CAN OVERSIGHT MITIGATE AUDITOR'S MOTIVATED REASONING? AN EXPERIMENTAL STUDY

• Published in: Economic and business review for Central and South-Eastern Europe Vol. 17; no. 3; pp. 371 - 391
• Main Authors: Slapnicar, Sergeja, Loncarski, Igor, Groff, Maja Zaman
• Format: Journal Article
• Language: English
• Published: Ljubljana University of Ljubljana, Faculty of Economics 01.01.2015; University of Ljubljana
• Subjects: Accountant independence; Accounting firms; Audit committees; Auditing; Auditors; Auditors opinions; Audits; Bias; Client relationships; Cognition & reasoning; Corporate governance; Decision making; Economic crisis; Financial incentives; Financial reporting; Financial statements; Hypotheses; International finance; Monetary incentives; motivated reasoning; oversight; personal relationship; Personal relationships; Regulation; Regulatory reform; Slovenia; Studies; Slovenia
• ISSN: 1580-0466; 2335-4216
• DOI: 10.15458/85451.7

Evidence of auditors' failure to provide an independent opinion has reopened debates on measures to ensure auditor independence. We examine the effectiveness of oversight on two prominent determinants of auditor's biased opinion - financial incentives and a personal relationship with the client. We conduct a between-subject experiment involving an accounting choice task. We find a significant effect of a personal relationship on the auditor's choice after controlling for financial incentives. Oversight has a significant negative effect on auditor's choice arising from financial incentives, whereas a personal relationship significantly reduces the effectiveness of oversight. Our results show that, in addition to oversight, other solutions that break up personal ties are needed to ensure auditor independence.