Reexamining the Outcome Effect : Are Auditors Penalized for Exercising Professional Skepticism?

Research suggests audit firms' evaluation systems inhibit professional skepticism. Specifically, supervisors “penalize auditors who employ an appropriate level of skepticism, but do not identify a misstatement” (Brazel et al. 2016, p. 1577), thereby discouraging future instances of professional skepticism. Across two experiments using practicing auditors, we advance the understanding of outcome effects by dis-aggregating the evaluation process to determine whether audit superiors penalize and/or reward appropriately skeptical auditors. Our design isolates the effects of an auditor's skeptical action, outcome of the skeptical action (i.e., misstatement identification or not), and budget overage of the skeptical action on supervisors' evaluations. While we identify fact patterns consistent with prior research (i.e., evaluations of auditors who identify a misstatement are higher than those who do not), contrary to prevalent interpretations of extant auditing outcome effect papers, our results indicate supervisors reward auditors who identify a misstatement, but we find no evidence of a penalty