Does Seeking Audit Evidence Impede the Willingness to Impose Audit Adjustments?

In an abstract, incentivized experiment patterned after the investigation and adjustment decisions that characterize auditing, we find that participants who adjust for information obtained from their willful investigation specify lower adjustments than participants who get the same information without having to take investigative action. Our theory draws on mental accounting and information choice effects, which in combination predict that unfavorable outcomes from costly investigative actions can impede the willingness to incur additional costs in the adjustment process. Separating investigative and adjustment decisions in a paired variant of the task removes the effect of investigative effort on adjustments, but introduces a systematic negative effect on adjustments from sharing risk with paired participants. Our study provides potential insight into the puzzle of why auditors willingly exert costly effort to uncover material misstatements, only to subsequently waive the adjustments that would correct these misstatements.