The Effect of Accounting Uncertainty and Auditor Reputation on Auditor Objectivity

This paper reports results of experimental markets that examine whether accounting uncertainty impacts auditor objectivity in a setting where the auditor also has an incentive to build a reputation for objectivity. While prior research has examined the impact of uncertainty on auditor objectivity, our research is the first to explicitly incorporate auditor reputation into the research design. The results provide strong evidence that accounting uncertainty impacts auditor objectivity despite the damage to auditor reputation. Our markets suggest that in the absence of accounting uncertainty auditors remain objective due to concerns about their reputation with managers and investors. However, in the presence of accounting uncertainty auditors impair their objectivity by misreporting in favor of managers. Our results suggest that regulators should focus on enhancing auditor incentives to maintain objectivity when faced with accounting uncertainty, but do not need to be concerned about auditor objectivity violations when accounting pronouncements provide unambiguous guidance.