Accountability, the Dilution Effect, and Conservatism in Auditors' Fraud Judgments

Abstract

This paper investigates the effects on auditors' judgments of being held accountable to superiors in their firm. The specific audit judgment task studied is fraud risk assessment in the presence of both relevant and irrelevant information. Although auditors routinely encounter both relevant and irrelevant information when assessing the risk of fraud, normatively, only the former should affect their judgments. However, prior research (Hackenbrack [1992]) has demonstrated that auditors' fraud risk judgments are influenced by irrelevant information; i.e., they are subject to the dilution effect (Nisbett, Zukier, and Lumley [1981]). Following Tetlock and Boettger [1989], recent auditing research (Messier and Quilliam [1992] and Hackenbrack [1992]) suggests that holding auditors accountable for theirjudgments will exacerbate the dilution effect,