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An experimental investigation of endogenously versus exogenously determined guidance: implications for using social norms in financial reporting
Amy K. Choy, University of Alberta
Ronald R. King, Washington University
ABSTRACT. Sunder (2005, 2006) recommends that the role of social norms be more carefully examined as a substitute for centrally dictated standards. He reasons that the latter limit experimentation and innovation, which require input from auditors (endogenously determined guidance). We develop a gatekeeper ultimatum game and report the results of an experiment investigating (1) how endogenously determined guidance affects auditors’ “objectivity and courage” to withstand client pressures (Herz 2003), and (2) how the quality of the endogenously determined guidance is affected by auditor litigation. We find that (1) auditors are more willing to withstand client pressures when they help to develop the guidance; (2) auditors exhibit a social preference for fairness and are willing to take costly action to punish unfair behavior from managers; and (3) the quality of the endogenously determined guidance is lower when auditors face financial sanctions.
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