘Task’ and ‘Environment’ variables. These three variables
are integral components of the JDM process utilized by an accountant or an auditor. It is
important that individuals make good quality judgments, as the quality of an individual’s
judgment can affect his or her professional standards and performance while also having an
impact on other stakeholders, including fellow employees, business owners and the
institution or organization. Equally, a poor judgment can lead to major financial loss,
triggering a filtering impact on the people who rely on others’ JDM. For example, investors
rely on forecasts by financial analysts to make investment decisions, and if the financial
analyst has made poor judgments then the investor will suffer. Poor decisions of this nature
can also lead to negative legal outcomes such as payouts in civil litigation (Erickson et al.,
2000).
Various characteristics of the accountant (e.g., knowledge, expertise, information processing
capabilities, ability to use decision aids and prior beliefs from past experiences) influence the
individual’s judgment. The task variables relate to the nature and dimensions of the task per
se (e.g., its presentation format, complexity, risk, choice of accounting methods) and these
attributes of task also influence the accountant’s judgment. The environmental variables
relate to the situations surrounding an individual while he or she performs a JDM task; they
are not related to any one task. Time pressure, internal control, corporate governance and
accountability are the types of environmental attributes that have the capacity to influence
JDM, as these attributes can change the task requirements as well as amount of knowledge,
effort and motivation that the decision maker must bring to the task (Libby and Luft, 1993,
p.435).
The objective of this paper is to review the studies that have examined the determinants of
accounting and auditing JDM, in particular the research examining the variables of ‘Person’,
‘Task’ and ‘Environment’. This paper evaluates all the papers published in ten leading
accounting journals during 1980 – 2010 that fall within the domain of JDM research: The
Accounting Review (AR); Accounting and Business Research (ABR); Accounting Horizons
(AH); Behavioral Research in Accounting (BRA); Journal of Accounting Research (JAR);
Journal of Accounting and Public Policy (JAPP); Journal of Accounting and Economics
(JAE); Contemporary Accounting Research (CAR); Accounting, Organizations and Society
(AOS); and British Accounting Review (BAR). The review highlights the progress in literature
over the past three decades and also identifies the theoretical and methodological strengths
and limitations of previous research. The identified limitations would be useful to improve
the research method, theory development and hypothesis formulation of future studies.
The remainder of the paper is organized as follows. Section two provides an overview of the
studies under review. Sections three to five evaluate the studies under the three categories of
the ‘Person’, ‘Task’ and ‘Environment’ variables. The last section provides the conclusion
and implications of this study.
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2.0
Scope of Accounting Judgment and Decision Making Research
JDM research in accounting, a part of the larger area of psychological research called
‘behavioural decision theory’, studies how professional accountants’ judgments and decisions
are made and identifies ways to improve them (Trotman, 1998, p.115). To understand the
importance of JDM in accounting, it is important to be acquainted with the terms of JDM. For
the purpose of this study, judgment refers to “forming an idea, opinion or estimate about an
object, an event, a state, or another type of phenomenon” and the term decision refers to
“making up one’s mind about the issue at hand and taking a course of action” (Bonner, 1999,
p.385). According to Brown et al. (1993, p.275), “accounting standards provide accountants
with incomplete direction and require them to exercise professional judgment”. Accordingly,
the financial reports of business enterprises are the end products of numerous judgments and
decisions (Hronsky and Houghton, 2001, p.123).
Over the past few decades, several prestigious commissions and other bodies have referred to
this relationship between accounting standards and judgment. For example, the Cohen
Commission in its 1978 report commented (p.16) that:
Judgment pervades accounting and auditing. It is exercised in considering whether
the substance of transactions differs from their form, in resolving questions of
materiality and adequacy of disclosure, in deciding whether an estimate can be made
of the effects of future events on current financial statements, and in allocating
receipts and expenditures over time and among activities.
From a practical perspective, accountants or managers who produce accounting information
choose accounting methods and make judgments that best suit their objectives (Clor-Proell,
2009). For example, loan officers use professional judgments in evaluating the credit
worthiness of loan applicants (Houston and Peters, 2001). Financial analysts who use
accounting information make judgments about future earnings (Mikhail et al., 1999).
Auditors use professional judgments to make decisions about the accuracy of financial
statements (Lindberg, 1999). Analytical procedures, which provide important evidence to the
external auditor for the initial planning of the audit work, require the application of
professional judgment (Kaplan, 1988). Finally, professional institutions that regulate the
work of accountants and auditors make overarching decisions and judgments on the
appropriate disclosure and presentation of financial information.
Thirty-two studies have examined the effect of the ‘Person’ variable on JDM [seven studies
in JAR (Ashton and Kramer, 1980; Messier, 1983; Kida, 1984; Butler, 1985; Frederick and
Libby, 1986; Butt, 1988 and Frederickson et al., 1999), eight studies in AR
(Abdolmohammadi and Wright, 1987; Kachelmeier and Messier, 1990; Choo and Trotman,
1991; Brown, C. and Solomon, 1991; Bonner et al., 1996; Shelton, 1999; Ng and Tan, 2003
and Bhattacharjee et al., 2007), seven studies in BRA (Lo, 1994; Anderson and Maletta, 1994;
Anderson et al., 1997; Emby et al., 2002; Rose, 2007; Lehmann and Norman, 2006 and
Agoglia et al., 2009), two studies in ABR (Strawser, 1990 and Hooper and Trotman, 1996),
four studies in AOS (Wright, 1988; Trotman and Sng, 1989; Butt and Campbell, 1989 and
Hoffman et al., 2003), three studies in CAR (Boritz, 1985; Tan and Yip-Ow, 2001 and Earley,
2002) and one study in JAPP (Anderson et al., 1995)].
Ten studies have examined the effect of the ‘Task’ variable on JDM [one study in JAR
(Phillips, 1999), four studies in AR (Prawitt, 1995; Maines and McDaniel, 2000; Kadous et
al., 2008 and Clor-Proell, 2009), one study in BRA (Chung and Monroe, 2001), one study in
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AOS (Blocher et al., 1986), one study in CAR (Kadous and Magro, 2001) and two studies in
the AH (Kaplan, 1988 and Ayers and Kaplan, 1998)].
Twenty-three studies have examined the effect of the ‘Environment’ variable’ on JDM [two
studies in BRA (Tan et al., 1997 and Sharma et al., 2008), one study in AH (Jennings et al.,
2006), one study in ABR (Wright, A and Wright, S, 1996, three studies in BAR (Dezoort and
Lord, 1994 Lee, 2002 and Dunk, 2007), nine studies in JAR (Trotman and Yetton, 1985;
Ashton, R. H. 1990; Tan and Kao, 1999; McDaniel, 1990; Kennedy, 1993; Gibbins and
Newton, 1994; Peecher, 1996; Glover, 1997 and Hoffman and Patton, 1997), two studies in
CAR (Bamber and Bylinski, 1987 and Cohen et al., 2002), three studies in AR (Kennedy,
1995; Wilks, 2002 and Libby et al. 2004) and two studies in AOS (Stocks and Harrell, 1995
and Dezoort et al. 2006)].
The individual studies share a common attempt to identify potential factors that may affect
judgments, as will be shown in the next three sections, which discuss individually the
research relevant to the ‘Person’, ‘Task’ and ‘Environment’ variables in the ten leading
accounting journals during 1980 – 2010.
3.0
Studies that classify Judgment and Decision Making Factors as a ‘Person’
Variable
Mautz and Sharaf (1961, p.35) pointed out that:
Before making a judgment on a value problem, it should be apparent that broad
experience, a perceptive memory, controlled imagination and a sound understanding
of the functions and responsibility of the profession are invaluable aids to the exercise
of sound judgment.
Person variables relate to the characteristics the decision maker brings to the task, like
knowledge, expertise, information processing abilities, use of decision aids and prior beliefs
or ‘anchoring’, as Tversky and Kahneman (1974) describe it (Bonner, 1999 and Nelson and
Tan, 2005). Accountants must constantly depend on their knowledge and decision-making
skills to come up with the best answers to different types of decisions under a wide range of
conditions; hence, it is of both theoretical and practical interest to investigate the
effectiveness of these attributes. Studies that have considered the JDM factor as a ‘Person’
variable (see Tables 1A to 1E in the Appendix) were attempts to examine the influence of (1)
knowledge, (2) expertise, (3) information processing abilities, (4) use of decision aids and (5)
prior beliefs (anchoring) on various dependent variables such as making decisions about the
going-concern of an entity, predicting financial statement errors, recall of information and
fraud assessments.
Of the thirty-two studies reviewed within this area, four studies have considered the effect of
knowledge on JDM [(Frederick and Libby, 1986 (JAR); Butt, 1988 (JAR); Choo and
Trotman, 1991 (AR) and Emby et al., 2002 (BRA)]. Ten studies have provided an insight into
the effect of expertise on JDM [(Ashton and Kramer, 1980 (JAR); Messier, 1983 (JAR);
Abdolmohammadi and Wright, 1987 (AR); Anderson and Maletta, 1994 (BRA); Lo, 1994
(BRA); Shelton, 1999 (AR); Earley, 2002 (CAR); Lehmann and Norman, 2006 (BRA); Rose,
2007 (BRA) and Agoglia et al., 2009 (BRA)]. Three studies illustrate the effect of information
processing abilities on JDM [(Brown and Solomon, 1991 (AR); Hooper and Trotman, 1996
(ABR) and Hoffman et al., 2003 (AOS)]. Eight studies have investigated the effect of using
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decision aids on JDM [(Boritz, 1985 (CAR); Butler, 1985 (JAR); Kachelmeier and Messier,
1990 (AR); Strawser, 1990 (ABR); Anderson et al., 1995 (JAPP); Bonner et al., 1996 (AR);
Anderson et al., 1997 (BRA) and Ng and Tan, 2003 (AR)]. Seven studies have studied the
effect of prior beliefs on JDM [(Kida, 1984 (JAR); Wright, 1988 (AOS); Butt and Campbell,
1989 (AOS); Trotman and Sng, 1989 (AOS); Frederickson et al, 1999 (JAR); Tan and YipOw, 2001 (CAR) and Bhattacharjee et al., 2007 (AR)].
The following subsections review the studies relevant to the ‘Person’ variable, looking at
each attribute or quality in turn. Subsequent subsections discuss the research methods
employed in these studies and provide suggestions and directions for future research.
3.1
Knowledge
In the past few years, considerable amount of studies associated with auditor judgment has
elicited several concerns about the way audit tasks are carried out and the types of the
education and training that would assist individuals, i.e. how knowledge might affect the
approach to judgment and help in better decision making (Knechel, 2001, p.695). As Waller
and Felix (1984, p.383) point out that “the professional auditor acquires a complex network
of knowledge over his or her years of experience: knowledge that simply cannot be obtained
in the classroom”.
In the 1980s, much interest centred on the differences between auditors and novice students.
By using students and auditors, Butt (1988) showed that for both students and auditors,
frequency judgments1 based on direct experience only were the most accurate, and those
based on indirect experience only were the least accurate.2 Overall, the study illustrated that
auditors performed slightly better than students in the auditing task, but no differences were
found between the two groups in the generic task (p.329).
In the mid-1980s, behavioural research subsequently moved from an abstract setting to a
more realistic setting in search of the knowledge effect in which the main concern was to
discover what is stored in the expert’s memory. Frederick and Libby (1986) are regarded as
the first published study attempting to show how knowledge differences affect the judgment
of accountants. By using Tversky and Kahneman’s3 (1983) conjunction paradigm, the study
showed that experienced auditors have both knowledge of relations of the control weaknesses
and accounts errors, and knowledge of relations among accounts, and this determines their
judgment behaviour. On the other hand, less experienced auditors possess only knowledge of
account relations, and this is the knowledge that determines their judgment behaviour. This
study has made a significant contribution by pointing out that even understanding experts’
use of heuristics and their cognitive abilities requires consideration of their knowledge,
because knowledge interacts with the ability to determine judgment. These findings drew the
importance of studying the effects of expertise on the professional judgments and this will be
discussed in detail in the next subsection.
1
Frequency judgment has been referred to as “in addition to the actual audit hours used in an area, the frequency of errors discovered in past
audits may serve as a guide in allocating hours in the current audit plan” (Butt, 1988, p.315).
2
Experiences with frequency data range along a continuum from direct to indirect experience. Direct experience can vary from uncovering
an error personally to participating in an audit where an error is found and discussed. On the opposite end of the continuum is indirect
experience, such as receiving summary data regarding the frequency of occurrence of a particular type of accounting error.
3
According to Tversky and Kahneman, decision heuristics incorporate domain-specific knowledge with natural assessment processes that
are routine parts of perception and comprehension.
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In the early 1990s, the knowledge literature expanded to include the schema-based
framework, i.e. how knowledge is structured. Choo and Trotman’s (1991) study is an
example of this. They adopted a “schema-based framework”4 to examine differences in the
knowledge structures and judgments of experienced and inexperienced auditors. The study
examined the recall of typical and atypical information by experienced and inexperienced
auditors within the context of a going-concern situation and then related this measure of
memory to the inferences and predictive judgments made. The findings showed that with
respect to knowledge structures, there were differences between experienced and
inexperienced auditors in the amounts, type and clustering of items that were recalled. These
findings imply that experienced auditors’ inferences are based on the way information is
organized in the memory. Finally, they found no direct relationship between the predictive
judgments made and the items recalled for either experienced or inexperienced auditors. The
study by Emby et al. (2002) showed that audit partners are subject to the influence of the
outcome knowledge as the negative outcome information influenced audit partners’ judgment
regarding the client’s continued operation. No outcome information was interpreted as
positive outcome information suggesting that individuals have difficulty in anticipating nonevents.
< Insert Table 1A here>
3.2
Expertise
Research in this area investigates the relationship between expertise and professional
judgment. Expert knowledge is important to know how and why a better performance is
achieved when an individual becomes more experienced (Nelson and Tan, 2005, p.49).
R. H. Ashton and Kramer (1980) first documented that students behave similarly to auditors
in such measures as cue utilization, consensus and consistency in making judgments. The
study assessed the effect of experience on judgment. The student subjects had no auditing
experience, while the auditors used for comparison purposes had between one and three
years’ of experience. The findings showed no significant differences between the judgment of
the students and the auditors and concluded that, when feasible, future behavioural
accounting research projects might include student subjects, in addition to real-world subjects
of interest in order to evaluate the importance of experience, wealth, age or other factors on
the issue under investigation. Ashton and Kramer (1980) used accounting students as
subjects, whereas Messier (1983) used twenty-nine audit partners with varying levels of
experience and showed that only consensus of the audit partners’ materiality/disclosure
judgments was affected by experience levels and firm type (p.618).
In the 1990s, the literature on experience made a smooth progression to include the type of
information used by accountants in their decision making. These studies had important
practical implications, as they highlighted that as accountants gain more experience, they are
able to provide better professional judgments. The Anderson and Maletta (1994) study
illustrates how accountants used the given information. They examined whether experience
affected the concentration given to negative audit evidence. The results indicated that
experience is crucial when there is negative audit evidence present but levels of experience
have no effect on the positive information. The findings of this study are important in that
4
A schema-based framework organizes memory and plays a fundamental role in all cognitive activities (e.g., remembering, predicting,
explaining and formulating an opinion regarding a client’s financial reports) (Waller and Felix, 1984).
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they enhance our understanding of the effect of experience-related differences on audit
judgment tendencies and thus add to the general knowledge base concerning the role of
expertise in auditing. In effect, it could be argued that in terms of audit effectiveness it is
better for inexperienced auditors to be more risk averse or conservative in their approach to
the audit process. This allows them, in spite of their lack of knowledge, to root out potentially
critical problems that can be reviewed later by more experienced auditors. Conversely, these
findings also raise a question of whether the negative tendencies exhibited by inexperienced
auditors are optimal in terms of the balance between audit effectiveness and efficiency.
An additional branch of the expertise literature has investigated the significance of the
experience effect when task complexity is explicitly considered. Explaining the effect of
experience and task complexity is the work of Abdolmohammadi and Wright (1987), which
showed that significant differences were consistently found between experienced staff and
other subjects for unstructured and semi-structured tasks. The findings show that experienced
staffs are able to make more accurate decisions about complex tasks than inexperienced staff.
Lo (1994) pushed the expertise literature on information use even further. His study revealed
that there were differences in the judgments of experienced and less experienced auditors
who were to make decisions regarding the going concern of a firm. Further to this, Shelton
(1999) showed the effect of irrelevant information in the going-concern judgments of lessexperienced auditors compared with those of more experienced auditors. The findings
showed that experience reduced the influence of irrelevant information in auditor judgment.
More experienced auditors (partners and managers) were not influenced by the presence of
irrelevant information in making a going-concern judgment. On the other hand the less
experienced auditors (seniors) were influenced by the presence of irrelevant information
(p.223). This study made a significant contribution to accounting practice by highlighting that
experienced auditors could detect and correct the judgments made in audit reviews (p.224).
In the first decade of the 2000s, the expertise literature advanced to pursue a cognitive
explanation of accountants’ behaviour and to explain what happens to the differences in
judgments when the task is simple. Earley (2002) is a good example of this. The study
examined how experienced and less experienced auditors used different types of information
when forming judgements about the reasonableness of client-provided information.
Experienced auditors provided a better judgment on the discount rates used in real estate
valuation (p.608). Further to this, Lehmann and Norman (2006) study showed that more
experienced individuals can solve complex problems better than the less experienced
individuals as they have better knowledge structures.
Studies by Rose (2007) and Agoglia et al. (2009) showed the expansion of the expertise
literature from information selection abilities to industry-specific knowledge and expertise.
Rose (2007) found that auditors with fraud-specific experience compared with no fraudspecific experience made better judgment regarding fraud when there was existence of
aggressive reporting. These findings have practical implications such as audit firms can be
more confident in their judgments when fraud-specific experience auditors are involved to
investigate misstatements in reporting. Additionally, Agoglia et al. (2009) indicated that
review team task-specific experience played a significant role in mitigating the effect of the
fraud assessment documentation structure on auditor fraud risk judgments. They found that
experienced preparers were less influenced by a component documentation structure than
their less experienced counterparts.
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< Insert Table 1B here>
3.3 Information Processing
An important issue in audit judgment research has been how information is combined when
making judgments, and in particular, whether auditors’ judgments involve configural cue
usage5 (Hooper and Trotman, 1996, p.125). According to (Nelson and Tan, 2005), from the
early 1970s there has been a lot of focus on how information is combined and processed
cognitively.
Throughout the 1990s, there has been a lot of interest in whether accountants were able to
process information configurally or whether they became susceptible to the heuristics and
biases described in the psychology literature. The work of Brown and Solomon (1991) and
Hooper and Trotman (1996) are examples of studies in this area. Evidence from the Brown
and Solomon (1991) study indicated that a high proportion of auditors processed the available
information configurally. Based on the findings of Brown and Solomon (1991), Hooper and
Trotman (1996) extended this research by examining some of the conditions that may have
facilitated the development of the auditors’ ability at configural processing of the available
information. The study found that the type of compensatory form and level of consensus was
higher for auditors who processed information configurally than for those who did not.
Hoffman et al. (2003) added to the literature by studying the order of information processing.
They compared the judgments of experienced and inexperienced auditors in a constrained
versus an unconstrained information processing situation and found that experienced
auditors’ going-concern judgments differed from inexperienced auditors’ judgments only
when processing was unconstrained. Constraining the experienced auditors’ processing
practice prevented them from attending to as much positive evidence as they did when their
processing was unconstrained, and this resulted in lower quality going-concern judgments in
the constrained processing condition. This differential attention to evidence accounted for the
difference in judgment. This study provides evidence that forcing experienced auditors to
process information sequentially when they are more accustomed to processing it
simultaneously can have a detrimental effect on their judgments (p.710).
< Insert Table 1C here>
3.4 Decision Aids
It is quite common in accounting to use decision aids to improve the professional judgments
of individuals when there is a lack of knowledge and expertise. Decision aids vary from being
relatively simple, such as checklists, audit programs and other aspects of the audit software;
that are embedded in professional standards and being more complex (Messier, 1995).
Research into the use of decision aids helps us to understand how these aids improve or bias
the judgments made.
In the 1980s, studies were focused on the use of simple decision aids. For example, Butler‘s
(1985) study showed that the decision aid helped the auditors to make more accurate
decisions when accepting or rejecting reported account balances. Boritz (1985) also examined
the effect of data structuring techniques as a form of aid on audit judgments and he found that
Configural information processing is “cognition in which the pattern (or configuration) of stimuli is important to the subsequent
judgment/decision” (Brown and Solomon, 1990, p.19).
5
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the structure of information presentation appeared to assist in the evaluations and plans of the
auditors. In an exploratory study, Strawser (1990) examined audit-risk judgments using the
human information processing methodology. His findings showed that auditors’ judgments
were not consistent with the audit risk model; rather, they demonstrated that while the auditrisk model implicitly assigned an equal weight to each component, the lack of more explicit
guidance led to differences in judgments (p.74). The study highlighted that it is important to
provide the auditors with more explicit guidance while also suggesting that there is a need to
modify the audit-risk model. Kachelmeier and Messier (1990) provided evidence that
auditors create the inputs necessary to justify the desired sample sizes. This study shows how
combining human judgment and decision aids relates to input bias that is designed to achieve
the desired outcomes.
In the mid-1990s, the use of more complex decision aids was investigated. Anderson et al.
(1995) explored the potential legal effects of not completely using the diagnostic (analytical
procedures) decision aids. The results showed that the incomplete use of the decision led to
increased perception of the liability compared to when no decision aid was used. This finding
implies that decision aids need to be fully used to assist in decision making. Interest in the
literature grew and studies focused on the use of two decision aids. Using 105 auditors,
Bonner et al. (1996) demonstrated that the checklist aid slightly improved the judgments of
experienced auditors. From an audit perspective, the results indicated that the mechanical
aggregation aid alone would eliminate the adverse effects of a mismatch between dimension
importance and knowledge organisation and task organisation. Anderson et al. (1997) tested
the influence of having auditors focus on explanations from an error vs non-error dominated
list of explanations. The findings showed that requiring auditors to focus on errors from an
error-dominated list led to an increase in their assessment of error. By contrast, requiring the
auditors to focus on non-errors from a non-error dominated list did not significantly decrease
their assessment of error. These findings may reflect the greater emphasis auditors place on
the effectiveness of the audit compared to audit efficiency. The results also showed that
auditors’ initial and revised probability of error estimates were significantly affected by client
environment information. Furthermore, Ng and Tan (2003) undertook an experiment on audit
managers to find out the effects of two decision aids: the availability of authoritative
guidance and the effectiveness of the client’s audit committee. The results showed that the
auditors’ perceived negotiation outcome was jointly influenced by authoritative guidance
availability and audit committee effectiveness. The authoritative guidance availability had a
greater effect on the auditors’ perceived negotiation outcome in the absence of an effective
audit committee compared to the outcomes in its presence.
The findings of the above studies showed that, on one hand, decision aids improve
professional judgments, while on the other, their use can contribute to input bias designed to
achieve predetermined outcomes, as shown in the study by Kachelmeier and Messier (1990)
where the auditors create the input necessary to justify the desired sample sizes.
< Insert Table 1D here>
3.5
Prior Beliefs
Psychology research has suggested that human reasoning is “prone to a ‘confirmation bias’
that hinders effective learning” and hence affects judgment (Klayman and Ha, 1987, p.211).
Tversky and Kahneman (1974) posit that individuals employ a heuristic rule of anchoring and
adjustment, i.e. the tendency to establish an initial starting point (e.g., prior experience) and
then make adjustments from this anchor in light of additional data. For example, Lord et al.
10
(1979) showed that subjects used different standards for criticizing conflicting evidence than
those they used for criticizing supporting evidence. While most of this work on prior beliefs
has been done in the fields of psychology and social psychology, there has been some
research done in accounting as well.
Studies carried out in the early 1980s provide much descriptive evidence about the effects of
prior knowledge on JDM. For example, according to Waller and Felix (1984, p. 399), “the
auditor manifests a strong tendency to seek and use confirmatory rather than disconfirmatory
evidence”. Moreover, Kida (1984) showed that the auditors weighted causal data as more
than equally diagnostic than non-causal data in their decision making processes, providing
support for the impact of intuitive cause effect relations. Trotman and Sng (1989) extended
Kida’s (1984) study on auditors’ choice of information cues and supported the findings that
prior beliefs led to a different judgment in comparison to when there was no prior beliefs.
The study by Wright (1988) contributed to the prior belief literature when he examined the
effect of prior information on audit effectiveness and audit efficiency. The results suggest that
when linked to prior working papers the audit efficiency had adverse effects. Butt and
Campbell (1989) studied the effect of prior knowledge on the importance of information
order and they found that subjects with strong prior beliefs were unaffected by information
order but weak prior beliefs were associated with a recent effect. The findings have practical
implications by highlighting that a single piece of negative evidence appears to be greater
than a single piece of positive evidence (p.479). Frederickson et al. (1999) presented another
key addition to the prior knowledge literature when they studied the interplay between
accountants incentives and correct judgment and how it is affected by prior knowledge. They
found that previous experience under a performance evaluation system can systematically
bias decision makers’ subsequent evaluations. In particular, an examination of the differential
sensitivity of encoding and retrieval processes commonly required in accounting settings
suggested that monetary incentives increased both the duration (measured by time spent on
the task) and consistency of encoding effort relative to a flat wage, and that this effort
increased performance in the recall task by a greater amount than in the recognition task.
Providing monetary incentives at the time of retrieval increased the duration of the retrieval
effort, improved recall, and only slightly improved recognition. As the task structure was
increased (moving from recall to recognition), exerting additional effort was less effective
because less effort-sensitive processing was required for the task. Further, without a
knowledge base, increased effort expended at the retrieval stage which was not reflected in
improved recall or recognition performance. The impact of incentives depends not only on
the type and amount of incentives offered but also on the level of task structure and the
knowledge of the decision maker.
Tan and Yip-Ow (2001) examined how the initial conclusion reached by the preparer of audit
work papers and the manner in which the preparer structures the associated evidence can
influence the reviewer’s judgment in an audit setting. Their results showed that when a
preparer structured the memo to emphasize evidence consistent with her/his conclusions and
de-emphasized inconsistent evidence, reviewers placed less weight on the conclusions
reached by the preparer than when the memo was structured in a neutral fashion. These
results have implications for the accounting profession, as reviewers generally work under
the time pressure of tight deadlines, and it is possible that their sensitivity to stylization
attempts may be reduced in such conditions.
11
Using a multi-client audit context, Bhattacharjee et al. (2007) found that auditors are
susceptible to contrast effects such that their judgments on a current client are influenced by
their exposure to similar judgment information on a prior client. They also found that
auditors’ documentations of evidence are systematically affected by these contrast effects and
the cascading of contrast effects. Thus, their results provide evidence for the importance of
contrast effects, and in particular, the cascading of contrast effects, on subsequent decisions.
< Insert Table 1E here>
3.6
Research Methods
All thirty-two studies reviewed under Person as a variable affecting JDM have used
experiment. Two of the four studies reviewed under the attribute of Knowledge (i.e.,
Frederick and Libby, 1986 and Butt, 1988) have used undergraduate and MBA students as
surrogates for auditors. This clearly raises the question of whether these students share
similar background experiences with the parties for whom they are acting as proxies, with
possible implications for the studies’ findings. Additionally, these studies have provided
empirical evidence but they have not provided real world settings, which again has
implications for the generalization of the findings. In the ‘real world’, there would typically
be genuine incentives to make particular decisions with real and ongoing implications as a
result of these decisions, which usually cannot be replicated in an experimental setting. For
example, Gibbins (1984) and Waller and Felix (1984) point out that auditors perform a
variety of subtasks in forming an audit opinion. Each subtask may require different types of
knowledge and involve a number of different processes. Given the complexity of the audit
opinion formulation process, successful efforts to understand the process will require
disaggregation and detailed analysis of the components (Gibbins, 1984). Only after these
steps have been completed and extended to important audit judgment tasks will we begin to
understand what knowledge differences allow experts to perform audit tasks that novices
cannot undertake.
In most of these studies, the variables under study were elicited on a Likert scale anchored
from 0 to 10. Likert scaling presumes the existence of an underlying (latent or natural)
continuous variable whose value characterizes the respondents’ attitudes and opinions
(Likert, 1932) . For example, Lo (1994) used a seven-point Likert scale, with 7 labelled ‘very
strong’, 4 labelled ‘average’, and 1 labelled ‘very weak’. Shelton (1999) used a –5 to 5 scale
for her studies. Lehman and Norman (2006) used written protocols based on the nature of the
task to measure the problem representation dependent variables. They asked participants to
write a summary explaining the case company’s financial condition to a supervisor and
explain their reasoning.
Of the studies reviewed, some specific limitations in the research methods were observed.
For example, Choo and Trotman (1991) examined the recall of information by experienced
and inexperienced auditors and then related this to the inferences of the auditors’ predictive
judgments. Even though the subjects were not asked to make a predictive judgment before
making the recall, it was suggested that, given the nature of the context, they probably formed
their judgments ‘on-line’ as evidence was encountered and before the recall exercise (Choo
and Trotman, 1991). Earley (2002) investigated the experience impact on client-provided
discount rates for real estate valuations. This study had some limitations in its methodology
because it was based on real estate audit engagements and hence it was difficult to determine
whether the auditors had the prior knowledge to carry out valuation tasks (and other related
analytical tasks), specially in the high risk circumstances in which discount rates provided by
12
the client or an outside appraiser are apparently in line with industry reports (p.611). Butler
(1985) had only seven usable responses in the control group and eleven in the aid group. This
shows that the sample was very small particularly given that that the subjects were collected
from one Big Firm. Hence, it was not a random selection of auditors.
The Lehman and Norman (2006) study may be having selection bias because only volunteers
from the membership of the Washington Society of CPAs were requested to take part in the
study and many of them were in the middle of the tax season. This selection of subjects
would have affected the number and experience level of individuals. The case dealt with an
industry sensitive to economic conditions, fuel prices and so on, which has been subjected to
publicity related to its deregulation. In addition, no independent variable was manipulated,
and the subjects analyzed only one case due to time constraint. As a result, the results of this
study may not be generalizable to other industries.
3.7
Suggestions for Future Research
Through experimental analysis and by using the Likert scale, previous studies have primarily
investigated the effects of knowledge, experience, information processing, use of decision
aids and prior beliefs on JDM. These studies have mostly used ANOVA or MANOVA
techniques to show the effects on JDM. While the studies reviewed are not exhaustive, they
have made a great contribution to the JDM literature and have broadened the understanding
of the factors affecting JDM.
The growing interest in the issues addressed in the literature also provides added impetus for
future research in the area of JDM. For example, Frederick and Libby’s (1986) study showed
that no attempt was made to ensure that the experimental task matched the structure of an
actual audit task and hence, future research could ensure that the experimental task is realistic
so that the results could be generalized. Moreover, Butt (1988) only partially supported the
predicted difference between auditors and students with respect to expertise (p.329). One
possible explanation for the lack of stronger results would be that the time available may
have been inadequate to access the mental organization of the auditors’ experiences with
errors. Another problem would have been introduced by the use of common financial
statement errors. Students’ classroom exposure may have provided a cognitive structure that
was adequate for a simple response like the one required in this task. While the task itself was
difficult due to the nature of the experimental stimuli and the limited exposure to them, the
response format that was used may have helped the students’ performance. In future research,
these factors could be explored by facilitating exposure time, the nature of the financial
statement errors, and the difficulty of the required judgment.
Choo and Trotman (1991) similarly did not obtain any information on the perceived
importance or diagnostic of each of the items recalled. It may be that it is the perceived
importance or diagnostic of the atypical versus typical items recalled, rather than the number
of items recalled, that is associated with predictive judgments. For example, a subject could
recall four atypical and two typical items and still provide a high probability of failure if he or
she considered one or two of the typical items to be highly diagnostic of failure. According to
the authors, this study did not examine certain aspects of judgments such as task structuring,
choice of rules used to process information, and interpretation of outcomes, as these factors
might affect a global judgment such as prediction of failure. Future research could examine
how judgment is affected when individuals are provided with a combination of both relevant
and irrelevant information.
13
Earley (2002) used a model that assumed that the valuation task is sequential, but sequential
processing is not explicitly measured. Earley commented that an interesting extension of her
study would be to have a clear picture of auditors’ expectations and then to investigate the
differential effect of expected versus unexpected events on auditor information processing
and its relationship to audit judgement errors. It appears that the most important area of future
research related to configural cue processing is to determine why some auditors process
information configurally while others do not (Hooper and Trotman, 1996). Two interested
areas could be to find out what increases the level of configural processing across subjects,
and whether training, decision aids and various types and combinations of feedback increase
the level of configural information processing. Future studies could examine how judgment is
affected by the presence of decision aids. Anderson et al. (1997) examined the notion that
perceptions of audit firm liability will be lower in an environment in which a decision aid is
fully utilized than in an environment where no decision aid is used. Future studies could
focus on exactly how a change in auditors’ probability assessment of error translates to a
change in the nature, extent and timing of planned audit procedures. Future research should
also focus on other ways of stimulating the attention that auditors give to error and non-error
explanations provided by a decision aid. With respect to the study by Bonner et al. (1996),
future research could examine the effect of decision aids when auditors’ estimates of
conditional probabilities are influenced by client-specific inherent and control risk factors.
Additionally, future research could examine the extent to which standardized audit programs
mitigate the effects of inaccurate conditional probability estimates on audit planning
decisions.
One way of extending Ng and Tan’s (2003) study would be to use more revenue-recognition
cases with or without authoritative guidance and find the effect it has on the judgment. Future
research could also use audit partners from Big 4 and non-Big 4 firms rather than audit
managers as the partners are closely involved with the client negotiation process. Also, the
Ng and Tan (2003) study was administered online via the Internet which lacked the control
typically found in laboratory experiments and so future research could use an experimental
setting and examine other contextual features (e.g., negotiation expertise) on auditors’
judgments and negotiation outcomes. Reflecting on Lehman and Norman (2006), future
studies should use more than one case to generalise the results. Future studies could also
investigate the effects for a variety of different auditing and accounting tasks. Rose’s (2007)
study was not designed to differentiate between potential explanations of the direct effect of
fraud experience on judgment, and future research will be necessary to understand why fraudspecific experience alters judgment but not attention to evidence.
4.0
Studies that classify the Judgment and Decision Making Factor as a ‘Task’
Variable
A task is a piece of work assigned to or demanded of someone (Bonner, 1999, p.390). Task
variables relate to dimensions of the task per se, for example, its presentation format,
complexity, risk and choice of accounting methods. Accountants “perform a variety of tasks
to arrive at an opinion pertaining to the financial statements” (Nelson and Tan, 2005, p.42).
Several studies have examined how JDM is affected when information is presented in
different formats, when different choices are made about the accounting methods used and
when information is complex.
14
Three studies have examined the effect of information presentation format [Blocher et al.,
1986 (AOS); Kaplan, 1988 (AH) and Maines and McDaniel, 2000 (AR)]. A further two
studies have investigated the effect of task complexity in JDM [(Prawitt, 1995 (AR) and
Chung and Monroe, 2001 (BRA)], four studies have considered the impact of risk on the JDM
[(Phillips, 1999 (JAR); Ayers and Kaplan, 1998 (AH); Kadous and Magro, 2001 (CAR) and
Kadous et al., 2008 (AR)] and only one study has examined the effect of choice of accounting
method on the JDM [(Clor-Proell, 2009 (AR)].
4.1
Presentation Format
Information presentation formats make a difference in some situations but not in others
(Bonner, 1999, p.90). Graphical formats for information presentation have been promoted as
an aid to decision making (Kaplan, 1988, p.90). Benson (1984, p.46) also argues that
“information can be absorbed and understood much faster in graphic rather than numeric
form”.
Adding to the literature on information presentation formats, Blocher et al. (1986) examined
the effect of report format (graphic and tabular) and task complexity on the accuracy6 and
bias of internal auditors’ risk judgments. The findings showed a significant interaction exist
between report format and task complexity, for both decision accuracy and bias. The findings
illustrated that for simple tasks, the graphic presentation format helps to distinguish between
high and low risk states and when tasks are complex tabular format assists in distinguishing
between high and low risk states (p.458). On the other hand Kaplan (1988) added to the
literature by showing that presentation format did not significantly influence the auditors’
judgment. This study highlights that auditors can select either a tabular or graphical
presentation format without fear of affecting their judgment. This may give comfort to an
auditor who has a strong preference for one format over the other. Maines and McDaniel
(2000) extended this literature to show the impact of information placement in the financial
reports. They claimed that information placement can signal the relevance of information,
with information that is disclosed as notes in the reports being seen as less useful than
information that is recognized on the face of the reports.
< Insert Table 2A here>
4.2
Task Complexity
Given that accounting and auditing tasks differ in terms of complexity, studies that examine
the effects of task complexity offer opportunities to understand how task structure can
influence judgments. Bonner (1994) provided three reasons for the examination of task
complexity in an audit situation; first, the complexity of a task would have a considerable
impact on auditor performance, secondly, current decision aids and training techniques may
be enhanced when researchers have a better knowledge of task complexity, and thirdly,
understanding the complexity of a task makes easier for management in audit firms to have
the appropriate professionals for different type of audit tasks.
Prawitt (1995) used an experiment to investigate how structured audit approaches affect
managers’ human resource assignments in environments that vary in complexity. The
findings indicated that the structure of a particular audit approach at the task level affected
the experience level required of the personnel assigned to do the initial assessment of the
Accuracy is “measured as the ability to discriminate between high and low risk reports, while bias is the propensity to report observing a
high risk report” (Blocher et al., 1986, p.457).
6
15
associated judgment-oriented audit task in both lower and higher complexity environments.
An interesting addition to the task complexity literature was based on psychological and
marketing theories suggesting that females may make more accurate decision than males
when tasks are complex. Chung and Monroe (2001) examined the effects of gender and task
complexity on the accuracy of audit judgments and their findings illustrated that when tasks
were less complex males made more accurate decisions than females but when the tasks were
more complex females made more accurate decisions. The participants in the study were
relatively inexperienced, so the results could not be generalized.
< Insert Table 2B here>
4.3
Risk
Kadous and Magro (2001) found that tax professionals process information according to
clients risk levels. Tax professionals give more consideration to negative outcome
information when assessing high risk clients. The literature on practice risk expanded when
Kadous et al. (2008) investigated if high practice risk (i.e. exposure to the monetary and nonmonetary costs of making inappropriate recommendations) moderates these effects. They
found that professionals make judgments that are consistent with client preference for a client
with low practice risk. They also found that after controlling for the impact of information
search, professionals tended to adjust their recommendations away from the client-preferred
position, regardless of practice risk. The study has contribution to the accounting literature by
showing that professionals are able to overcome confirmation bias in high-risk situations by
adapting to a high-risk setting and conducting a more balanced search for information
(p.152).
Related to practice risk is the condition that affects judgments when dealing with risks.
Phillips (1999) identified conditions that affect how auditors attend to and judge the
possibility of aggressive financial reporting in their client’s financial statements. The results
indicated that auditors pay more attention to aggressive reporting in a financial statement
account when it is assessed as having a high, rather than low, risk of misstatement. This study
adds to the literature on earnings management and aggressive financial reporting by showing
that the amount of attention given to evidence of aggressive reporting for one financial
statement account depends on whether aggressive reporting is noted for other accounts.
Further, these results indicate that auditors’ attention to aggressive financial reporting can be
enhanced if they prioritize their reviews to examine corroborating evidence for high-risk
accounts before they consider evidence documented in low-risk accounts. These results have
direct implications for scheduling audit work and may extend to other financial statement
users (p.184).
Understanding the client acceptance process is very important, as client acceptance decisions
are critical to the success of public accounting firms. Firms are interested in obtaining and
retaining clients, but do not wish to be associated with overly risky clients. Ayers and Kaplan
(1998) took a further step by investigating whether risk review partners make more
conservative client acceptance judgments than engagement partners, and if so, why they do.
Results suggested that risk review partners make more conservative client acceptance
judgments than engagement partners. The study yields important insights because it shows
how two types of partners differ in their views for client acceptance.
< Insert Table 2C here>
16
4.4
Choice of Accounting Methods
“Firms often have discretion over the accounting information presented in their financial
statements” (Clor-Proell, 2009, p.1466). The use of different accounting methods can lead to
differences in the accounting numbers. As the users become familiar with the type of
information disclosed, they may develop expectations about firms’ choice of accounting
methods based on industry standard or on a firm’s past choices of accounting methods.
Clor-Proell (2009) examined how users’ judgments and decisions are affected when their
expectations about accounting methods are same as the firm’s choice of accounting method.
Results showed when there are differences in the actual and expected accounting methods
then credibility judgments and investment decisions are affected. These findings are of
significance to the accounting researchers, regulators, standard-setters, and managers because
they demonstrate how important it is to consider the users’ expectations when deciding the
accounting method to use for information disclosure (p.1487).
< Insert Table 2D here>
4.5
Research Methods
JDM research is “grounded in the world of practice, and it is incumbent on researchers to
shed light on the tasks and their characteristics” (Nelson and Tan, 2005, p.47). In this review
of eleven papers related to the JDM, use of a Likert-type scale has been common in most of
the studies. All the papers under review have used experiments.
Some limitations in the methods adopted by the studies under review have been observed.
For example, Prawitt (1995) used an experiment on managers to investigate how structured
audit approaches affect managers’ human resource assignments in environments that varied
in complexity. The results are subject to some limitations. For example, the nature and scope
of the experiment did not allow for complete researcher control at all phases of the data
collection and the generalizations to practice are limited by the assumption that responses
realistically reflect human resource allocation decisions in practice. In their examination of
whether high practice risk mitigates the client preference effect, Kadous et al. (2008) for
instance, conducted a study potentially limited in that, because perceptions of risk and its
effect are inextricably linked (e.g., Johnson and Tversky, 1983; Slovic and Peters, 2006), it is
possible that in manipulating practice risk they also manipulated the effect towards the client.
Additionally, the results of Phillip’s (1999) study may not be generalizable as the
experimental design required subjects to review pieces of evidence in an environment that did
not allow them to search freely for other evidence, although that would be possible in a
realistic setting.
4.6
Suggestions for Future Research
While these studies to some extent provide evidence of the effect of Task variable factors on
JDM, there is still more scope for future research to expand the current literature. For
example, Prawitt’s (1995) study investigated how structured audit approaches affect
managers’ human resource assignments in environments that vary in complexity. An
important question that future research could answer is whether structured decision aids
facilitate the transfer and understanding of high level knowledge to users, and as such serve
as learning tools, or whether such aids encourage the mechanistic application of poorly
understood routines, thereby impeding the formation of sophisticated mental representations
(p.463). Moreover, Chung and Monroe (2001) studied gender and complexity and since this
is one of the limited number of studies to suggest the presence of gender differences in
17
information processing, future studies could use different tasks at different levels of
complexity which would be able to confirm whether judgments made by males are still less
accurate than those made by females (p.123). Moreover, future research could examine the
interaction between gender and the other elements of task complexity on judgment outcome.
Ayers and Kaplan (1998) investigated whether risk review partners make more conservative
client acceptance judgments. Future research might examine the extent to which innate
conservatism vs task-specific experience vs firm-designed client screening incentives affect
client-acceptance judgments. Other research might attempt to seek out ways to maximize
consistency across risk review partner judgments. Finally, research on other personality and
ability-related individual differences among partners in the two separate partner groups may
help us to understand better how these individuals differ (p.152).
5.0
Studies that classify the Judgment and Decision Making Factor as an
‘Environment’ Variable
Environmental variables relate to the conditions and circumstances surrounding an individual
while he or she performs a JDM task; they are not related to any one task. For example, an
individual can be subjected to time pressure while performing a number of tasks (Bonner,
1999, p.399). The environmental factors “do not alter the requirements of the task but change
the amount or allocation of effort that decision makers are willing to employ to fulfil those
requirements; that is, it changes the motivation and the characteristics of the accounting
environment have the capacity to influence judgment performance” (Libby and Luft, 1993,
p.435).
The literature under review has focused on four areas as characteristics of the accounting
environment: governance and internal control; pressure; group, rather than individual,
decision-making processes; and accountability. Of the studies reviewed, twenty-three studies
fall within this domain of research. Four studies have looked into the effect of corporate
governance and internal control on JDM [(Wright, A and Wright, S, 1996 (ABR); Cohen et
al., 2002 (CAR); Jennings et al., 2006 (AH) and Sharma et al., 2008 (BRA)]. Five of the
studies have looked into the effect of pressure on JDM [(Bamber and Bylinski, 1987 (CAR);
McDaniel, 1990 (JAR), DeZoort and Lord, 1994, (BAR); Lee, 2002 (BAR) and Dunk, 2007
(BAR)]. Two studies are related to the effect of group versus individual decision making
[(Trotman and Yetton, 1985 (JAR) and Stocks and Harrell, 1995 (AOS)]. Twelve studies are
related to the effect of accountability on JDM [(Ashton, 1990 (JAR); Kennedy, 1993 (JAR);
Gibbins and Newton, 1994 (JAR); Peecher, 1996 (JAR); Hoffman and Patton, 1997 (JAR);
Glover, 1997 (JAR); Tan and Kao, 1999 (JAR); Kennedy, 1995 (AR); Libby et al., 2004 (AR);
Tan et al., 1997 (BRA) ; Wilks, 2002 (AR) and DeZoort et al., 2006 (AOS)].
5.1
Corporate Governance and Internal Control
“Corporate governance and internal control are an important entity-level factor that sets the
tone for the overall control environment and has significant implications for risk judgments”
(Sharma et al., 2008, p.106). Corporate governance, which is often regarded as the central
feature of a firm’s internal control system (Fama, 1980; Fama and Jensen, 1983) affects the
extent and timing of undertaking the tasks.
In the 2000s, there was a shift in the literature from the perception of corporate governance as
something of a monitoring role, to an interest in how governance mechanisms such as the
18
board and the audit committee affect the audit process. Cohen et al. (2002) study
demonstrated that seniors, managers and partners when making audit decisions use the
corporate governance information. They reported that auditors may also rely on the audit
committee if they are delegated more responsibilities over the financial reporting process
(p.589). Jennings et al. (2006) study showed that by strengthening corporate governance and
by rotating audit firms the auditor independence is improved. The study by Sharma et al.
(2008) expanded the literature to include voluntary corporate governance. The results showed
that when corporate governance is strong auditors are happy to accept clients as these clients
are considered to have lower control environment risk. The findings suggest that acceptance
of audit clients is largely dependent on the clients level of corporate governance.
In audit planning, together with corporate governance, an understanding of the strength of a
client’s internal controls in various cycles is also important. Wright, A and Wright, S (1996)
examined the occurrence, financial impact and cause of detected misstatements as related to
the assessed strength of internal controls. The findings suggest that when controls were
assessed as weaker, errors were more likely to have an effect on reported earnings, suggesting
greater audit exposure. This was found to have important implications for the appropriate
focus of audit tests under different internal control situations, since procedures should be
tailored to risks that are present. Consideration of control environment risk factors may serve
to further mitigate such risk and enable auditors to avoid conducting costly audit procedures.
For example, a management with strong knowledge of accounting and a willingness to
consult with the auditors may substantially reduce the frequency of errors.
< Insert Table 3A here>
5.2
Pressure
Bamber and Bylinski (1987) examined how audit managers budget their time between
different audit responsibilities. In particular, they considered how much time is allocated to
planning and how much time is allocated to review. Their results suggest that a manager’s
review is not performed as a simple mechanical process, but is an appropriate response to the
engagement characteristics. The findings showed that time pressure did not influence the
quality of manager’s review (p.140). Lee (2002) adds to the literature on the professional
socialisation of auditors. He found that although time pressures existed, junior staffs often
sacrificed leisure and study time to ensure proper conduct of audit work. Junior staff
members’ regular responsibilities in the context of risk-based auditing involve the use of
discretion when deciding how to use the time available to obtain the best possible evidence to
reduce the risk of a material misstatement.
Auditing creates an environment in which time pressure and program structure are jointly
imposed, and McDaniel’s (1990) research shows the interactions between these two
environmental factors. His study adds on the importance of examining more than one
environmental factor at a time. McDaniel assessed whether and how the imposition of time
pressure and structured guidance affected audit performance. The results suggest that
increasing time pressure reduces audit effectiveness. Specifically, the empirical results
indicate that auditors’ “processing accuracy and sampling adequacy, as well as overall audit
effectiveness, declined as time pressure increased” (p.282). By contrast, audit efficiency
increased with increasing time pressure for both groups. McDaniel suggested that structure
and too much time pressure could lead to stress which could reduce subject’s motivation to
perform the task well.
19
DeZoort and Lord (1994) extended the time pressure literature to include obedience pressure.
The findings indicated that obedience pressure within a public accounting firm can affect
subordinates’ judgments, which can lead to auditor judgment variation and an increased
likelihood of auditors violating professional norms and standards. These findings have
practical implications, such as the need for additional time within the firm to be devoted to
training programs that focus on the resolution of conflict between personnel, which could
reduce obedience pressure effects. Written guidelines should be in place to be followed when
there are disagreements between auditors (p.23). Dunk (2007) added to the literature by
studying on innovation budget pressure and found the quality of Information Systems (IS)
information has a positive influence on performance when innovation budget pressure is
high, but has no effect when the pressure is low.
< Insert Table 3B here>
5.3
Group as opposed to Individual Information Processing
Relatively little work has been done on the differences in judgment of information processing
done by group and individually. Solomon (1987) observed that the results of existing studies
were contradictory and Libby and Luft (1993) pointed out that the reasons for group
performance exceeding individual performance were unclear (p.438).
Trotman and Yetton (1985) were the first to investigate the mechanisms by which differently
structured groups could reduce judgment error. They found that the review process
significantly reduced judgment variance. However, similar improvements were obtained by
the use of an interacting or composite group of two seniors. Stocks and Harrell’s (1995) study
brought an extension to the individual versus group information processing, which had
important practical implications. The results indicated that groups make better judgments
than individuals. These findings imply that decisions related to complex business matters
should be made by groups rather than individuals (p.697).
< Insert Table 3C here>
5.4 Accountability
Another characteristic of accounting settings that has attracted the attention of behavioural
researchers is the fact that individuals responsible to make decisions are also accountable of
their decisions to many stakeholders such as supervisors, clients or others. Accountability can
motivate individuals to exert more effort while doing tasks because the type of decisions they
make can have an effect on their performance evaluation and thus, eventually, monetary
reward. Accountability can also induce increased effort to demonstrate the competence levels
(Libby and Luft, 1993). Understanding the determinants of the accountability is important,
because accountability can be used by CPA firms to influence auditors’ performance (through
the review and performance evaluation processes).
R. H. Ashton (1990) was one of the first to highlight the performance effects of
accountability. His study showed that the directional effects of three pressure inducers
(incentives, feedback and justification) are moderated by the presence of a decision aid. More
specifically, his study showed that in the absence of a decision aid, subjects achieved greater
classification accuracy in a repetitive decision task when a monetary incentive was offered, or
when feedback about past performance was provided, or when they were required to justify
their choices, relative to the absence of these three variables. In contrast, when a decision aid
was available, the same incentive, feedback and justification requirements resulted in lower
20
classification accuracy, again relative to the absence of these three variables. The subjects in
Ashton’s study did not have the requisite task-specific knowledge and therefore this could be
a reason why the justification pressure encouraged subjects to reduce their reliance on the
decision aid and increase reliance on their own judgment; however, because they did not have
the relevant knowledge for the task, performance suffered.
Relevant to R. H. Ashton’s study, Tan and Kao (1999) examined how the relation between
accountability and performance could be moderated by task complexity, knowledge and
problem-solving ability. They provided evidence that accountability may not improve
performance for low and medium complexity tasks where the individual lacks the requisite
knowledge or for a high-complexity task where the individual lacks either the requisite
knowledge or problem-solving ability. The implication of these findings is that accountability
may lead to an increased effort but does not improve performance. In such an instances, it
may be more helpful to introduce decision aids, to replace the auditor with someone who has
the requisite knowledge and ability, and to reassign the auditor to a task that matches his or
her skill level.
Glover (1997) addressed a related issue, examining whether auditors exhibit a dilution effect
when faced with time pressure and accountability. He found that time pressure reduced the
dilution effect. Contrary to the findings in psychology, accountability did not influence the
dilution effect exhibited by auditors. While previous studies have focused primarily on the
detrimental effects of time pressure on judgment effectiveness, this study provided evidence
that time pressure, even at a relatively high level, can reduce judgmental bias.
Accountability may not solve all biases and performance deficiencies, so it becomes
important to find out under what conditions accountability works and when it does not work.
Kennedy (1993; 1995) looked at the conditions under which accountability operates and
conducted studies to show when judgment bias could be reduced with increased
accountability. Kennedy’s (1993) study shows that accountability helps in the audit review
process and also leads to an increased effort exerted by individuals in a variety of ways. She
examined whether accountability, defined as the requirement to justify one’s judgments to
others (Tetlock, 1983), mitigates recency.7 Her findings showed that executive Master of
Business Administration (MBA) subjects, who were not familiar with making judgments
about going concerns firms, displayed significant recency effects, while auditors, who were
familiar with this task, did not demonstrate the recency effects. However, when
accountability was imposed on the MBA subjects, no recency effects were noted. The study
showed that effort-related biases such as recency can be mitigated by accountability. This
study has implications for auditing practice and audit judgment research because auditors
always operate in an accountability-inducing environment. Audit managers make goingconcern evaluations of their clients based on many pieces of evidence that have been gathered
and reviewed, and their own judgments are subject to review. The absence of recency found
in the study when judgments were made by experienced professionals after all the evidence
was available, and the debiasing effect of accountability for less experienced judges, suggest
that recency may not be an issue of great concern for audit practitioners.
7
Recency relates to the tendency to overweight evidence received later in a sequence.
21
The study by Kennedy (1995) added accountability to the knowledge literature, which had
important practical implications as well. She examined the ‘curse of knowledge’8 in judgment
and the extent to which it is mitigated by accountability, experience, and counterexplanations. She found that the curse of knowledge effects is found among auditors and
MBA students in experiments using both the going-concern and analytical review type tasks.
The study showed that accountability is ineffective in mitigating these effects. The practical
implications of Kennedy’s findings are quite important; for example, in cases of fraudulent
reporting or lawsuits alleging negligence by auditors, it is common for other auditors to be
called upon to review the audit papers and comment on the quality of the audit provided
(p.270).
Applying the social contingency theory in which individuals are motivated by a desire for the
approval of others, Tan et al. (1997) extended the work of Kennedy (1995) by providing
accountable auditors with outcome knowledge that embodied more uncertainty than that in a
factual outcome or an outcome that is known with certainty. The results indicated that risk
assessments made by a partner and known by a subordinate have a significant influence on
the risk assessments made by accountable subordinates. Additionally, when subordinate
accountable auditors are exposed to the preferences of the superior to whom they are
accountable, they generally engage in less cognitive processing than subordinates. Gibbins
and Newton (1994) extended the literature to expand the conceptual base of accountability by
placing it into the professional setting of the public accounting firm. They used self-reports of
accountants in public accounting firms to incorporate some of the contextual factors
associated with accountability in that setting. The results indicated that reported
accountability situations lead to increased cognitive effort and through these changes in
cognitive processing, accountability seems to reduce occurrence of judgmental biases.
Based on a cognitive model of justification, Peecher (1996) carried out an experiment to
examine whether the preferences of those demanding justification (justifiee preferences)
affect the weight that auditors give to different levels of an environmental cue (i.e. client
integrity). This was the first study to provide evidence that the preferences of the reviewer are
significant. The findings suggest that justifiee preferences influence auditors’ likelihood
assessments and the weight they attach to positive levels of environmental cues when making
such assessments. However, the findings also suggest that negative levels of environmental
cues diminish the influence of justifiee preferences. This study raised questions about the
ability of auditors to disentangle the justification enhancement value of evidence from its
other properties. Wilks (2002) extended this work by providing evidence that the reviewer’s
preferences distort the preparer’s memory for evidence. He showed that knowing the
expectation of the person accountable to affect the type of judgments made.
Hoffman and Patton (1997) investigated the effects on auditors’ judgments of being held
accountable to superiors in their firm. The specific audit judgment task studied is fraud risk
assessment in the presence of both relevant and irrelevant information. Their results showed
that auditors’ judgments exhibited the dilution effect both when they were held accountable
and when they were not. Accountability to superiors did not exacerbate the dilution effect but
did result in more conservative fraud risk judgments. Their results have some important
8
The curse of knowledge occurs when individuals are unable to disregard appropriately information that has already been processed
(Kennedy, 1995, p. 249).
22
practical implications, since in the real world, senior auditors surely encounter a great deal of
irrelevant information.; Thus, it is likely that their fraud judgments are also biased by the
dilution effect, although there can be ways to mitigate these effects. For example, a review by
a manager or a partner could influence the firm’s ultimate fraud judgments. If the managers’
and partners’ fraud judgments are not influenced by the dilution effect, they may be able to
offset any bias in the seniors’ judgments.
Libby et al. (2004) examined whether the quality of balance score measures improve when
managers need to justify their decisions to their superiors. They found that when managers
have to justify their judgments there is increased managerial use of unique measures. The
results suggest that auditing and assurance regulators, standard setters, and public accounting
firms and their clients may wish to continue to examine the nature and value of assurance
reports in the area of performance measurement. Dezoort et al. (2006) investigated the effect
of differential accountability pressure strength on auditors’ materiality judgments. They
found that when auditors are having a high accountability pressure their materiality judgment
is more conservative and had less judgment variability compared to when the auditors have
lower accountability pressure. Additionally, they found that auditors under high levels of
accountability pressure needed more time to complete the task. These findings suggest that
when individuals have higher accountability they need to be more careful in carrying out their
responsibilities.
< Insert Table 3D here>
5.5
Research Method
All the studies reviewed, with the exception of one, used the experimental method to study
the factors grouped under Environment that affect JDM. The Stocks and Harrell (1995) study
used the survey method which had some limitations. Even though their research method
allowed them to collect the data in a natural setting, it lacked the involvement of the
researchers which could raise questions regarding the validity of the responses (p.697).
Kennedy (1993 and 1995) showed that effort related biases such as recency can be mitigated
by accountability and Kennedy (1995) examined the ‘curse of knowledge’ in judgment. Both
of her studies have limitations because auditors work in a much richer information
environment than the research setting. Additionally, DeZoort and Lord’s (1994) study of the
obedience pressure does not reflect the practical situation because the pressure to obey a
superior is likely to be much greater in practice. Similarly, the DeZoort et al. (2006) study did
not reflect the real world situations as in the real world the auditors are accountable to many
stakeholders such as superiors, audit committees, client management, regulators.
There are also some limitations to the Trotman and Yetton (1985) study. Their results may
not generalize to natural settings where auditors have incentives to process information more
or less extensively than they did during this experimental task. Care should also be taken
when generalizing from the results of the Glover (1997) study. In practice, auditors work in a
more complex environment (e.g., richer information, group decision making, incentives,
feedback, supervision and review) than the experimental setting in the study. Other variables
present in the audit environment may interact with time pressure, accountability, and nondiagnostic information and different levels of these factors can exist in almost any
combination.
23
5.6
Future research
Future research could be undertaken to extend and corroborate the findings of Cohen et al.
(2002) to establish if corporate governance is really taken into account by auditors to promote
audit effectiveness and efficiency. A suggestion for the Stocks and Harrell (1995) study
would be to extend the research to investigate why the judgment quality gap between groups
and individuals increases as the information level increases. More manipulation of the
experimental treatment factor might be performed in future studies in order to assess the
generalizability of this study’s findings.
Even though the audit committees are seen as very crucial in corporate governance, not much
is known about how audit committees interact with auditors, or how they rely on auditors’
work in their deliberations. Future research could examine the interaction of accountability
with other pressures on auditors, such as those mentioned above. The particular
accountability ‘culture’ may also be important. For example, accounting firms may have an
atmosphere of accountability that affects all facets of an auditor’s work. Alternatively,
accountability requirements may be overtly stressed on each task undertaken.
6.0
Conclusion and Implications
In this review, the extant literature on JDM from the 10 top-tier accounting journals has been
subdivided into ‘Person’, ‘Task’ and ‘Environment’ perspectives. This subdivision has
allowed clear observation of how the literature of JDM has progressed over time and how the
different perspectives of JDM have been influential upon researchers. Since individuals do
not work in isolation, it was crucial to understand how people, tasks and the environment
interact to influence decision making.
A total of sixty-five papers were identified, which were then categorized as part of this strand
of research. Accounting researchers in this area have primarily used the experimental
technique to uncover the effect of the factors grouped according to Bonner (1999). Although
this method is quite powerful, it is really difficult to reflect the actual environment in the
study, and this has been a common limitation to most of the studies. This review suggests a
number of avenues for future research. With respect to the person perspective, one area in
which future research will continue to grow is the study of how knowledge develops and
leads to the gaining of expertise, not only with regard to technical issues but also with the
client-management issues. Another important direction would be towards developing a better
understanding of how audit firms can aid decisions by focusing on providing expertise where
it is needed. Relevant to the task perspective, one area that has been insufficiently researched
is the interaction between gender and task complexity. This area will be an interesting field to
explore, especially given the reality of the 21st century in which women are making
significant advances towards gender equality in the workplace.
Nearly all the research discussed as part of this paper was conducted in an audit context.
Recently, there has been growing interest in investigating related issues in financial
accounting (e.g., Clor-Proell, 2009). It can be seen that there are many important issues
related to the effects of person, task and environment in financial accounting, and in
understanding how aspects of these institutional settings affect learning and the performance
of tasks. Another important direction for future researchers will be the examination of how
accounting judgment is affected by the presence of decision aids that is believe to be
researched insufficiently in the area of financial accounting. Understanding how ethics affect
24
JDM is another area that has been largely ignored by the JDM literature. Yet another exciting
area for future research would be the study of interactions of the person and environment
perspectives; for example, the effect of the interaction of experience and accountability on the
JDM would be an interesting direction for future research.
Finally, although the studies reviewed have been grouped under three broad categories, the
interdependence of these three perspectives is important and offers more openings for future
research. This level of grouping also presents a better understanding of the interconnection of
the issues at hand while presenting a better overview of what is available in the area of
academic and professional research concerning judgment and decision making.
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Appendix
Table 1A ‘Knowledge’ as a Person Variable
Study
Country
(Sample size)
(Subjects)
Method
Dependent
Variable
Major Findings
Frederick and Libby
(1986)
US
Experiment
Prediction of
financial statement
errors
Knowledge and experience have an effect on
judgment.
Experiment
Frequency judgment
Knowledge and experience have an effect on
judgment.
33 Experienced Auditors,
22 Undergraduate
Auditing Students and 18
MBA Advanced
Accounting Students
Butt (1988)
US
159 Undergraduate
35
Students and 69
Experienced Auditors (34 years of experience)
Choo and Trotman
(1991)
Experienced Auditors
(seniors and supervisors
having at least 3 years of
auditing experience)
Experiment
Information recall
Inexperienced Auditors
(recruits in an
international firm having
less than 6 months of
practical experience)
Emby et al. (2002)
US and Canada
122 Audit Partners
Findings show that experienced auditors recall
more atypical items than inexperienced
auditors, but there are no differences in the
number of typical items recalled.
Experienced auditors are more likely than
inexperienced auditors to infer that previously
unstated atypical items are true.
Experiment
Going-concern and
peer assessment of an
organization
That audit partners are subject to the influence
of the outcome knowledge.
Negative outcome information influences
audit partners’ assessment of the likelihood of
the client’s continued existence.
36
Table 1B
‘Expertise’ as a Person Variable
Study
Country
(Sample size)
(Subjects)
Method
Dependent
Variable
Major Findings
Ashton and Kramer
(1980)
30 Undergraduate
Auditing Students
Experiment
Judgment
Messier (1983)
29 Audit Partners
Experiment
Materiality/disclosure
judgment
Abdolmohammadi
and Wright (1987)
96 Students
63 Practising Auditors
30 Partners
119 Managers
Audit Seniors
Auditors
Audit Students
Experiment
Judgment
Experiment
Auditor attendance to
negative audit
evidence
Lo (1994)
156 Auditors
Experiment
Going-concern
decision
Shelton (1999)
US
Experiment
Judgment on
information
relevance
That students behave similarly to auditors in
terms of measures such as cue utilization,
consensus, and consistency in making
judgments.
That only consensus of the audit partners’
materiality/disclosure judgments is affected
by experience and firm type.
That significant differences are consistently
found between experienced staff and other
subjects for unstructured and semi-structured
tasks.
That experience plays a primary role in
auditor attendance to negative audit evidence
but does not affect attendance to positive
information.
Reveals a lack of consensus among both
experienced and less experienced auditors
who were given information for a problem
firm.
That experience reduces the influence of
irrelevant information in auditor judgment.
Shows that more experienced auditors
(partners and managers) are not influenced
by the presence of irrelevant information in
making a going-concern judgment.
Anderson and
Maletta (1994)
56 Partners and
Managers and
31 Audit Seniors
Earley (2002)
36 Experienced Auditors
and 26 Less Experienced
Auditors
Experiment
Judging the
reasonableness of
client-provided
discount rates used in
real estate valuation.
Rose (2007)
125 Practising Auditors
Experiment
Intentional
misstatement of
financial reports
Lehmann and
Norman (2006)
US
Experiment
Going-concern
judgment
65 Graduate Students
51 Professionals
108 Practising Auditors
(54 preparers and 54
reviewers)
Experiment
Fraud assessment
Agoglia et al. (2009)
On the other hand, less experienced auditors
(seniors) are influenced by the presence of
irrelevant information.
That experienced auditors outperform less
experienced auditors when judging the
reasonableness of client-provided discount
rates used in real estate valuation.
Performance at both experience levels is
similar when the client-provided discount
rate is consistent with the industry rate.
Those auditors with fraud-specific
experience are more likely than auditors with
less fraud-specific experience to believe that
intentional misstatement has occurred when
evidence of aggressive reporting exists.
Results suggest that more experienced
professionals have more concise problem
representations.
That review team task-specific experience
plays a significant role in mitigating the
effect of fraud assessment documentation
structure on auditor fraud risk judgments.
Experienced preparers are less influenced by
component documentation structure than
their less experienced counterparts.
37
Table 1C
‘Information Processing’ as a Person Variable
Study
Country
(Sample size)
(Subjects)
Method
Dependent
Variable
Major Findings
Brown and Solomon
(1991)
49 Audit Seniors
Experiment
Configural
processing of
information
Evidence indicates that a high proportion of
the auditors’ configurally process the
available information. Results also confirm
that the form and nature of the auditors
configural information processing are
predictable based on auditing knowledge
specific to the task being performed.
Hooper and Trotman
(1996)
Australia
Experiment
Configural
processing of
information
That the proportion of the auditors
processing the information configurally by
chance is more.
Experiment
Constraining
information
processing
That experienced auditors’ going-concern
judgments differ from inexperienced
auditors’ judgments only when processing
is unconstrained.
50 Seniors/Managers
Hoffman et al.
(2003)
64 Auditors - an average
of 3.5 years of
experience.
35 Undergraduate
Students
Experienced auditors’ processing prevents
them from attending to as much positive
evidence as they do when their processing
is unconstrained, resulting in lower goingconcern judgments in constrained
processing conditions.
38
Table 1D ‘Use of Decision Aids’ as Person Variable
Study
Country
(Sample size)
(Subjects)
Method
Dependent
Variable
Major Findings
Bortiz ( 1985)
40 Auditors
Experiment
Data structuring
techniques
Butler (1985)
18 Auditors
Experiment
Audit sampling risk
assessment
Strawser (1990)
78 Senior Auditors
Experiment
Information
processing
Kachelmeier and
Messier (1990)
152 Auditors
Experiment
Audit Sampling
Anderson et al.
(1995)
Judges
Experiment
Perceptions of audit
firm liability
Anderson et at.
(1997)
US
104 Audit Seniors and
80 Audit Managers
Experiment
Auditors initial and
revised estimates
Bonner et al (1996)
104 Auditors
Experiment
Ng and Tan (2003)
US
113 Audit Managers
Experiment
administered
online
Decision Aids
(1) a checklist aid
which facilitates
knowledge retrieval
and
(2) a decomposition
and mechanical
aggregation aid
which facilitates both
knowledge retrieval
and aggregation
Amount booked after
negotiations
Structure of information presentation
appears to play a significant role in the
evaluations and plans of the auditors.
Findings show that the aid is able to lead
the auditors to more correct decisions with
regard to accepting or rejecting a reported
account balance.
Auditors’ judgments are not consistent with
the audit risk model.
While the audit-risk model implicitly
assigns an equal weight to each component,
the lack of more explicit guidance leads to
differences in judgments.
The decision aid leads to systematically
larger sample sizes than those elicited from
unaided intuitive judgment. Sample sizes
are even larger when subjects are asked
only for the decision aid parameter values,
suggesting that at least some subjects work
backwards in an attempt to circumvent the
decision aid.
Less than complete utilization of a decision
aid increases jurists’ assessments of
liability.
Findings show that having auditors focus on
errors from an error dominated list results in
an increase in auditors’ likelihood
assessment of error. On the other hand
having the auditors focus on non-errors
from a non-error dominated list does not
significantly decrease auditors’ likelihood
assessment of error.
Findings show that the checklist aid slightly
improves the degree to which auditors’
judgments reflect experienced frequencies
and the mechanical aggregation aid greatly
improves auditors’ judgments, completely
counteracting the effect of the task
organisation-knowledge organisation
mismatch.
Results show that auditors’ perceived
negotiation outcome is jointly influenced by
authoritative guidance availability and audit
committee effectiveness. Specifically,
authoritative guidance availability has a
greater effect on auditors’ perceived
negotiation outcome in the absence of an
effective audit committee than in its
presence.
39
Table 1E ‘Prior Beliefs’ as a Person Variable
Study
Country
(Sample size)
(Subjects)
Method
Dependent
Variable
Major Findings
Kida (1984)
73 Partners and Managers
Experiment
Prior Belief on
Cause and Effect
information
Wright (1988)
36 Auditors (mean of 3.8
years of experience)
Experiment
Prior company
information
Butt and Campbell
(1989)
123 Practising Auditors
Experiment
Prior Belief about
internal control
Trotman and Sng
(1989)
USA
Experiment
Prior Belief –
pieces of
information about
the business
success and failure
Results indicate that auditors weight causal
data more than equally diagnostic non
causal data in their decision processes,
providing support for the impact of intuitive
cause-effect relations.
Overall results suggest that access to prior
working papers does not appear to create a
serious anchoring effect impeding audit
effectiveness. Reliance on prior working
papers does, however, appear to adversely
affect audit efficiency
Prior belief has an effect on the importance
of information order: with high prior
beliefs, subjects’ judgments are unaffected
by information order, while low prior
beliefs are associated with a recency effect.
When the prior information indicates
failure, hypothesis framing does not affect
the relative number of failure and viable
cues. However, when the prior information
indicates no failure, hypothesis framing
does have a significant effect.
80 Auditors
Fredrickson et al.
(1999)
134 Auditing Students
Experiment
Tan and Yip-Ow
(2001)
58 Audit Seniors
Experiment
Prior Knowledge –
accountant
incentives and the
relationship with
prior knowledge
Prior information
Bhattacharjee et al.
(2007)
53 Auditors
Experiment
Prior information
Previous experience under a performance
evaluation system can systematically bias
decision makers’ subsequent evaluations.
When preparers structure the memo to
emphasize evidence consistent with their
conclusions and de-emphasize inconsistent
evidence, reviewers place less weight on the
conclusions reached by the preparer than
when the memo is structured in a neutral
fashion.
Auditors are susceptible to contrast effects
such that their judgments on a current client
are influenced by their exposure to similar
judgment information on a prior client.
40
Table 2A – ‘Presentation Format’ as Task Variable
Study
Country
(Sample size)
(Subjects)
Method
Dependent
Variable
Major Findings
Kaplan (1988)
69 Auditors
Experiment
Expected value of a
revenue account
Blocher et al. (1986)
47 Internal Auditors
Experiment
Accuracy and bias of
internal auditors’ risk
judgments.
Maines and
McDaniel (2000)
95 Part-time MBA
Students
Experiment
Processing of
comprehensiveincome information
Presentation format does not significantly
influence auditors’ expected value
judgments.
Results show a significant interaction
between report format and task complexity,
for both decision accuracy and bias.
Findings show that nonprofessional
investors’ rely on the financial statement to
provide signals about the nature and
importance of comprehensive-income
information
Study
Country
(Sample size)
(Subjects)
Method
Dependent
Variable
Major Findings
Prawitt (1995)
355 Audit Managers
Experiment
Task level staffing
assignment
Results indicate that the structure of a
particular audit approach at the task level
impacts the experience level required of the
personnel assigned both to perform and to
initially supervise/review the associated
judgment-oriented audit task in both lower
and higher complexity environments.
Chung and Monroe
(2001)
101 Males
58 Females
Experiment
Accuracy of audit
judgments
that in the less complex task, males are
more accurate than females.In the more
complex task, females are more accurate
than males.
Table 2B –‘Task Complexity’ as Task Variable
41
Table 2C ‘Risk’ as Task Variable
Study
Country
(Sample size)
(Subjects)
Method
Dependent
Variable
Major Findings
Kadous and Magro
and Spilker (2008)
63 Tax Professionals
Web-based
experiment
Time and
recommendations
When facing a client with low practice risk,
the professionals’ search is biased in a
manner that leads judgments to be
consistent with client preference; however,
the search is less biased when facing a
client with high practice risk, and resulting
judgments are less consistent with client
preference.
Kadous and Magro
(2001)
86 Practising Tax
Accountants
Experiment
Client type
Tax professionals process information
differently for clients of different risk
levels. Tax professionals weight negative
outcome information more heavily when
forming likelihood assessments underlying
recommendations for a high-risk client than
for a low-risk client. Risk directly affects
recommendations in that tax professionals
more strongly recommend an aggressive
position for a low-risk client.
Phillips (1999)
100 Audit Seniors
and Managers
Experiment
Misstatements in
sales
Results that auditors devote more attention
to aggressive reporting in a financial
statement account when it is assessed as
having a high, rather than low, risk of
misstatement.
Ayers and Kaplan
(1998)
216 Big 6 Audit
Partners
QuestionnaireBased Survey
Client type
Risk review partners make more
conservative client acceptance judgments
than engagement partners.
Table 2D ‘Choice of Accounting Methods’ as Task Variable
Study
Country
(Sample size)
(Subjects)
Method
Dependent
Variable
Major Findings
Clor-Proell, 2009
172 Accountants
On line
experiment
Future profitability,
perceived reliability,
management
credibility and
investment choices
Results show that the extent to which an
actual accounting choice matches an
expected accounting choice affects both
credibility judgments and investment
decisions, but does not affect assessments
of future profitability and information
reliability.
42
Table 3A – ‘Corporate Governance and Internal Control’ as Environment Variable
Study
Country
(Sample size)
(Subjects)
Method
Dependent
Variable
Major Findings
Sharma et al. (2000)
Singapore
Experiment
Client
acceptance, risk
and audit
planning
judgments.
Results show that auditors make more
favourable client acceptance judgments
when corporate governance is stronger.
Interviews
Examine the role
of corporate
governance in
the audit process
Auditors consider corporate governance
factors to be especially important in the
client acceptance phase and in an
international context.
Experiment
Auditor
independence
Strengthening corporate governance
(beyond minimal) and rotating audit firms
(compared to partner rotation) lead to
enhanced auditor independence perceptions.
Experiment
Audit
engagement’s
effectiveness
and efficiency
Findings suggest that the assessed strength
of account-specific internal controls appears
to be related to the occurrence, impact and
direction of detected errors. When controls
are assessed as weaker, errors are more
likely to have an effect on reported
earnings, suggesting greater audit exposure.
60 Big 4 Audit
Managers
Cohen et al. (2002)
US
36 Auditors From
Big 5
Jennings et al. (2006)
US
49 Judges
Wright and Wright
(1996)
US
186 Audit
Agreements
43
Table 3B – ‘Pressure’ as Environment Variable
Study
Country
(Sample size)
(Subjects)
Method
Dependent
Variable
Major Findings
Bamber and
Bylinski (1985)
73 Audit Managers
Experiment
Audit planning
judgment
McDaniel (1990)
179 Staff Auditors
Experiment
Overall audit
effectiveness
Results indicate that:
1) managers exhibit reasonable agreement
in budgeting over half of audit management
time to review;
2) the initial audit plan directs their
subsequent review;
3) time pressure does not significantly
affect estimated review times; and
4) firm affiliation, auditor experience level,
and initial planning effort are associated
with differences in managers' review
practices and perceptions.
At low time pressure, structured audit
programs lead to significantly higher audit
effectiveness, efficiency, and consistency.
Dezoort and Lord
(1995)
146 Auditors
Experiment
Auditor judgment
variation
Findings indicate that obedience pressure in
the form of inappropriate instructions from
superiors within a public accounting firm
can affect subordinates’ judgments which
can lead to auditor judgment variation and
an increased likelihood for auditors to
violate professional norms and standards.
Lee (2002)
UK
Case study
Judgments on
material
misstatements
The evidence shows that trainees
concentrate work on areas where material
misstatements could occur and that junior
staff do not have low regard for audit
protocol.
Survey
Quality of IS
performance
Results show that when innovation budget
pressure is high, quality of IS information
enhances performance
12 Case Studies
Dunk (2007)
Australia
119 Functional
Managers
Table 3C – ‘Group Vs Individual Information Processing’ as Environment Variable
Study
Country
(Sample size)
(Subjects)
Method
Dependent
Variable
Major Findings
Trotman and
Yetton (1995)
51 Audit Seniors and
Supervisors and 24
Managers from a single
large international audit
firm.
Experiment
Individual and group
judgments
That the review process significantly
reduces judgment variance and the reduced
variance in group judgments compared to
individual judgments may simply be due to
a diversification effect.
Stocks and Harrell
(1995)
112 Bank Loan Officers
Questionnaire
Survey
Judgment quality
The judgment quality of groups is higher
than that of individuals at both the six-cue
and nine-cue information levels.
44
Table 3D – ‘Accountability’ as Environment Variable
Study
Country
(Sample size)
(Subjects)
Method
Dependent
Variable
Major Findings
Ashton (1990)
182 Auditors of Big 5
Experiment
Decision making
The directional effects of three pressure
inducers (incentives, feedback, and
justification) are moderated by the presence
of a decision aid with a high implicit
performance standard because of the
increased task difficulty affected by the aid.
Kennedy (1993)
58 Executive MBA
Students and 171
Auditors
Experiment
Failure of a firm
That effort related biases such as recency
can be mitigated by accountability.
Gibbins and
Newton (1994)
50 Partners and
Directors, 76 Managers
and Principals,18
Senior Auditors and 11
Junior Auditors
Questionnaire
Survey
Accountability in
public accounting
settings
That reported accountability situations lead
to increased cognitive effort and through
these changes in cognitive processing,
accountability seems to reduce occurrence
of judgmental biases.
Kennedy (1995)
147 MBA Students and
161 Auditors
Experiment
Making goingconcern decisions
That curse of knowledge effects are found
among both auditors and MBA students in
experiments using both the going-concern
and analytical review type tasks. The study
shows that accountability is ineffective in
mitigating these effects
Peecher (1996)
106 Auditors
Experiment
Effect of
Accountability on
clients’ integrity
That justifiee preferences influence
auditors’ likelihood assessments and the
weight they attach to positive levels of
environmental cues when making such
assessments.
Hoffman and
Patton (1997)
Auditors
Experiment
Fraud risk assessment
Their results showed that auditors’
judgments exhibited the dilution effect both
when they were held accountable and when
they were not. Accountability to superiors
did not exacerbate the dilution effect but did
result in more conservative fraud risk
judgments.
Glover (1997)
156 Auditors
Experiment
Risk assessment
Accountability has no significant impact on
the dilution effect.
Tan et al. (1997)
70 Audit Supervisors
and Managers
Experiment
Compliant behaviour
with the client
Results indicate that risks assessments made
by a partner and known by a subordinate
have a significant influence on the risk
assessments made accountable
subordinates. Additionally, when
subordinate accountable auditors are
exposed to the preferences of the superior to
whom they are accountable, they generally
engage in less cognitive processing than
subordinates.
Tan and Kao
Singapore
Experiment
Accountability and
That accountability may not improve
performance for a low-complexity task, for
45
(1999)
105 Auditors of Big 6
auditor performance
a medium complexity task where the
individual lacks the requisite knowledge, or
for a high-complexity task where the
individual lacks either the requisite
knowledge or problem-solving ability.
Wilks (2002)
60 Audit Managers
Experiment
Knowledge of
Supervisor’s
Preference
That earlier knowledge of supervisors’
views influences subordinates’ judgments,
in part because subordinates predecisionally
distort evidence toward those views. Results
also suggest that auditors are unlikely to
anticipate that earlier knowledge of their
supervisors’ views increases a subordinate’s
tendency to agree with those views.
Libby et al.(2004)
227 MBA Students
Experiment
Process
Accountability
Process accountability led to greater use of
cognitive effort.
Dezoort et
al.(2006)
167 Auditors
Experiment
Differential
Accountability
Under higher levels of accountability
pressure (i.e. justification, feedback)
provided more conservative materiality
judgments and had less judgment variability
than auditors under lower levels of pressure
(i.e. review, anonymity).
46
47