Believe Who You Trust : How Do Inappropriate Auditor Actions to Improve PCAOB Inspection Outcomes Influence Non-Professional Investors’ Decision Making?

We examine how an accounting firm’s attempt to circumvent the PCAOB inspection process influences non-professional investors’ judgments about auditor credibility and willingness to continue investing in a company the firm audits. In an experiment using 198 non-professional investors, we manipulated the auditor’s historical PCAOB inspection deficiency rate (low versus high) and whether the auditor attempted to breach the PCAOB inspection process (absent versus present). We note four important findings. First, we find a negative association between inspection deficiency rate and perceived expertise and between breaching the inspection process and perceived trustworthiness. Next, we observe that lower perceived expertise and trustworthiness are jointly associated with lower perceived auditor due care, lower perceived financial statement accuracy, and, in turn, a lower likelihood that participants maintain their investment in the company. Third, our inferences are similar when we conduct a second experiment and alternatively measure auditor trustworthiness as improperly revising the audit materiality threshold to forego a material adjustment. Lastly, we explore an intervention in a third experiment and find that when the accounting firm communicates decisive actions taken to rectify the breach of trust, non-professional investors are more likely to continue to invest and perceive the investment as less risky, particularly when the auditor’s historical deficiency rate is high