Probabilistic Audits and Misreporting – the Influence of Audit Process Design on Employee Behavior

Posted by ARC Commitee - Mar 26, 2021

In a recent study, forthcoming in the European Accounting Review (EAR), Corinna Ewelt-Knauer, Anja Schwering and Sandra Winkelmann illuminate how the design of probabilistic audits influences employee behavior, specifically performance misreporting. The experimental study builds on behavioral accounting research, which shows that audits do not only help to detect and prevent undesired employee behavior like misreporting. Instead, audits can change employees’ perception of the situation – from an ethical decision frame to an economic decision frame, in which opportunistic and therefore misreporting behavior is perceived as appropriate from the employees’ perspective.

To mitigate these undesired effects on employee behavior induced by audits, it is crucial that companies carefully consider how to design their audit processes. This paper shows that, on the one hand, direct face-to-face contact between the employee and the auditor can help to reduce misreporting since the psychological pressure to behave as desired increases for the employee. An implementation of face-to-face contact (even if virtually) is especially in digitalized times a thought-provoking impulse. On the other hand, it is beneficial for companies to limit the employees’ understanding of the audit process since it hampers employees’ analysis of the cost and benefits of misreporting leading to more careful and less misreporting behavior. Overall, the study gives interesting insights on how to increase a company’s audit efficiency.

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