Several streams of literature suggest that performance evaluations may be subject to biases often inherent in forming perceptions of others. For instance, evaluations of others’ decisions often occur after information about outcomes is available (Buchheit and Richardson, 2002). A bias may result when there is an “outcome effect”, which refers to the systematic overweighting of outcome knowledge by the evaluator in assessing another’s decision or performance (Ghosh and Ray, 2002; Hawkins and Hastie, 1990). When objective measures such as outcomes not controllable by a decision maker are used for subjective evaluations of performance, the outcome does not necessarily reflect performance. Therefore, its use may result in incorrectly rewarding or penalizing the person or group being evaluated, and the performance evaluation and control systems are suboptimal (Ghosh and Ray, 2002). In an audit context, the pressure to meet time budgets may lead auditors to forego aud procedures that might otherwise be desirable if they fear that that they will be penalized in the event that a “clean opinion” ultimately results.

The purpose of the current study is to extend an earlier study by Lipe (1993) that advanced a cognitive model to explain how outcomes of decisions affect perceptions. Specifically, this study manipulates the findings of an audit that is significantly over the time budget. The intent is to examine the impact of differing audit results on supervisors’ perceptions of benefits accruing to the firm as a result of the excess audit time. Lipe’s model is further tested to determine if perceptions of benefit are associated with “loss” or “cost” frames, which in turn are expected to be associated with the actual performance evaluation and the extent to which a supervisor would want to work with the same auditor in the future.

Whether Lipe’s cognitive model extends to the context of evaluating a subordinate auditor’s engagement performance is unclear. First, her study focused on a managerial accounting context and used cost accounting students and business professionals. To some extent, the performance of a specific audit necessitates a short-term focus with a primary concern for managing risk on that specific audit. The idea of benefits and costs of each decision may not be as salient to the auditor in the performance of his/her normal responsibilities as auditors focus on complying with standards applicable to each individual audit. Second, because auditing standards require considerable documentation, the decision process in a “real” audit is arguably more observable to the evaluator than in many contexts. The evaluator is then in a better position to evaluate the process exclusive of the outcome.

Consistent with the results of prior studies in other areas, the outcome of an over-budget audit affected performance evaluations positively when the audit resulted in significant financial statement adjustments and a qualified opinion as opposed to a clean opinion. Also, subjects indicated more strongly that they would like to work with the auditor on a future audit when the audit disclosed significant financial statement adjustments. The results provide some support for Lipe’s (1993) cognitive model in the audit context, but not in all respects. Specifically, subjects told that the audit resulted in significant financial statement adjustments associated a greater level of benefit accruing to the firm, which in turn was positively associated with the performance evaluation and subjects’ indications as to whether they would work with the auditor on a future assignment. However, the effect of audit findings on the benefit assessment was no longer significant after considering experience in public accounting, although the audit findings significantly affected the final performance rating. The level of benefit was further correlated with subjects’ framing of the additional audit time as a “cost” or a “loss”. The judgment of loss/cost was further associated positively with the performance evaluation such that, as the judgment tended toward “cost”, the performance evaluation increased in a moderately significant manner.

The study also extends an earlier study by Kaplan and Reckers (1985) by incorporating the outcome of the audit. Kaplan and Reckers (1985) examined evaluators’ causal attributions as to whether a hypothetical subordinate was responsible for a time budget overrun, but did not vary the outcome of the audit in terms of financial statement adjustments and type of report issued. The results of the current study suggest that the results of an audit may change an evaluator’s perception of the excess time spent such that a benefit is perceived for the firm when the audit discloses problems. In turn, these changed perceptions appear to mitigate a tendency to perceive a budget overrun as substandard performance.

Previously published in: Corporate Governance, Volume: 20, Number 1, 2005  less