The Relevance and Materiality of Illegal Acts: Examining Auditor and Investor Judgments

The audit expectation gap exists and persists due to changing “…social, economic, and political developments of the time.” (Sikka, et al., 1998) Like stakeholders’ demands for and the profession’s response to fraud detection in the 2000s, investors are increasingly interested in C-suite employees’ and entity’s illegal acts, finding them both relevant and material (Cline, Walkling & Yore, 2018). This study identifies a gap between auditors’ and investors’ relevance and materiality judgments of a CEO’s illegal act. Varying role (auditor vs. investor) and using experience as a control (audit vs no audit), results show that non-auditor investors rate a CEO’s illegal act as significantly more relevant and material than do auditors placed in either role, while auditors in an investor role find a CEO’s illegal act significantly more material than auditors in an auditor role. Qualitative comments indicate that investors see managers’ personal misconduct as indicative of their lack of personal integrity and lose trust in them across personal to work situations. Auditors do not make the same connection. Our findings highlight challenges for the audit profession in meeting investors’ expectations in the context of managers’ illegal acts.