An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

David Piercey
University of Illinois at Urbana - Champaign

Abstract: New documentation requirements open auditors’ assessments to potential ex post scrutiny (PCAOB 2005). As a result, one would expect documentation, if anything, to induce more conservative (higher) audit risk assessments (SEC 2002). However, this study presents evidence that documentation has the opposite effect when auditors assess risks in words rather than numbers. Even though it opens up audit risk assessments to potential PCAOB inspection, documentation ironically causes verbal risk assessments to become more lenient (lower), unlike numerical assessments. I find that verbal audit risk assessment invokes a specific type of word-smithing behavior, and documentation amplifies this behavior. As a result, I predict (and find) that documentation lowers verbal risk assessments. I also find evidence linking the persuasiveness of individual auditors to their verbal assessments. These findings suggest unintended consequences of documentation requirements when auditors assess risk verbally.

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