The Effect of National Office and External Inspection on Audit Partner’s Judgment

Abstract

This paper investigates how efforts to improve audit quality within audit firms and outside of audit firms collectively affect audit partner’s judgment. Externally, audit regulators conduct inspections and provide feedback to auditors with the goal of improving audit quality. Internally, national office supports auditor partners to make judgment and prepare for inspections. However, we know little about how the two forces interact. Using a between-subject experiment with audit partners and senior managers, I predict and find that when the regulator is antagonistic (i.e., when audit regulator’s feedback anchors on failure), audit partners working with a collaborative national office are less committed to their negotiation goals than those working with a prescriptive national office, and are more likely to rely on integrative negotiation strategy (Expand the Agenda) that seeks to benefit both the client and the auditor than those working with a prescriptive national office. However, when the regulator is less antagonistic, audit partners are more committed to reducing client’s aggressive net income. My findings demonstrate national office’s move towards a more collaborative consultation approach could have negative consequences under an antagonistic regulatory environment, but they may be mitigated when the regulatory environment is less antagonistic.