If You Want My Advice: Status Motives and Audit Consultations About Accounting Estimates

52 Pages Posted: 25 Jun 2016

See all articles by Warren Robert Knechel

Warren Robert Knechel

University of Auckland Business School

Justin Leiby

University of Illinois at Urbana-Champaign

Date Written: June 21, 2016

Abstract

Effective consultation is critical for improving the audit of estimates. In an experiment where audit managers acted as consultants to other auditors, we examine conditions in which consultants either recommend estimates that differ substantially from advice-seekers’ assessments (contrariness) or recommend narrower reasonable ranges of estimates (precision). Psychology theory argues that both of these attributes can improve estimates. We examine whether these attributes depend on consultants' status motives, i.e., the desire to gain respect from or power over others. We find that active status motives lead consultants with higher specialized knowledge to provide recommendations that are less contrary, but more precise. However, consultants increase precision by tightening range bounds in a manner not counter to management’s preference and thus unlikely to prompt the audit team to challenge the estimate. Further, we find that higher consultant decision authority also constrains precision. Our findings suggest limits to consultation’s potential effectiveness in improving estimates. For instance, our findings suggest that firms and standard setters emphasize consultant scrutiny on the range bound that is most likely to constrain management opportunism.

Keywords: Status motives, Auditor consultation, Advice, Accounting estimates, Specialists, Evolutionary psychology

JEL Classification: M4, G18

Suggested Citation

Knechel, Warren Robert and Leiby, Justin, If You Want My Advice: Status Motives and Audit Consultations About Accounting Estimates (June 21, 2016). Available at SSRN: https://ssrn.com/abstract=2798939 or http://dx.doi.org/10.2139/ssrn.2798939

Warren Robert Knechel

University of Auckland Business School ( email )

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand

Justin Leiby (Contact Author)

University of Illinois at Urbana-Champaign ( email )

1206 S 6th St
Champaign, IL 61822
United States
2173007825 (Phone)

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