Auditors' Evaluation of Subsequent Events: The Effects of Prior Commitment and Type of Accountability

What is it about?

A judgment problem associated with auditing subsequent events is that auditors fail to adequately respond to subsequent events identified late in the audit. One possible source of this failure to respond could be that subsequent events are typically discovered near the end of the audit when the auditor has established an initial view regarding the fair presentation of the financial statements and have communicated that view to management. We conducted two experiments with experienced auditors. Our first experiment finds that auditors propose smaller audit adjustments to subsequent events following prior commitment when the control environment risk is low, relative to when there is no prior commitment. Our second experiment demonstrates that process accountability (a requirement to justify the processes leading to a decision), rather than outcome accountability (the need to justify a final decision), can more effectively mitigate auditors' biases arising from prior commitment.

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