Second Partner Review: An Experimental Investigation
Posted: 8 Aug 2002
This paper uses experimental economic methods to test the effects of second-partner reviews and the availability of sampling information on the competence and independence reflected in the engagement partner's audit reports. The results support the hypotheses, which are based on the analytical predictions of Matsumura and Tucker (1995). Reporting bias was reduced, but not eliminated, by adding second-partner reviews and/or the availability of additional sample information. One unexpected result was that second partners, whose incentive scheme was designed to promote unbiased reporting, exhibited reporting bias, and, in one cell, exhibited more bias than the "biased" engagement partner they were monitoring.
When not subject to second-partner reviews, engagement partners were strategic in their reporting, but not in their sampling decisions. With the introduction of second-partner reviews, the situation reversed. The effects of client pressure became evident in sampling, but were less pronounced in reporting.
Keywords: second partner review, experimental economics, game theory, audit reporting, sampling
JEL Classification: M40, C7, C9
Suggested Citation: Suggested Citation