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    Auditors’ Overconfidence in Predicting the Technical K...
    research summary posted October 22, 2014 by Jennifer M Mueller-Phillips, tagged 11.0 Audit Quality and Quality Control, 11.05 Training and General Experience 
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    Title:
    Auditors’ Overconfidence in Predicting the Technical Knowledge of Superiors and Subordinates
    Practical Implications:

    In this study, we show that both subordinates and superiors are overconfident in predicting other auditor’ knowledge and that this overconfidence effect interacts with task difficulty. Inaccuracy in assessing the technical knowledge of other specific auditors has the potential to degrade audit quality. Likewise, incorrect assessments of the technical knowledge of groups of auditors may distort the audit firms understanding of training needs of auditors. More accurate and objective assessments of interpersonal knowledge of other auditors are needed to enhance audit quality.

    For more information on this study, please contact Hun-Tong Tan.

    Citation:

    Han, J., K. Jamal, and H-T. Tan. 2011. Auditors’ overconfidence in predicting the technical knowledge of superiors and subordinates. Auditing: A Journal of Practice & Theory 30(1): 101-119.

    Keywords:
    technical knowledge; overconfidence; auditor rank.
    Purpose of the Study:

    Prior research documents that auditors are overconfident in predicting the technical knowledge of subordinates. Overconfidence is also thought to be affected by task difficulty.

    Overconfidence on the part of subordinates has implications for audit effectiveness and/or efficiency. Audit workpaper preparers (i.e., subordinates) stylize workpapers both to manage their reputations with their superiors and to conserve cognitive effort. Prior research shows that auditors who report to a superior whom they perceive to be less technically competent (or alert to conclusion errors) may, at the margin, devote less attention to conclusion errors in workpaper preparation, with adverse effects on audit effectiveness. Subordinates who are overconfident in the knowledge of their superiors may actually exert more cognitive effort than otherwise, and may be less likely to stylize their work as a means of reputation management. Likewise, the extent to which superiors scrutinize the work of their subordinates is affected by their perceptions of the subordinate’s technical knowledge. Incorrect perceptions about subordinate technical knowledge can lead to inefficient audit review processes. In practice, auditors perform a variety of tasks that vary in difficulty. Understanding how task difficulty may moderate auditors’ overconfidence is important to assess the implications of overconfidence in actual audit settings.

    We extend the literature on auditors’ overconfidence in three ways.

    First, we examine whether auditors’ overconfidence in predicting the technical knowledge of another auditor varies as a function of the hierarchical rank of the auditor making the prediction relative to the target—i.e., whether it is the superior making a prediction of a subordinate, or a subordinate making a prediction of a superior. Subordinates are the main frontline collectors and recorders of audit data and, thus, whether subordinates are overconfident in predicting the technical knowledge of their superiors is important.

    Second, we examine whether overconfidence effects vary as a function of task difficulty. This issue is important because in practice, auditors perform a variety of tasks that vary in difficulty.

    Third, prior research focuses on auditors’ overconfidence in predicting the technical knowledge of specific individual auditors. We examine whether this effect replicates when auditors make predictions about groups of auditors. 

    Design/Method/ Approach:

    We conducted an experiment.. Participants were 14 audit managers and 28 audit seniors from a major public accounting firm. They comprised 14 natural teams of one audit manager and two audit seniors, who worked on the same team for audit assignments. The participants work on two technical audit tasks. One of these tasks is a relatively easy error frequency (EF) task. The other, more difficult task related to an accounting entry for a firm which has entered into an interest rate swap (IRS) agreement with another firm.

    Findings:
    1. Audit managers are overconfident in predicting individual audit seniors’ knowledge for the more difficult IRS task, but not for the less difficult EF task.
    2. However, the pattern reverses when audit seniors predict audit managers’ knowledge. Audit seniors are overconfident in the individual audit managers’ knowledge for the EF task but not for the IRS task.
    3. Auditors’ predictions of groups of other auditors replicate their predictions of individual auditors.
    4. Hence, auditors’ overconfidence in other auditors’ knowledge is jointly affected by the predicting direction (whether subordinates predict superiors’ knowledge; or whether superiors predict subordinates’ knowledge) and task difficulty.
    Category:
    Audit Quality & Quality Control
    Sub-category:
    Sustainability ServicesTraining & General Experience