Accounting--Moral and ethical aspects

The study examines the potential threat to an auditor’s independence in fact which
may result from the extraordinarily favorable personal reputation (superstar status) of an
audit client’s CEO This potential threat to an auditors’ independence is the result of a
halo effect bias which can distort an individual’s judgment and behavior Accounting
firms use a business risk audit approach which involves conducting a strategic risk
assessment which assesses the overall threats to the business model of an audit client
Prior research has demonstrated that the strategic risk assessment can bias the judgment
of auditors pertaining to financial account level risk assessments For example, the Bernie
Madoff Ponzi scheme demonstrated how an extraordinarily well respected individual
with superstar status can distort the judgment of knowledgeable and normally skeptical
individuals An experiment was conducted to examine the potential threat of a superstar
CEO on an auditor’s independence as demonstrated by the ability to distort the judgment of the auditor during the performance of the strategic risk assessment In addition, the
experiment was designed to examine whether the halo cognitive bias can lessen the
impact that an auditor’s professional skepticism has on his or her judgment and behavior
during the audit of a client’s financial statement Unlike other studies which have sought
only to demonstrate that a cognitive bias exist which impairs auditor judgment; the study
also examined whether the influence of a halo effect bias can be mitigated by the formal
rating of audit evidence in a similar manner that was used by Embu and Finley (1977) to
successfully mitigate a framing effect
The experiment did not support the main hypothesis of the study that auditors
assess the strategic risk at a lower risk level for firms that employ a superstar CEO than
for those whom employ a non-superstar CEO This result may primarily be due to the
inability of the scenario used in the experiment to sufficiently differentiate the
characteristics of the superstar and non-superstar CEO Without establishing that the
participants’ judgment was being distorted by a superstar CEO; the other hypotheses
which involved testing a debiasing method to mitigate the halo effect caused by a
superstar CEO and investigating whether a halo effect reduces the impact that auditors’
trait skepticism level has on their judgment could not be properly tested

I show that auditors experience cognitive dissonance when they fail to take appropriate professionally skeptical (hereafter PS) action in line with high PS judgment I specifically show that cognitive dissonance leads auditors to revise their attitudes on low ranking audit actions upward and lower their risk assessments, consequently, lower overall professional skepticism I also find that auditor cognitive dissonance leads to exaggerated ex-post auditor self-assessments professional skepticism Professional skepticism is fundamental to performing an audit according to auditing standards and critical to audit quality Extant research that investigates treatments to enhance professional skepticism predominantly treats both skeptical judgment and skeptical action as analogous outcomes of professional skepticism If, however, there is a breakdown between PS judgment and PS action, the overall benefits of these treatments will be trivial I show that cognitive dissonance due to the incongruence between PS judgments and PS actions leads to an unforeseeable corollary of lower overall professional skepticism I also demonstrate a specific mechanism of how auditor incentives lead to lower professional skepticism, hence, lower audit quality Both researchers and practitioners can benefit from this study by better understating the intricacies in the critical link between PS judgment and action Additionally, I provide an empirical investigation of the components in Nelson’s (2009) model of professional skepticism and extend the model to reflect the intricacies between PS judgment and PS action I test my hypotheses via a three-group research design with attitude change as a proxy measure of cognitive dissonance