The Unintended Consequences of Audit Materiality Disclosures on Whistleblowing Intentions

Within the accounting profession, there exists disagreement about the merits of disclosing auditors’ materiality thresholds. Professional standards require materiality threshold disclosures in the United Kingdom and The Netherlands but not in the United States. Additionally, some audit firms, like PwC-Finland and PwC-Sweden, elect to disclose materiality voluntarily. Although disclosing materiality has been shown to benefit investor decision-making, prior research also suggests that client personnel may take advantage of the information to engage in earnings manipulations below the materiality threshold. We contribute to this debate by examining the influence of materiality disclosures on employee whistleblowing intentions. We conduct an experiment wherein we manipulate materiality threshold disclosure (absent or present) and earnings manipulation amount (above or below materiality). We find evidence that the disclosure of the materiality threshold significantly decreases whistleblowing intentions when earnings manipulation falls below materiality and has no effect on whistleblowing intentions for above-materiality earnings manipulation. Data Availability: The data are available from the authors.