This paper provides theory and experimental evidence that, under common audit conditions, industry specialization inhibits some aspects of auditors’ professional skepticism. As auditors amass industry experience, they develop extensive knowledge of non-misstatement explanations for unusual financial statement fluctuations. This knowledge coupled with confidence in their ability to analyze audit evidence inhibits their inclination to be skeptical when there are no overt indicators of elevated misstatement risk. Although these conditions are, by definition, the conditions where misstatements are least likely, they are (...) also the same conditions where the PCAOB has alleged pervasive insufficient professional skepticism and where well-concealed fraud is possible. These results pose an ethical dilemma for the PCAOB in terms of weighing its charge to protect the public interest against the fairness of its inspections to audit firms. Encouragingly, I also predict and find that audit firm efforts to promote professional skepticism are more effective for specialists as non-specialists are skeptical regardless of these efforts. (shrink)

Both the Sarbanes–Oxley Act of 2002 and the Dodd-Frank Act of 2010 include clawback provisions that require executives to pay back incentive compensation earned on financial statements that are restated in a subsequent period. Such provisions intend to reduce unethical reporting behavior by executives who otherwise might be more inclined to misstate financial statements to boost incentive-based compensation. However, such provisions could promote rather than deter unethical behavior. In particular, Pyzoha :2515–2536, 2015) finds that, under certain conditions, executives are less (...) willing to restate financial statements in the presence of a clawback policy. Similarly, auditors might also act unethically by being less likely to propose restatements in the presence of clawbacks to avoid upsetting management. To examine this possibility, this study reports the results of three experiments that examine the effect of clawback provisions on auditor judgment. Contrary to expectations, our three experiments, along with supplemental qualitative evidence consistently indicate that clawbacks do not affect auditors’ propensity to propose restatements. These results suggest that a decrease in the number of restatements in a clawback environment will not be due to auditors acting unethically to appease management. The effects of clawbacks on auditors’ risk assessments, however, are less conclusive. As such, we offer potential post hoc explanations to guide future research. (shrink)

This study examines how codes of conduct, monitoring, and penalties for dishonest reporting affect reporting honesty in an online labor market setting. Prior research supports the efficacy of codes of conduct in promoting ethical behavior in a variety of contexts. However, the effects of such codes and other methods have not been examined in online labor markets, an increasingly utilized resource that differs from previously examined settings in several key regards (e.g., transient workforce, lack of an established culture). Leveraging social (...) norm activation theory, we predict and find experimental evidence that while codes of conduct and monitoring without economic penalties are ineffective in online settings, monitoring with economic penalties activates social norms for honesty and promotes honest reporting in an online setting. Further, we find that imposing penalties most effectively promotes honest reporting in workers who rate high in Machiavellianism, a trait that is highly correlated with dishonest reporting. In fact, while in the absence of penalties we observe significantly more dishonest reporting from workers who rate high versus low in Machiavellianism, this difference is eliminated in the presence of penalties. Implications of these findings for companies, researchers, online labor market administrators, and educators are discussed. (shrink)