An Experimental Investigation of Auditor-Auditee Interaction Under Ambiguity

This study experimentally investigates the interaction between auditors and auditees in a strategic setting. Auditee subjects asserted an asset value, given knowledge of the true value. Auditor subjects selected a costly sample of the assets and decided whether to accept or reject an auditee's asserted value. The experiment included between-subjects manipulations of auditee pay for undetected overstatements and ambiguity facing auditors. We investigate whether auditees anticipate the effect of auditors' ambiguity aversion on their decisions to sample and reject the reported balance. Results indicate that sampling increased with increases in either auditors' ambiguity or auditees' incentive to misstate. Also, controlling for sample size, auditors tended to reject the asserted value given a stronger incentive to misstate, but were unaffected by ambiguity. Auditees' misstatement rate was higher given a stronger incentive to misstate, and lower given more ambiguity facing auditors. Further, we document a strategic effect of ambiguity as the effect of auditors' ambiguity in reducing auditees' tendency to misstate was larger given a weaker incentive to misstate