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    Modification of the Audit Report: Mitigating Investor...
    research summary posted July 20, 2015 by Jennifer M Mueller-Phillips, tagged 12.0 Accountants’ Reports and Reporting, 12.05 Changes in Reporting Formats 
    Modification of the Audit Report: Mitigating Investor Attribution by Disclosing the Auditor's Judgment Process.
    Practical Implications:

    This study provides a number of contributions to auditing research. It is the first study to consider the efficacy of modifying the audit report to mitigate negative attributions of auditor performance. This mitigation technique responds to recent calls for changes in the audit report to improve communications to users. Further, examining the efficacy of this technique addresses the validity of claims that the use of an auditor judgment framework will enhance investor confidence. Finally, this study investigates investor assessments of the quality of auditor judgments. This focus is important given the significant role that investor confidence in the audit process plays for the effective and efficient functioning of the capital markets. 


    Wright, A. M., & Wright, S. 2014. Modification of the Audit Report: Mitigating Investor Attribution by Disclosing the Auditor's Judgment Process. Behavioral Research In Accounting 26 (2): 35-50.

    attribution theory, audit report modifications, auditing
    Purpose of the Study:

    There is a large body of research documenting the prevalence of an outcome effect. That is, once an event occurs, people ascribe the causes to factors they can readily associate with the event. The outcome effect is of particular relevance to the field of auditing in that auditors must often make difficult professional judgments, such as assessing the allowance for doubtful accounts, asset impairment, revenue recognition, and whether to issue a going-concern modified opinion for a company with financial difficulties, which investors, regulators, or juries may later question once the outcome is known.

    The Advisory Committee on Improvements to Financial Reporting (CIFR 2008) expressed significant concerns that preparers and auditors are often second guessed after making difficult judgments when subsequent events lead to questions about the validity of previous judgments, such as an earnings restatement.  CIFR argued that professional judgments are essential to reflect the economic substance of transactions and, thus, enhance the quality of financial reporting and auditing.

    The purpose of this study is to examine the efficacy of modifying the auditor’s report to provide decision-process information as a means to mitigate unfavorable investor auditor attributions.

    Design/Method/ Approach:

    This study entails an experiment with two conditions manipulated between-subjects: judgment process information (JPI PRESENT) and no judgment process information (JPI ABSENT). Seventy-two nonprofessional investors, MBA students from a large public university in the Northeast, participated in an experiment where they were randomly assigned to a judgment process information condition (JPI PRESENT), as suggested by CIFR, and a no judgment process information condition (JPI ABSENT). The evidence was gathered prior to November 2013. 


    The findings indicate that subsequent to a bankruptcy, the disclosure of the auditor’s careful decision process significantly enhanced auditor performance attributions in terms of lower assessments of the extent to which auditor’s actions contributed to investor losses, greater perceived auditor competence and diligence, and increased beliefs that the auditor made the right decision. In all, the results suggest that the disclosure of the auditor’s decision process is a promising tool to mitigate investors’ unfavorable auditor attributions. The findings lend credibility to the claims by CIFR that the establishment of a professional judgment framework can be an effective means to address the outcome effect and thereby promote auditors’ and preparers’ exercise of professional judgment.

    Accountants' Reporting
    Changes in Reporting Formats