If You Want My Advice: Status Motives and Audit Consultations About Accounting Estimates

• Published date: 01 December 2016
• DOI: http://doi.org/10.1111/1475-679X.12150
• Author: W. ROBERT KNECHEL,JUSTIN LEIBY
• Date: 01 December 2016

DOI: 10.1111/1475-679X.12150

Journal of Accounting Research

Vol. 54 No. 5 December 2016

Printed in U.S.A.

If You Want My Advice: Status

Motives and Audit Consultations

About Accounting Estimates

W. ROBERT KNECHEL

∗AND JUSTIN LEIBY

†

Received 27 June 2015; accepted 20 August 2016

ABSTRACT

Effective consultation is critical for improving the audit of estimates. In an

experiment where audit managers acted as consultants to other auditors, we

examine conditions in which consultants either recommend estimates that

differ substantially from advice-seekers’ assessments (contrariness) or recom-

mend narrower reasonable ranges of estimates (precision). Psychology the-

ory argues that both of these attributes can improve estimates. We examine

whether these attributes depend on consultants’ status motives, that is, the

desire to gain respect from or power over others. We find that active status

motives lead consultants with higher specialized knowledge to provide rec-

ommendations that are less contrary, but more precise. However,consultants

increase precision by tightening range bounds in a manner that is not counter

to management’s preference and thus unlikely to prompt the audit team to

challenge the estimate. We also find that higher consultant decision author-

ity constrains precision. Our findings suggest limits to consultation’s potential

effectiveness in improving estimates. For instance, our findings suggest that

∗University of Florida; †University of Georgia.

Accepted by Douglas Skinner. We are thankful for suggestions and comments from the

anonymous referee, Denny Beresford, Joe Brazel, Tim Bauer, Tim Brown, Frank Buckless,

Jackie Hammersley, Robin Pennington, Linda Quick, Bridget Stomberg, Eileen Taylor, and

workshop participants at North Carolina State University, the University of Georgia, and the

2015 International Symposium on Auditing Research (ISAR). Justin Leiby is grateful for sup-

port from a University of Florida Fisher School of Accounting Summer Research Grant.

1331

Copyright C, University of Chicago on behalf of the Accounting Research Center,2016

1332 W.R.KNECHEL AND J.LEIBY

firms and standard setters direct consultants to focus scrutiny on the range

bound that is most likely to constrain management opportunism.

JEL codes: B52; L84; M41; M42; M48

Keywords: auditor consultation; use of specialists; accounting estimates; sta-

tus motives; evolutionary psychology; decision authority; advice

1. Introduction

Financial reports contain many complex accounting estimates that require

significant auditor judgment and can increase the risk of material misstate-

ments. Auditors often struggle to maintain the requisite knowledge and

questioning mindset necessary to effectively assess these estimates (Griffith,

Hammersley, and Kadous [2015], PCAOB [2015a, b, c, d]). Due to these

difficulties, auditors routinely engage in consultation with other profession-

als to improve their own judgments in these areas (Kennedy, Kleinmuntz,

and Peecher [1997], Salterio and Denham [1997], AICPA [2002], IAASB

[2005], Barrows, Mahidhar, and Kambil [2010], Ranzilla et al. [2011],

AICPA [2012]). “Consultation” refers to an auditor receiving advice from

another knowledgeable individual (“consultant”). Such advice can range

from formal input from a designated expert to informal input from a

coworker or colleague.1Auditors often rely heavily on input from con-

sultations when evaluating estimates (Griffith, Hammersley, and Kadous

[2015]), and psychology research suggests that this input can be partic-

ularly helpful in improving uncertain estimates (Yaniv [2004]). Yet, little

is known about how the efficacy of consultation and the conditions under

which consultants provide advice that might improve the audit of estimates.

Consultation in auditing is pervasive and has substantial potential benefits,

thus the availability of useful advice is often a necessary condition to im-

prove the audit of estimates.

In this study, we examine two properties of advice that are likely to help

improve auditor judgment on accounting estimates: contrariness and preci-

sion.Contrariness refers to the degree to which a consultant’s advice differs

from the advice-seeker’s own opinion. Many of the presumed benefits of

consultation lie in the potential to expose auditors to new information and

alternative opinions (Barrows, Mahidhar, and Kambil [2010], Ranzilla et al.

[2011]), and there is ample evidence that exposure to contrary opinions

improves novice and expert judgment (Tetlock [2005], Larrick and Soll

[2006]). Precision refers to the narrowness of the range of options presented

by a consultant to an advice seeker, that is, reducing the range of possible

outcomes to be considered. Because auditing standards explicitly require

adjustments only to estimates that fall outside a reasonable range (AICPA

1The consultant’s advice could be opinions or suggestions for or against an option, about

the best process to address an issue, or additional information about an issue. We use “advice-

seeker” and “auditor” interchangeably to refer to the intended recipient of advice.

CONSULTATION IN AUDITING ESTIMATES 1333

[2006]), recommending narrower ranges for estimates or their inputs can

help constrain management’s leeway to use estimates opportunistically.

In spite of these potential benefits, the inherent frictions of an audit set-

ting can make contrariness and precision costly to auditors or an audit firm.

Audit engagements face intense budget pressure as well as scrutiny by both

internal quality reviews and external PCAOB inspections. These conditions

may pressure an audit team to prematurely reach an artificial level of con-

sensus on contentious issues and to focus on confirming evidence so that

the audit appears to be efficient and effective (e.g., AICPA [2012]). By its

nature, contrary advice can inhibit and delay generating consensus. In ad-

dition, audit clients may prefer imprecision that allows leeway for estimates

that reflect management’s incentives, rather than underlying fundamen-

tals, and can use their superior knowledge about their business to justify

this leeway (Bamber, Hui, and Yeung [2010], Dechow et al. [2010]). Thus,

increasingly precise recommendations require that consultants possess the

necessary expertise to justify constraining clients’ discretion over estimates.

Such conditions may work against consultants providing contrary or precise

recommendations.

We argue in this paper that contrariness and precision may increase when

consultants are motivated to signal their own self-confidence, as higher con-

trariness and precision are both interpreted as indicators of confidence

(Kanodia, Bushman, and Dickhaut [1989], Levy [2004], Moore and Healy

[2008]). Based on evolutionary psychology, contrariness and precision de-

pend on a consultant’s status motives, that is, the desire to gain respect from,

or power over, others (Griskevicius, Goldstein, et al. [2009], Griskevicius,

Tybur, et al. [2009], Kenrick et al. [2009]). Status motives are one of a

group of specialized decision rules that evolved to help early humans cope

with survival dilemmas they may have confronted (Cosmides and Tooby

[1994], Kenrick, Li, and Butner [2003]).2Status motives can activate in the

presence of cues of dominance, prestige, or competition, including accom-

plishments or rivalries, and are inactive in the absence of such cues. For

example, status motives could activate in the presence of a competitor, a

highly successful mentor or superior, luxurious surroundings or products,

or when explicitly considering career progression or professional accom-

plishments.

2Kenrick, Li, and Butner [2003] and Kenrick et al. [2009] identify a small number of these

specialized sets of decision rules, that is, evolutionary motives, specifically, status, self-protection,

coalition formation, mate acquisition, mate retention, and kin care, all of which serve to solve

particular survival problems that confronted people in hunter-gatherer times. Status motives

address the dilemma of competing with others for scarce resources. In this framework, prefer-

ences and resource allocations are utility-maximizing functions that depend on which evolved

set of decision rules is active. For example, when the status system is active, people derive util-

ity from actions that increase prestige or dominance, while people derive utility from actions

that increase safety when the self-protection system is active. Note that we are not interested in

how possessing status affects consultant recommendations, but rather in the motivation to gain or

maintain status.