A Matter of Perspective : Mitigating the Outcome Effect in Auditor Performance Evaluations

Prior research shows that the outcome effect in auditor performance evaluations can create adisincentive to exercise professional skepticism by punishing auditors whose skeptical behaviordoes not identify a misstatement. We experimentally demonstrate that perspective takingimproves this evaluation process by mitigating the influence of the outcome effect and increasingevaluator focus on decision process quality. In a common audit setting in which a staff auditorexhibits appropriate skeptical behavior but correctly identifies no misstatement, supervisingauditors prompted to take the perspective of the staff auditor evaluate the staff's performancemore highly than unprompted auditors. Further, we find that perspective taking equalizesauditors' propensity to appropriately rate staff as “above expectations” when they exhibit properskepticism, regardless of the resulting audit outcome (misstatement present or absent), mitigatingpunishment for no-misstatement skeptical behavior. We provide confirming evidence thatperspective taking effectively mitigates the outcome effect by increasing supervisor attentiontoward information cues about the staff's decision process quality and away from those about thenon-diagnostic misstatement outcome. Overall, we demonstrate that perspective taking canimprove attention to process quality and that audit firms can use perspective taking to helpproperly align reward structures with desired auditor behavior