Auditing firms (especially the Big Four) have been increasingly seeking "boomerang" auditors -- individuals who, after working as auditors, take a position as a manager or CFO at a company, and then return to auditing.
Driving this "boomerang" hiring trend is the belief that being able to take the perspective of a manager makes for a better auditor -- one who is better able to tell when a manager is overstating or exaggerating earnings.
A new study -- the first to measure auditor accuracy in assessing earnings bias -- seems to confirm this belief. The paper, "Perspective taking in auditor-manager interactions: An experimental investigation of auditor behavior," appears in the August 2015 edition of Accounting, Organization and Society
"Our findings show that when an auditor has been in the shoes of a manager, he/she is not only better at assessing whether a manager is exaggerating earnings, but is even better at guessing by how much that manager is overstating them,"said co-author Marietta Peytcheva, assistant professor of accounting at Lehigh University's College of Business and Economics, in a statement. Peytcheva's co-authors were Bryan Church of the Georgia Institute of Technology, Wei Yu of Hunter College and Ong-Ard Singtokul, of Chulalongkorn University.
The researchers conducted a role-taking experiment involving an auditor and a manager: One group of participants always played the role of an auditor receiving an earnings report from a manager. The other group of participants alternated between playing the role of an auditor and the role of a manager.
In the experiment, the auditors received earnings statements and were rewarded for their accuracy in identifying which managers were overstating earnings and by how much. The group who alternated roles performed significantly better than the group who remained solely in the auditor role - and they reported much better perspective-taking.
"It was the improved perspective-taking that led to the improved accuracy," added Peytcheva, "Or, you can just hire people who are naturally better at putting themselves in someone else's shoes."
For the full paper, head toScienceDirect here.
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