An Examination of the Effect of Consultation Review and Fee Size on Auditor Judgments

Prior research has shown that direct and indirect incentives in the audit environment can influence auditor judgment. The auditing profession suggests that certain firm-level quality control structures can reduce the effect that potential environmental biases can have on judgment-based decisions. The purpose of this paper is to examine the effects of a firm-level quality control, consultation review requirement, on auditor judgment where the auditor has incentives to be biased toward accepting the client's aggressive accounting method. Fifty-two experienced auditors were given a case study where an audit client was proposing an aggressive change in estimate. Consultation review requirement (required, not required) and fee size (high, low) were manipulated in the case materials. Three judgments were examined: allowability of the proposed accounting treatment under GAAP; assessment of the appropriateness of the proposed accounting treatment in the circumstances; and the likelihood of accepting the client-proposed accounting treatment. The results indicate that consultation review requirement resulted in more conservative judgments regarding the appropriateness of the accounting treatment. In addition, results show that, contrary to the audit profession's suggestion, consultation review requirement reduced the likelihood of accepting the aggressive accounting treatment when fees were low, but not when fees were high