Evidence Complexity and Information Search in the Decision to Restate Prior-Period Financial Statements

Framed in the decision to restate financial statements, this study addresses whether behavior predicted by competing theories depends on the complexity of evidence. Two experiments observe the information-search behavior of auditors responsible to investigate their firm's prior opinion. Experiment 1 shows that auditors confronted with few (many) summarized statements that replicate in form the materials used in prior research prefer to first search statements that are inconsistent (consistent) with the prior-period accounting. This result generally corroborates research in accounting and confirms the predictions of information-quantity theory in psychology (Fischer et al. [2008a]). In contrast, experiment 1 also shows that, when materials mimic the detailed documents common in practice, the results are different: Auditors confronted either with few or with many detailed documents prefer to search inconsistent documents first. This result confirms the predictions of evidence-complexity theory in psychology (Horowitz et al. [1996], [2001], [2002]) and shows that, compared to the materials on which prior research relies, detailed documents such as memos, emails, letters, and analyses drive information search toward inconsistent evidence. Experiment 2 probes further and finds that auditors evaluate documents bearing notes inscribed after the documents were prepared to be more inconsistent with the prior-period accounting, and that the dispersion in search behavior may be reliably conditional on the presence of notes