What Happens When Managers Are Informed? Effects of Critical Audit Matter Awareness and Auditor Relationship on Managers' Accounting Estimates

The Accounting Review ◽

10.2308/tar-2019-0370 ◽

2021 ◽

Author(s):

Hun-Tong Tan ◽

Feng Yeo

Keyword(s):

Social Distance ◽

Working Relationship ◽

Distant Relationship ◽

Client Relationship ◽

Accounting Estimates ◽

Reporting Decisions

We examine how managers' accounting estimates are affected by whether they are informed about an impending critical audit matter (CAM) disclosure from a close or distant auditor. A close (distant) auditor is one who has a smaller (greater) social distance from the client in terms of their working relationship. We predict and find that being informed about an impending CAM by a close (distant) auditor leads to more (less) aggressive estimates than if managers are not informed. With a close auditor-client relationship, managers perceive a CAM disclosure as forewarning investors about estimate subjectivity, thus providing a moral license to report more aggressively. With a distant relationship, a CAM disclosure does not provide a moral license but signals greater auditor scrutiny, which leads to less aggressive reporting. Our results inform regulators and standard setters about the effects of CAM on managers' reporting decisions in the presence of a close auditor-client relationship.

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Auditors′ reporting decisions for accounting estimates

Managerial Auditing Journal ◽

10.1108/02686909510087955 ◽

1995 ◽

Vol 10 (5) ◽

pp. 27-36 ◽

Cited By ~ 11

Author(s):

Steven Kaplan ◽

Philip M.J. Reckers

Keyword(s):

Accounting Estimates ◽

Reporting Decisions

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The Impact of Client Error-Management Climate and the Nature of the Auditor-Client Relationship on External Auditor Reporting Decisions

Behavioral Research in Accounting ◽

10.2308/bria-51770 ◽

2017 ◽

Vol 29 (2) ◽

pp. 37-50 ◽

Cited By ~ 2

Author(s):

Stephen Perreault ◽

James Wainberg ◽

Benjamin L. Luippold

Keyword(s):

Audit Quality ◽

Interpersonal Relationship ◽

Data Availability ◽

Error Management ◽

Corporate Policies ◽

Tone At The Top ◽

Client Relationship ◽

Reporting Decisions ◽

Auditor Reporting ◽

The Impact

ABSTRACT An important aspect of an organization's tone at the top is its practices for correcting the behavior of employees who deviate from set corporate policies and procedures (COSO 2013). Collectively, these practices are often referred to as an organization's error-management climate (EMC). We investigate whether a client's EMC can lead to behaviors that could reduce audit quality. We conduct an experiment and find that when a client's EMC is error averse (i.e., where employees are sanctioned for committing errors), external auditors indicate that client employees' errors discovered by the auditor are less likely to be reported. In addition, we examine the joint impact of the nature of the auditor-client relationship and EMC on auditor reporting. We find perceptions of reporting likelihood to be lower when the auditor is described as having a positive interpersonal relationship with the client employee responsible for the error. In addition, we find that this factor interacts with client EMC so as to exacerbate the observed reluctance to report when the climate is error averse. Our results provide initial evidence to suggest that an organization's EMC may impact auditor behaviors that could lead to reduced audit quality. Data Availability: Upon request.

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Seeing Similarity or Distance?

Social Psychology ◽

10.1027/1864-9335/a000168 ◽

2014 ◽

Vol 45 (2) ◽

pp. 127-134 ◽

Cited By ~ 6

Author(s):

Leigh Wilton ◽

Diana T. Sanchez ◽

Lisa Giamo

Keyword(s):

Social Distance ◽

Mixed Race ◽

Racial Groups ◽

Perceived Similarity ◽

The Social ◽

Intergroup Perception ◽

Intergroup Perceptions ◽

Racially Ambiguous ◽

Ambiguous Faces

Biracial individuals threaten the distinctiveness of racial groups because they have mixed-race ancestry, but recent findings suggest that exposure to biracial-labeled, racially ambiguous faces may positively influence intergroup perception by reducing essentialist thinking among Whites ( Young, Sanchez, & Wilton, 2013 ). However, biracial exposure may not lead to positive intergroup perceptions for Whites who are highly racially identified and thus motivated to preserve the social distance between racial groups. We exposed Whites to racially ambiguous Asian/White biracial faces and measured the perceived similarity between Asians and Whites. We found that exposure to racially ambiguous, biracial-labeled targets may improve perceptions of intergroup similarity, but only for Whites who are less racially identified. Results are discussed in terms of motivated intergroup perception.

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Replication of Experiments Evaluating Impact of Psychological Distance on Moral Judgment

Social Psychology ◽

10.1027/1864-9335/a000188 ◽

2014 ◽

Vol 45 (3) ◽

pp. 223-231 ◽

Cited By ~ 20

Author(s):

Iris L. Žeželj ◽

Biljana R. Jokić

Keyword(s):

Moral Judgment ◽

Social Distance ◽

Psychological Distance ◽

Temporal Distance ◽

Construal Level ◽

Systematic Effect ◽

Replication Studies ◽

Opposite Conclusion ◽

Moral Transgressions ◽

Replication Of Experiments

Eyal, Liberman, and Trope (2008) established that people judged moral transgressions more harshly and virtuous acts more positively when the acts were psychologically distant than close. In a series of conceptual and direct replications, Gong and Medin (2012) came to the opposite conclusion. Attempting to resolve these inconsistencies, we conducted four high-powered replication studies in which we varied temporal distance (Studies 1 and 3), social distance (Study 2) or construal level (Study 4), and registered their impact on moral judgment. We found no systematic effect of temporal distance, the effect of social distance consistent with Eyal et al., and the reversed effect of direct construal level manipulation, consistent with Gong and Medin. Possible explanations for the incompatible results are discussed.

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