Offsetting Misstatements: The Effect of Client Pressure and Materiality on Auditorss Judgments

Abstract

This study examines the effect of client pressure and materiality on auditors’ judgments of detected misstatements that have offsetting effects on the client’s income. One hundred and forty-three experienced German auditors completed a case that varied whether offsetting misstatements are contained in the same or different accounts, the level of client pressure, and the quantitative materiality of the misstatements. The results show: First, when misstatements are contained in two different accounts: client pressure lowers the proportion of auditors who require full correction of the detected misstatements. Second, the proportion of auditors who require adjustments that result in the client management failing to meet the bonus constraint is higher when the net effect of the offsetting misstatements is more quantitatively material compared to when the quantitative materiality is small. Third, when the two misstatements are contained in the same account, neither client pressure nor quantitative materiality impacts the proportion of auditors who require full correction of the detected misstatements or prevent the client management from meeting the bonus constraint. Fourth, we find that audit experience, audit experience with listed clients, and the level of the team member impact the results. Finally, in spite of the statistical results, the overall findings show that a high proportion of the auditors in our study (ranging from 68 to 95.7 percent) require full correction of the misstatements and prevent the client from meeting the bonus constraint. These results have important implications for researchers, practitioners, regulators, and standard setters.