Reexamining the Outcome Effect: Are Auditors Penalized for Exercising Professional Skepticism?

Abstract

Prior research has documented an outcome effect such that appropriately skeptical auditors receive higher performance evaluations when they identify a misstatement than when they do not. In Experiment 1, we find differences in performance evaluations (as identified in prior research and that we empirically confirm) are driven by a positive reaction to auditors who identify a misstatement rather than a negative reaction to auditors who do not. In Experiment 2, we use the evaluation fact pattern from Experiment 1 and find outcome effects do not differentially impact auditors’ subsequent professional skepticism, so long as the auditor is aware of their initial task performance evaluation. Taken together, results from our experiments contradict the consensus inference in prior research that the audit evaluation system inadvertently disincentivizes profession skepticism. Rather, our results suggest the evaluation system not only does not deter professional skepticism, but also is critical in facilitating auditors’ professional skepticism.