Counteracting the Directional Influence of Incentives on Auditor Judgment

Yuepin (Daniel) Zhou

Gies College of Business
University of Illinois at Urbana-Champaign
[email protected]

June 2019

I am grateful to my dissertation committee: Kathryn Kadous (chair), Jackie Hammersley, Kristy

Towry, and Melissa J. Williams, for their invaluable advice. This paper has benefited from
helpful comments from Tim Bauer, Tim Brown, Melissa Carlisle, Amanda Carlson, Will
Ciconte, Deni Cikurel, Mike Durney, Cassandra Estep, Bright Hong, Lisa LaViers, Melanie
Millar, Bob Mocadlo, Mark Peecher, Kathy Rupar, and from workshop participants at Cornell
University, Emory University, the University of Florida, and the University of Illinois at Urbana-
Champaign. I am thankful for the support of the Access to Audit Personnel Program of the
Center for Audit Quality (CAQ) and the Auditing Section of the American Accounting
Association, and I am particularly grateful to the auditors who participated in the study. The
views expressed in this paper are mine alone and do not reflect those of the Center for Audit
Quality. I acknowledge the generous financial support of Emory Goizueta Business School, the
AICPA Accounting Doctoral Scholars program and the Sheth Fellowship during my doctoral
studies.

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 Counteracting the Directional Influence of Incentives on Auditor Judgment

ABSTRACT

Auditing standards require auditors to be objective in their judgment. However, incentives

inherent in the audit environment motivate auditors to prefer a particular audit conclusion over
others, undermining auditor objectivity. In this study, I predict and find that making auditors’
intrinsic motivation for their work salient counteracts the directional influence of incentives on
auditor judgment. I show that the counteracting effects are achieved through auditors’
information processing: auditors with salient intrinsic motivation search for relatively more
evidence that contradicts their incentive-preferred audit conclusion, evaluate acquired evidence
as relatively less supportive of their incentive-preferred audit conclusion, and integrate the
evidence into their judgment to a greater extent. The results indicate that salient intrinsic
motivation that focuses auditors on intrinsic rewards of audit tasks can mitigate the distorting
influence of directional incentives on audit quality, a challenging issue that has consistently
concerned regulators, practitioners, and academics.

Key Words: directional incentives; intrinsic motivation; motivated reasoning; information

search; information evaluation

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 INTRODUCTION

Auditors operate in an environment with various economic, social, and personal incentives

[Nelson 2005]. These incentives can motivate auditors to prefer a particular audit conclusion

over others [Church, Jenkins, McCracken, Roush, and Stanley 2015]. Some incentives, such as

maintaining professional reputation and minimizing legal liabilities, prompt auditors to thwart

clients’ aggressive financial reporting, while others, such as maintaining good client

relationships, encourage auditors to go along with their clients’ aggressive reporting [Blay 2005].

Regulators have noted that incentives inherent in the audit industry impair auditors’ objectivity

and audit quality, leading to low financial reporting quality [PCAOB 2012]. Empirical evidence

corroborates that auditors’ judgment is biased toward reporting decisions that are more consistent

with their incentives, threatening audit quality (e.g., Hackenbrack and Nelson [1996]).1 As a

result, the issue of how to effectively counteract the directional influence of incentives on audit

judgment has been of great interest to policy makers, practitioners, and academics [Moore,

Tetlock, Tanlu, and Bazerman 2006; Nelson 2006; CAQ 2014; PCAOB 2016].

Auditors, motivated by their incentives, consciously or unconsciously form directional goals

that align with their incentives (e.g., favoring an aggressive or conservative accounting method)

and engage in a biased reasoning process in order to reach their directional goals [Kadous,

Kennedy, and Peecher 2003]. The biased cognitive process, known as motivated reasoning,

induces individuals to strategically collect and evaluate information to facilitate justifying and

reaching preferred conclusions [Kunda 1990]. Empirical evidence and regulator findings

confirm that auditors tend to over-rely on evidence that supports their desired conclusions and

1
While a more conservative audit conclusion is usually linked to higher audit quality, an overly conservative audit
conclusion motivated by auditors’ own incentives, such as avoiding litigation, could also potentially impair audit
quality and financial reporting quality [DeFond and Zhang 2014].

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dismiss evidence that contradicts their preferred conclusions [Turner 2001; PCAOB 2012, 2017].

In this study, I examine whether and how making auditors’ intrinsic motivation for their work

salient can mitigate the directional influence of incentives on audit judgment by changing

auditors’ cognitive processing.

Intrinsic motivation refers to the drive to engage in an activity for the satisfaction inherent

in the activity [Ryan and Deci 2000]. These satisfactions are not necessarily derived from

earning extrinsic rewards by completing the task. Rather, they are related to the positive feelings

of solving challenging problems, learning new skills, and increasing competency through the

process of performing the activity. Importantly, the extent to which an individual focuses on her

intrinsic motivation when performing a task can be influenced by contextual factors, such as task

instructions, leadership styles, priming, etc. [Gagné and Deci 2005; Cerasoli, Nicklin, and Ford

2014; Kadous and Zhou 2018]. Salient intrinsic motivation prompts individuals to focus less on

extrinsic rewards and outcome of a task, and more on the process of performing a task—for

example, satisfying their curiosity by collecting and viewing information to solve a problem

[Nolen 1996]. Based on this reasoning, I expect that increasing the salience of auditors’ intrinsic

motivation will make auditors less concerned about whether they can reach an audit conclusion

that is motivated by their extrinsic incentives, thereby mitigating the directional influence of

incentives on auditors’ judgment and information processing.

To test my hypotheses, I conduct an experiment in which 107 senior-level auditors evaluate

the reasonableness of a client’s revenue growth assumption used in a goodwill impairment test.

The case provides auditors with a list of 14 evidence items. Auditors can choose to review as

many or as few items as they like. Importantly, each evidence item has a descriptive title that

enables auditors to infer whether that item supports, does not support, or is irrelevant to

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management’s revenue assumption. This design feature allows me to measure the relative

emphasis auditors put on different types of information during information search. For each

chosen item, auditors evaluate the implications of the item for the revenue assumption, allowing

me to measure auditors’ evaluation of different types of evidence items.

I use a 2 × 2 between-participants design in my experiment. I manipulate auditor incentive

at two levels by varying whether the firm is concerned with auditors undertaking costly

investigations of the client’s explanations (Credence-inducing Incentive) or uncritically

accepting the client’s explanations (Skepticism-inducing Incentive) [Peecher 1996]. The

credence-inducing incentive is expected to motivate auditors to justify reaching the client’s

preferred goodwill impairment conclusion, whereas the skepticism-inducing incentive is

expected to motivate auditors to be skeptical of the client’s preferred conclusion. Following

prior research [Amabile 1985; Kadous and Zhou 2018], I manipulate the salience of intrinsic

motivation by asking auditors to either rank order a list of intrinsic reasons that they like their job

(intrinsic condition) or a list of reasons that they eat at a restaurant (control condition). While the

former rank order task is expected to make auditors more aware of their intrinsic motivation for

the job, the latter is not expected to change the salience of intrinsic motivation.

Consistent with the theory, I find that salient intrinsic motivation counteracts the directional

influence of incentives on auditors’ judgment. Auditors’ judgments are less influenced by their

incentives in the intrinsic motivation conditions than in the control conditions. Process analyses

show that salient intrinsic motivation mitigates the directional bias in audit judgment through its

impact on auditors’ information processing. Auditors with salient intrinsic motivation search for

relatively more information that contradicts their incentive-preferred audit conclusion, evaluate

the information as less supportive of their incentive-preferred audit conclusion, and are more

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willing to integrate the relevant information into their judgment than do auditors in the control

conditions.

This study is important for several reasons. First, directional influence of incentives has

been repeatedly shown to undermine audit quality [Nelson 2005]. Policy makers and researchers

have had only limited success in developing effective means of counteracting the impact of

motivated reasoning on auditor judgment [Moore et al. 2006; Church et al. 2015]. Prior research

has examined the effectiveness of changing auditors’ directional incentives or directional goals,

such as removing the economic bond between the auditor and its client [Hurley, Mayhew, and

Obermire 2018] or strengthening the effectiveness of audit committee [Bhaskar, Hopkins, and

Schroeder 2019], in addressing this problem. This paper extends prior research by providing a

new perspective on how to address auditor motivated reasoning. Instead of changing auditors’

directional goals, the current study shows that another promising means is to change auditors’

cognitive processing styles. Having auditors focus more on the intrinsic rewards and the process

of an audit task causes auditors to attend to more contradictory information and evaluate

information less consistently with their incentives, resulting in audit judgment that is less

influenced by their directional incentives. This new perspective complements previous

approaches in circumstances where completely avoiding conflicts of interest in auditing

environment may be challenging [Moore et al. 2006] and when the strength of audit committee is

beyond the audit firms’ control [Bhaskar et al. 2019].

Second, this paper extends the literature on intrinsic motivation by showing that the benefits

of intrinsic motivation can sustain, despite the existence of extrinsic incentives. Most of the

prior motivation research focuses on how extrinsic incentives “crowd out” intrinsic motivation

[Cerasoli et al. 2014]. My study demonstrates that when intrinsic motivation is salient, not only

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will it not be crowded out by extrinsic incentives, but it will protect individuals against the

impact of extrinsic incentives. This is the first study that examines the counteracting effects of

salient intrinsic motivation on motivated reasoning. The findings of this study provide important

practical implications. Auditors and other working professionals often work in environments

where numerous extrinsic incentives exist. Thus, for the benefits of intrinsic motivation to

manifest in practice, intrinsic motivation needs to be able to withstand the presence of extrinsic

incentives in workplace. This study supports that the improved audit judgment and information

processing caused by salient intrinsic motivation is likely to persist in practice where extrinsic

incentives are abundant. While the main purpose of this paper is to develop and test theory, the

findings of the paper can be leveraged by audit firms that seek to mitigate the negative impact of

directional incentives on audit quality. For example, firms can make their employees’ intrinsic

motivation salient through firm leadership emphasis on intrinsic goals [e.g., Kadous, Proell,

Rich, and Zhou 2018] or by providing autonomy-supportive work environment that fosters

auditors’ intrinsic motivation [e.g., Gagné and Deci 2005; Williamson 2008; Peecher, Ricci, and

Zhou 2019].

Third, this paper provides process data on how directional incentives affect auditor

judgment by simultaneously measuring auditors’ information search and information evaluation

behaviors during the audit task. Information processing (e.g., information search and

information evaluation) is a central part of the audit process and a key to high audit quality and

appropriate exercise of professional skepticism [Bonner 2008; Griffith, Hammersley, and

Kadous 2015a; Nolder and Kadous 2018]. Therefore, it is important to understand auditors’

underlying decision process by measuring their cognitive processing unobtrusively [Kadous and

Zhou 2017]. In addition, this paper focuses on the relative emphasis auditors put on contrary

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information (versus corroborating information) in their cognitive processing and in forming their

judgment. This is an important aspect of information processing as regulators frequently cite

auditors’ inadequate consideration of contradictory evidence as one of the root causes of audit

deficiencies [PCAOB 2016, 2017, 2018]. Thus, the current study extends prior research on

improving auditors’ cognitive processing [e.g., Griffith, Hammersley, Kadous, and Young

2015b; Kadous and Zhou 2018] by examining ways to encourage auditors to incorporate

contradictory information into their decision process.

BACKGROUND AND HYPOTHESIS DEVELOPMENT

Auditing standards require that auditors be “without bias with respect to the client” (AS

1005). However various incentives inherent in the audit practice threaten auditors’ objectivity

and independence [Nelson 2005]. For example, on the one hand, auditors are motivated to

prevent aggressive financial reporting by their incentives to maintain a good reputation,

minimize litigation liability, and avoid regulatory sanctions. On the other hand, auditors are

incentivized to go along with clients’ preferred aggressive reporting by their desire to maintain

good client relationships in order to retain clients, earn high audit fees, and grow the business.

Auditors, motivated by their incentives, form directional goals to arrive at a biased audit

conclusion, a cognitive process known as motivated reasoning [Kunda 1990; Kadous et al.

2003]. For example, Hackenbrack and Nelson [1996] find that auditors allow more aggressive

client reporting when audit engagement risk is low (i.e., incentives favoring aggressive reporting

method) than when engagement risk is high (i.e., incentives favoring conservative reporting

method). Directional goals can also arise from incentives to please a supervisor. For example,

Peecher [1996] shows that auditors are less skeptical about the client’s explanations when their

firm emphasizes audit efficiency than when their firm emphasizes professional skepticism.

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 The negative impact of directional goals caused by auditors’ incentives on audit quality has

greatly concerned practitioners, regulators, and academics [Moore et al. 2006; Nelson 2006;

PCAOB 2012; CAQ 2014]. Researchers have examined the efficacy of several approaches to

reducing the negative impact of auditors’ incentives on audit judgment. For example, SAS No.

90 attempts to address this issue by requiring auditors to discuss the quality of the client’s

accounting methods (AU Section 380) with the audit committee, i.e., increasing the auditor’s

accountability to the audit committee. Other proposed solutions include requiring disclosure of

conflicts of interest, increasing regulation over the auditor-client relationship, and restructuring

the auditor-client relationship by having a third party choose a company’s auditor [Moore et al.

2006; Hurley et al. 2018]. However, prior studies suggest that these proposed solutions are

either ineffective or costly to implement. For example, asking auditors to assess the quality of

the client’s accounting method for discussion with the audit committee (i.e., SAS No. 90)

amplifies the effects of directional goals on auditors’ acceptance of client-preferred methods

[Kadous et al. 2003]. Disclosing conflicts of interest increases the bias in one’s judgment

relative to not disclosing [Cain, Loewenstein, and Moore 2005; Jamal, Marshall, and Tan 2016].2

In this study, I provide theoretical predictions about how making auditors’ intrinsic motivation

for their job salient can counteract the directional impact of incentives on auditors’ judgment.

Intrinsic motivation refers to one’s desire to engage in an activity for its own satisfaction,

rather than for external rewards [Ryan and Deci 2000]. People are intrinsically motivated when

they care primarily about enjoying tasks, satisfying curiosity, overcoming challenges, and

2
One exception that provides an effective means of mitigating motivated reasoning is a concurrent study conducted
by Bhaskar et al. [2019] where they find strong audit committee can mitigate the effect of client pressure on
auditors’ adoption of directional goals.

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building competence [Lepper and Henderlong 2000].3 Intrinsically motivated individuals are

concerned less about the specific outcomes of the task and focus more on the process of

performing the task itself—ensuring that the task is done appropriately. That is, they are driven

by their internal needs to understand the material and the context and to learn and develop

themselves through the process of completing a task [Nolen 1996].

Individuals can be motivated intrinsically, motivated extrinsically, or both. For example, an

auditor can be motivated to ask for a tough assignment because she enjoys the challenge and

learning opportunities provided by the assignment (i.e., intrinsic motivation) and/or because she

values recognition and promotion opportunities provided by the assignment (i.e., extrinsic

motivation). While the two types of motivation often co-exist, the extent to which one’s intrinsic

motivation is salient when performing a task (i.e., intrinsic motivational orientation) is

influenced by both contextual factors and personality traits [Amabile, Hill, Hennessey, and Tighe

1994; Cerasoli et al. 2014]. While people with a high trait level of intrinsic motivational

orientation tend to focus more on the intrinsic rewards when conducting activities, contextual

factors that increase the salience of intrinsic motivation can also orient individuals toward the

intrinsic aspects (enjoyment, curiosity, learning, etc.) of an activity [e.g., Amabile 1985].

Salient intrinsic motivation induced by contextual factors, such as task instructions,

observing others performing an activity intrinsically, and priming, has been shown to influence

3
Intrinsic motivation is distinguished from professional identity in that intrinsic motivation reflects motivation
stemming from enjoyment of the work itself and enjoyment of mastery of the work, whereas professional identity
reflects shared norms and values between an auditor and the profession [Bamber and Iyer 2002; Bauer 2015].
Professional identity can motivate auditors to achieve particular outcomes, including fitting into the profession,
making decisions that uphold the profession’s ideals, etc. [Bauer 2015]. Professional identity often means different
things for different auditors. Prior research shows that public accountants tend to view their profession in
“commercial terms” [Suddaby, Gendron, and Lam 2009] and accounting students “are particularly unlikely to have
chosen the accounting major because it interests them” and are more likely to choose accounting major because they
can be “very well off financially” [Madsen 2015]. Thus, the empirical evidence indicates that the values that
auditors identify with their profession are more likely to be extrinsically motivated than intrinsically motivated.

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people’s behaviors and judgment on subsequent tasks. For example, it improves students’

performance in an anagram task [Gillet, Vallerand, Lafrenière, and Bureau 2013] and conceptual

learning of an article [Vansteenkiste, Simons, Lens, Soenens, and Matos 2005]. Nonetheless,

prior research has not tested or discussed whether salient intrinsic motivation can mitigate

directional judgment bias caused by one’s motivated reasoning.

Based on a synthesis of the literature on intrinsic motivation, I develop expectations about

the effects of salient intrinsic motivation on auditors’ judgment when they face directional

incentives. Evidence from the psychology literature indicates that salient intrinsic motivation

can “immunize” individuals against the negative impact of extrinsic incentives on child creativity

[Hennessey, Amabile, and Martinage 1989; Hennessey and Zbikowski 1993]. In these studies,

children were paid to perform a creativity task. Before they started the task, half of the

participants watched videos that emphasized intrinsic motives for doing schoolwork, while the

other half watched videos irrelevant to intrinsic motivation. Children reminded about the

importance of intrinsic motivation in the video were less likely to experience the negative

crowding-out effects of extrinsic rewards on creativity in a subsequent task than those who did

not watch the videos.

The above two studies are different from the current study in multiple dimensions: 1) they

examine a different effect of intrinsic motivation (mitigating the crowding-out effect of extrinsic

incentives on creativity versus mitigating the impact of motivated reasoning on audit judgment);

2) they focus on different behaviors (creativity on a storytelling activity versus audit judgment of

goodwill impairment and the underlying cognitive processing); and 3) they use a different

participant population (primary school students versus auditors). However, the findings of the

prior studies provide the theoretical mechanism of how salient intrinsic motivation can mitigate

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the directional impact of incentives on audit judgment. When an individual whose intrinsic

motivation is salient, she will focus her attention more on the process of a task (e.g., the

enjoyment and learning/mastery derived from performing a task) and less on the end results of a

task (e.g., the extrinsic incentives that can be earned for completing a task). By shifting her

focus toward the intrinsic aspects of a task, that individual will be less influenced by the extrinsic

incentives and less motivated to arrive at a judgment that will help her realize the extrinsic

incentives. The idea that salient intrinsic motivation inoculates individuals against the impact of

extrinsic incentives can be further inferred from the findings that salient intrinsic motivation

reduces children’s negative feelings associated with perceived poor test performance [Burton,

Lydon, D'Alessandro, and Koestner 2006] and counteracts the negative effect of extrinsic

rewards on children’s interest in an activity [Fazio 1981].

Based on the above reasoning, I expect that auditors whose intrinsic motivation is salient

will be less concerned about whether they can support an audit conclusion that is consistent with

their incentives. Instead, they are more motivated to understand the task and learn about the

evidence that can help them make a proper conclusion, thus leading to audit judgment that is less

influenced by extrinsic incentives. The following hypothesis formally states the prediction:

Hypothesis 1: Auditors’ judgment will be less affected by the directional influence of

incentives when their intrinsic motivation is more salient.

Motivated reasoning theory indicates that when individuals are motivated to arrive at a

particular conclusion, they will attempt to justify the desired conclusion in order to appear

“objective” to themselves and others. To find support for her desired conclusion, the individual

will process available information in a way that the conclusion seemingly can be reached by

interpreting the acquired evidence [Pyszczynski and Greenberg 1987; Kunda 1999].

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 Information search and information evaluation are two important components of an

individual’s decision-making process [Einhorn and Hogarth 1981]. Prior accounting studies

indicate that accounting professionals engage in strategic information acquisition and evaluation

in order to support their directional goals. For example, auditors tend to focus their search more

on information that confirms management’s assumption when they learn that their firm is

concerned about audit efficiency than when their firm is concerned about sufficient professional

skepticism [Turner 2001]. In addition, prior findings indicate that auditors tend to evaluate

information as more supportive of audit conclusions that align with their incentives than of

conclusions that are not consistent with their incentives [e.g., Wilks 2002; Blay 2005].

The empirical findings about how incentives cause auditors to perform incentive-consistent

information search and information evaluation corroborate regulators’ concerns that auditors

tend to overly focus on finding confirming evidence “without adequately considering contrary

evidence” [PCAOB 2012] and auditors “did not take into account relevant evidence that

appeared to contradict certain assertions” when evaluating evidence [PCAOB 2016, 2017].

Thus, the key to mitigating the directional influence of incentives on audit judgment is to

prompt auditors to attend to information that contradicts their incentive-preferred audit

conclusion and to evaluate information less favorably toward their preferred conclusion. The

more contrary evidence auditors search for and review, the less likely they will be able to justify

their preferred conclusion. Building on the theoretical reasoning behind Hypothesis 1, I propose

that intrinsically motivated auditors will be less concerned about whether they can find and

evaluate evidence in a strategic way to support their preferred conclusion but more interested in

understanding how to reach an appropriate judgment based on the relevant evidence. Driven by

their intrinsic motivation to learn and to satisfy their curiosity, intrinsically motivated auditors

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will be more likely to search for information that is not consistent with their expected or

preferred conclusion. They will also be less likely to evaluate information favorably for the

purpose of supporting their preferred conclusion. Stated formally:

Hypothesis 2: Auditors will search for relatively more evidence that contradicts their

incentive-preferred audit conclusion when their intrinsic motivation is more salient.

Hypothesis 3: Auditors will evaluate information as relatively less supportive of their

incentive-preferred audit conclusion when their intrinsic motivation is more salient.

RESEARCH METHOD

I test my hypotheses in an experiment in which auditors evaluate the reasonableness of

management’s revenue growth assumption used in a goodwill impairment test. The overall

design is 2  2, with both manipulations between participants.4 I manipulate auditor incentive at

two levels (i.e., credence-inducing incentive, skepticism-inducing incentive) and the intrinsic

motivational orientation of the auditors at two levels (i.e., intrinsic, control). Ninety-four

experienced senior auditors and 13 managers from eight national and international firms

completed the study in one sitting.5 Seniors and managers are appropriate participants because

they are often primarily responsible for performing the major steps in auditing complex

4
I obtained Institutional Review Board approval for the study. This study is part of a larger study with a 2  3
design. Two experimental conditions where I examine the effects of accountability in counteracting the directional
influence of incentives are not included in this paper. Consistent with my theory, I do not find support that holding
auditors accountable for their decision process mitigates the directional influence of incentives on auditor judgment.
5
One hundred fifteen audit seniors and managers participated in the study. Eight of them did not complete the study
in one sitting as required by the instruction. They spent on average 227 minutes on the study, ranging from 92
minutes to more than 13 hours, significantly more than did the rest of participants (mean = 35 minutes, p < 0.01).
As the case asks participants to view various audit evidence and incorporate the evidence into their final audit
judgment, it is essential that participants complete the case in one sitting where the information they viewed is still
relatively fresh on their memory when making the audit judgment. Therefore, data from these participants are
excluded from the analyses. Including the eight participants in the analyses would increase p-value for H1 from
0.03 to 0.07, whereas p-values for tests of H2 and H3 remain significant or improve slightly (all p values ≤ 0.05).

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accounting estimates in practice [Griffith et al. 2015a]. Participants have an average of 4.3 years

of auditing experience, and 84 percent of them are CPAs.

Task

Participating auditors completed a case in which they form a conclusion about the

reasonableness of management’s revenue growth assumption used in a goodwill impairment test.

The case contains a list of evidence items that auditors can choose to review and evaluate before

they make their conclusions. The case is purposefully ambiguous about whether management’s

assumption is reasonable. The ambiguity is realistic, and it provides auditors with opportunities

to engage in motivated reasoning.

I administered the study online through Qualtrics. Figure 1 provides an overview of the

experimental procedures. Auditors first received a brief intervention that manipulates the

salience of intrinsic motivation (described below) at the beginning of the task. Auditors then

learned about their firm’s concern, which was used to manipulate auditor incentives, and were

asked to briefly describe the firm’s concern in their own words to reinforce the incentive

manipulation. Next, auditors read background information about the company and the goodwill

impairment test, and made a preliminary assessment of the reasonableness of the revenue

assumption.

[Insert Figure 1 here]

After making the preliminary assessment, auditors had the option to review additional

information from a list of 14 evidence items. Each evidence item has a descriptive title that

enables auditors to infer, without reading the contents of the item, whether the item supports

(positive evidence), does not support (negative evidence), or is not directly related to (neutral

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evidence) management’s revenue growth assumption.6 For example, titles of positive evidence

include “Strong sales in early FY 2016” and “Positive market reactions to the new product”;

titles of negative evidence include “Intensified market competition” and “Potential delayed

launch of Product C”; titles of neutral evidence include “No significant capital expenditures in

the near future” and “Stable operating expense”. There are six positive items, six negative items,

and two neutral items. Appendix A lists the fourteen items and their classifications.7

Auditors could select as many or as few items as they wished to review, with information

search occurring in rounds. Every round, they could select up to four items, and they evaluated

the implications of each selected item for the client’s revenue growth assumption. At the end of

each round, auditors reassessed the reasonableness of the client’s revenue assumption based on

all the information they had reviewed so far. Auditors were told that they could stop the

information review process at any time, as long as they felt that they had reviewed enough

information to make their final conclusion. After auditors made their final assessment, they

answered questions related to the case and demographic questions in the post-experimental

questionnaire. Feedback on auditors’ judgment is provided to all participants at the end of the

instrument. The feedback showed how the auditor’s final reasonableness assessment compared

to the average reasonableness assessment made by auditors who completed the task in a pilot

study.

6
Participants evaluated the implications of each viewed item for management’s revenue growth assumption on an
11-point Likert scale ranging from 1 (very negative) to 11 (very positive). The average rating of positive evidence
items by participants is significantly more positive than the average rating of negative items (p < 0.01). In addition,
each positive (negative) item is rated significantly higher (lower) than the midpoint of the 11-point Likert scale (all
p-values < 0.01). This indicates that the categorization of the evidence items is consistent with participants’
evaluation.
7
I also vary between participants the order of the evidence items by creating two versions of the evidence list with
different ordering. Including evidence order and all possible interactions with the independent variables in the
ANOVA models does not change any of the inferences. Therefore, for analysis purpose, I collapse participants
across the two ordering conditions.

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Independent Variables

Auditor Incentive

I adapt auditor incentive manipulation from Peecher [1996] by varying the audit firm’s

concern about how auditors perform certain audit procedures. The instrument informs

participants that, at a recent firm training session, the firm expressed concerns about how certain

audit procedures were being performed. More specifically, in the credence-inducing incentive

condition, the case states that the firm was worried that:

auditors might undertake costly investigations of explanations other than those provided
by the client, even when there is no evidence that the client’s explanation might be wrong.
In other words, auditors sometimes might not fully utilize the clients’ insights to improve
the efficiency of our audits.

whereas in the skepticism-inducing incentive condition, the case states that the firm was worried

that:

auditors might uncritically accept the client’s explanations, even when there is evidence
that the client’s explanation might not be correct. In other words, auditors sometimes might
not approach client-provided explanations with enough professional skepticism.

I expect auditors in the credence-inducing incentive conditions to be motivated to be less

skeptical of the client’s explanations and view the client’s assumption as more reasonable,

whereas I expect auditors in the skepticism-inducing conditions to be motivated to be more

skeptical about the client’s assumption and view the client’s assumption as less reasonable.

Intrinsic Motivational Orientation

Following Kadous and Zhou [2018], I provide auditors in the intrinsic motivational

orientation condition with a list of intrinsic reasons that they like their job and ask auditors to

rank them in the order of importance to them. Although the particular orders auditors assign to

each reason are not important, the act of reviewing, contemplating, and applying those intrinsic

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reasons to themselves makes their intrinsic motivation toward their job more salient, and the

salient intrinsic motivation is expected to carry over to subsequent tasks. Auditors in the control

condition perform a filler task that involves ranking a list of reasons why they eat at a restaurant.

This filler task is not expected to change the salience of auditors’ intrinsic motivation for their

job. I use this filler task to keep the timing and task procedures similar across the experimental

conditions. See Appendix B for the lists of reasons provided in each condition.

Dependent Variables

I measure three types of dependent variables: audit judgment, information search, and

information evaluation. Auditors make a final reasonableness assessment of the client’s revenue

growth assumption after they finish reviewing and evaluating all additional evidence items that

they requested. The final assessment is collected on an 11-point Likert scale, ranging from 1

(not at all likely to be reasonable) to 11 (extremely likely to be reasonable). I use this dependent

variable to test audit judgment (Judgment).

Following prior research [Cloyd and Spilker 1999; Kadous, Magro, and Spilker 2008], I use

two measures to examine auditors’ information search behaviors: the proportion of positive

versus negative evidence items viewed and the proportion of time spent on positive versus

negative evidence items, where positive (negative) items support (do not support) management’s

revenue growth assumption. I compute the first measure (View) as the number of positive items

viewed divided by the total number of positive and negative items viewed. I computer the

second measure (Time) as the amount of time spent viewing positive items divided by the total

time spent viewing positive and negative items. Both measures can range from 0 (exclusive

negative evidence search) to 1 (exclusive positive evidence search).

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 During the information search process, auditors evaluate the implications of each viewed

item for management’s revenue growth assumption on an 11-point Likert scale ranging from 1

(very NEGATIVE) to 11 (very POSITIVE).8 To develop a measure of the aggressiveness of the

evaluation, I first divide each participant’s evaluation of an item by the average evaluation of the

same evidence item by all participants. The resulting measure is a standardized evidence

evaluation measure. A value greater than 1 indicates that the auditor evaluated that evidence

item more positively (i.e., aggressively) than other auditors, whereas a value smaller than 1

indicates that the auditor evaluated the evidence more negatively (i.e., conservatively) than other

auditors. I then use the mean of the standardized evidence evaluation measures across all viewed

items as the dependent variable for information evaluation (Evaluation).9

RESULTS

Manipulation Check

After auditors read the audit firm’s concern that is used to manipulate auditor incentives,

they are asked to describe the firm’s concern in their own words. While this step mainly intends

to reinforce the incentive manipulation, an inspection of participants’ responses identifies eight

auditors whose description of the firm’s concern is not consistent with the concern presented in

the case. Two auditors in the credence-inducing incentive conditions disagreed with the firm’s

concern and noted that the firm should not have such a concern; four auditors described a

concern that is either contrary to or irrelevant to the firm’s concern; and two auditors described

8
The original Likert scale used in the instrument ranges from -5 to +5. For purpose of data analyses, I convert the
scale to 1 to 11. The measure is adapted from Wilks [2002].
9
For example, if one participant viewed two evidence items during the information search and evaluated the item A
at 7.0 and item B at 4.5 on the 11-point Likert scale and the average evaluation of item A and item B by all
participants is 7.3 and 5.5 respectively, then the value of Evaluation for this participant is calculated as: ((7.0/7.3) +
(4.5/5.5))/2 = 0.89. In this case, the participant evaluated the evidence more conservatively than did the average
participant. Standardization of the evidence evaluation measure is necessary because it makes information
evaluation comparable across different participants where each participant viewed a different combination of
positive and negative items.

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the concern as the client’s concern instead of the audit firm’s concern. Successfully testing the

mitigating effects of salient intrinsic motivation requires that auditors understand their firm’s

concern. Therefore, I exclude these eight auditors from my sample for the following

analyses.10,11

Test of Hypotheses

Effects of Salient Intrinsic Motivation on Audit Judgment

H1 predicts that auditors whose intrinsic motivation is salient are less affected by

directional incentives in making audit judgment than are other auditors. Table 1 provides

descriptive statistics (Panel A), an ANOVA model (Panel B), test of the hypothesis (Panel C),

and simple effects tests (Panel D) for auditors’ assessments of the reasonableness of the revenue

assumption (Judgment).

[Insert Table 1 here]

Planned contrast based on the ANOVA model shows that, consistent with H1, auditors’

judgment is less influenced by their incentives when their intrinsic motivation is salient than

when their intrinsic motivation is not salient (p = 0.03, Panel C). Follow-up simple effects tests

show that auditors in the control conditions assess management’s revenue assumption as more

reasonable (i.e., a less skeptical audit judgment) in the credence-inducing incentive condition

than in the skepticism-inducing incentive condition (p = 0.04, Panel D), whereas auditors in the

10
Of the eight participants who described the firm’s concern wrong, four (50.0%) responded incorrectly to the
comprehension check question related to the firm’s concern, significantly higher than the remaining participants
(7.5%) (two-tailed p-value <0.01). Retaining these eight participants does not change any inferences related to the
hypotheses (all p-values < 0.05).
11
I did not employ a manipulation check question for the intrinsic motivational orientation intervention because I do
not expect participants to be aware of how the intervention affects the salience of their intrinsic motivation in the
task [Bargh and Chartrand 2000]. This implies a manipulation check would be ineffective and may even backfire
[e.g., Nisbett and Wilson 1977; Sigall and Mills 1998; Hauser, Ellsworth, and Gonzalez 2018]. Consistent with this
idea, prior research that manipulates the salience of intrinsic motivation often does not employ a manipulation check
[e.g., Amabile 1985; Kadous and Zhou 2018].

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intrinsic motivation conditions do not assess the revenue assumption differently in the two

incentive conditions (p = 0.38, Panel D).12 This indicates that salient intrinsic motivation

mitigates the directional influence of incentives on auditor judgment, supporting H1.

Effects of Salient Intrinsic Motivation on Information Search

Participants on average viewed 6.7 evidence items and spent 5.7 minutes viewing the

items.13 Table 2 Panel A provides descriptive statistics for the two information search measures:

View (i.e., the relative number of positive items viewed) and Time (i.e., the relative amount of

time spent on viewing positive items) as well as the factor score (Search) of the two information

search measures (View and Time).14 A higher value of Search indicates that the auditor searched

for relatively more positive evidence items than for negative evidence items. Table 2 also

reports an ANOVA model (Panel B), test of the hypothesis (Panel C), and simple effects tests

(Panel D), using Search as the dependent variable.

[Insert Table 2 here]

Planned contrast based on the ANOVA model shows that, consistent with H2, auditors

search for relatively more contradictory evidence when their intrinsic motivation is salient than

when it is not salient (p = 0.04, Panel C). Follow-up simple effects tests show that the

interaction is driven by the information search behaviors of auditors whose intrinsic motivation

is salient. More specifically, auditors in the intrinsic motivation conditions searched for

relatively more negative evidence when they had incentives to go along with the client

12
Auditor judgment is not significantly different between Intrinsic/Credence condition and Control/Credence
condition (t48 = 1.22, p = 0.23) or between Intrinsic/Skepticism condition and Control/Skepticism condition (t55 =
1.38, p = 0.17).
13
The total number of evidence items viewed and the total time spent on evidence items do not vary across
experimental conditions (all p-values > 0.10).
14
A factor analysis of the two information search measures (View and Time) identifies one factor with eigenvalue
greater than 1.00. The factor explains 93% of the variance. The inferences do not change if View or Time is used as
the dependent variable. The p-values for H2 are 0.09 and 0.03 based on View and Time, respectively.

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conclusion than when they had incentives to be critical of the client conclusion (p = 0.02, Panel

D); whereas the information search behaviors of auditors in the control conditions do not

significantly differ between the two incentive conditions (p = 0.90, Panel D). Untabulated

analyses confirm that the Search score is significantly negative (positive) in the intrinsic

motivation/credence incentive (intrinsic motivation/skepticism incentive) condition (one-tailed p

= 0.07 and 0.03 respectively), indicating that intrinsically motivated auditors searched for

relatively more incentive-inconsistent information. Thus, H2 is supported.

Effects of Salient Intrinsic Motivation on Information Evaluation

Table 3 provides descriptive statistics (Panel A), an ANOVA model (Panel B), test of the

hypothesis (Panel C), and simple effects test (Panel D) for the information evaluation measure

(Evaluation). Evaluation measures each individual auditor’s evaluation of information items

relative to all other auditors. A higher value of Evaluation indicates that the auditor evaluates

information items more supportive of the management’s assumption (i.e., less skeptically)

relative to the average participant.

[Insert Table 3 here]

Planned contrast based on the ANOVA model shows that, consistent with H3, auditors

evaluate the evidence less consistently with their incentives when their intrinsic motivation is

salient than when their intrinsic motivation is not salient (p = 0.01, Panel C). Similar to the

information search results, the interaction is driven by auditors in the intrinsic motivation

conditions evaluating information as less supportive of the incentive-preferred audit conclusion.

More specifically, auditors with salient intrinsic motivation assessed the evidence items as less

supportive of management’s revenue growth assumption when they faced credence-inducing

incentives than when they faced skepticism-inducing incentives (p = 0.02, Panel D); while the

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information evaluation behaviors of auditors in the control condition do not vary by their

incentives (p = 0.71, Panel D). Untabulated analyses provide corroborating evidence that the

Evaluation score is significantly smaller (larger) than 1.00 in the intrinsic motivation/credence

incentive (intrinsic motivation/skepticism incentive) condition (one-tailed p = 0.08 and 0.02

respectively), indicating that intrinsically motivated auditors evaluated the information less

consistently with their incentive-preferred conclusion. Therefore, H3 is supported.

Supplemental Analyses

The above analyses show that salient intrinsic motivation counteracts the directional

influence of incentives on auditor judgment by prompting auditors to search for more

contradictory evidence and evaluate information in the direction that opposes their incentive-

preferred audit conclusion. Another related finding of the above analyses is that for auditors in

the control conditions, their judgment is biased by their directional incentives, whereas their

information search and evaluation are not. Although the findings that auditors’ information

processing is not significantly influenced by their directional incentives in the control conditions

seem to be consistent with early accounting research that shows auditors are less susceptible to

confirmation bias in information search than the general population [e.g., Kida 1984; Butt and

Campbell 1989; Trotman and Sng 1989], it does not explain the seeming “disconnect” between

the neutral information processing styles and biased audit judgment in the control conditions. In

this section, I perform additional analyses to demonstrate that the seeming “disconnect” is caused

by control condition auditors’ superficial information processing and reluctance to integrating

the audit evidence into their judgment.

I first provide evidence that information search and evaluation play a different role in

forming audit judgment for auditors whose intrinsic motivation is salient versus those whose

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intrinsic motivation is not salient. I test the different roles of information processing in forming

audit judgment by fitting a structural equations model (SEM) to the data (Figure 2).15

[Insert Figure 2 here]

The structural equations model shows that auditor incentives have a direct impact on audit

judgment for all auditors such that credence-inducing incentive leads to a more aggressive audit

judgment (Link 5, Figure 2). However, the impact of auditor incentives on audit judgment

through information processing is different depending on the salience of auditors’ intrinsic

motivation. For auditors in the control conditions, the incentives do not have a significant

impact on how auditors search for and evaluate information (Link 1 and 2, Figure 2). In

addition, only information evaluation but not information search influences auditors’ judgment in

the control conditions (Link 3 and 4, Figure 2). The indirect effect of auditor incentives on audit

judgment through information search or through information evaluation is not significant in the

control conditions (p = 0.90 and 0.70 respectively). The results suggest that information search

and evaluation play a minimal role in forming audit judgment for auditors in the control

conditions. Rather, their judgment is directly driven by the incentives they face (Link 5).

On the other hand, for auditors in the intrinsic motivation conditions, the path coefficients

between auditor incentives and the two information processing measures are both significantly

negative (Link 1 and 2). The negative coefficients indicate that salient intrinsic motivation

causes auditors to move away from incentive-consistent information processing behaviors. The

two links between information processing measures and auditor judgment are also significant

(Link 3 and 4). The indirect effect of auditor incentives on audit judgment through information

15
Goodness-of-fit statistics show that the model fits the data well (χ21 = 0.15, p = 0.70; Comparative Fit Index =
1.00; and Root Mean Squared Error of Approximation = 0.00). Untabulated analyses show that the path coefficient
of Link 5 does not significantly differ between intrinsic motivation conditions and control conditions (χ 21 = 0.18, p =
0.67), therefore the path coefficient of Link 5 is held constant across all conditions.

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search and information evaluation are both significant for auditors in the intrinsic motivation

conditions (p = 0.06 and 0.03 respectively). The path analyses indicate that unlike auditors in the

control conditions, auditors in the intrinsic motivation conditions compensate for the direct

impact of incentives on judgment (Link 5) by searching for and evaluating information less

consistently with their supposed incentives (Link 1 and 2) and incorporating the information into

their judgment to a greater extent than did auditors in the control conditions (Link 3 and 4). This

“overcorrection” by salient intrinsic motivation through information processing offsets the direct

impact of incentives on audit judgment, resulting in less directionally biased audit judgment as

compared to that of auditors whose intrinsic motivation is not salient.

Next, I show that auditors in the control conditions are more attached to their preliminary

judgment, suggesting less openness to incorporate new information than their intrinsically

motivated counterparts. Recall that auditors are asked to provide a preliminary assessment of the

reasonableness of the revenue assumption before they search and review any evidence items. On

that same screen, auditors also indicate how confident they are about their preliminary

assessment on an 11-point Likert scale. I find that auditors in the control conditions reported

more confidence in their preliminary judgment (M = 7.48) than did auditors in the intrinsic

motivation conditions (M = 6.77, t105 = 2.18, p = 0.03). This suggests that auditors in the control

conditions are more attached to their initial judgment and are less willing to incorporate new

information into their final judgment, consistent with the idea that these auditors process

information superfically.

Finally, the difference in auditors’ willingness to incorporate new information is further

evidenced by how auditors revise their reasonableness assessment of the revenue assumption

after they have viewed additional information. Table 4 provides descriptive statistics of the

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changes in auditors’ reasonableness assessments from the preliminary reasonableness assessment

to their final assessment.

[Insert Table 4 here]

The descriptive statistics reveal two patterns. First, on average auditors in all conditions

lowered their reasonableness assessments after they had viewed additional evidence items.

Auditors’ tendency to revise down rather than to revise up their reasonableness assessment after

viewing additional positive and negative evidence is consistent with the prior findings that

auditor judgment is more sensitive to negative information than to positive information [Smith

and Kida 1991]. In addition, the descriptive statistics also show that auditors in the intrinsic

motivation conditions tend to revise down their assessment more than do auditors in the control

conditions (t105 = 1.45, one-tailed p = 0.07), especially in the credence incentive conditions (t48 =

1.83, one-tailed p = 0.04).16 This further supports the idea that auditors whose intrinsic

motivation is salient incorporate the evidence, especially the contrary evidence, to a greater

extent than do auditors in the control conditions when forming their final judgment.

To summarize, the supplemental analyses show that auditors in the control conditions do

not integrate the audit evidence into their judgment to the same extent as their counterparts in the

intrinsic motivation conditions do. For auditors in the control conditions, their information

search and evaluation play a less important role in forming the final audit judgment. Instead,

they are more attached to their preliminary judgment that is made before they view any relevant

16
The reason that the difference of change in assessment is most significant in the credence incentive conditions is
that the preliminary reasonableness assessment is relatively high in the credence incentive conditions because
auditors are motivated to reach assess the revenue assumption more reasonable. The high preliminary
reasonableness assessment, combined with the fact that auditors are more sensitive to negative information, provides
more room for auditors to lower their assessment in the final judgment if auditors incorporate the new information
they viewed into their final judgment. Untabulated analysis confirms that auditors’ preliminary reasonableness
assessment of the management assumption tends to be higher in the credence-inducing incentive conditions (M =
5.94) than in the skepticism-inducing incentive conditions (M = 5.39) (t105 = 1.54, one-tailed p = 0.06).

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evidence pieces. And unlike auditors in the intrinsic motivation conditions, they are less willing

to revise down the initial reasonableness assessment after viewing additional information that

contains evidence contrary to their initial judgment. The superficial processing of information of

auditors in the control conditions explains why their information processing seems to be

unaffected by their incentives whereas their final judgment is still directionally biased by the

incentives.

DISCUSSION AND CONCLUSIONS

Directional incentives and pressure inherent in the audit industry impair objectivity in

auditor judgment [Nelson 2005; Church et al. 2015]. However, there is limited empirical

evidence of how to effectively mitigate such impact. This study shows that increasing the

salience of auditors’ intrinsic motivation for their job can counteract the directional influence of

incentives on auditor judgments. It also provides evidence that salient intrinsic motivation

mitigates the impact of directional incentives on auditors’ judgment through its effects on

auditors’ information processing. Auditors with salient intrinsic motivation search for relatively

more information that contradicts their incentive-preferred conclusion, evaluate the information

as less supportive of their incentive-preferred conclusion, and incorporate the information into

their judgment to a greater extent than do auditors whose intrinsic motivation is not salient.

This study contributes to the motivated reasoning literature by providing a new perspective

on mitigating the impact of motivated reasoning on one’s judgment. Individuals engage in

motivated reasoning because they are motivated to reach a preferred conclusion that aligns with

their incentives and directional goals. One seemingly obvious solution to address the directional

impact of incentives is to change auditors’ incentives and their directional goals. However,

changing auditors’ incentive structure has proven to be challenging because various conflicting

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incentives are pervasive in the audit industry (e.g., affinity for client developed from interactions

with the client) and can be difficult to remove [Moore et al. 2006]. Prior research also indicates

that directly asking auditors to adopt an accuracy goal is not sufficient to cause auditors to

consider more contradictory evidence [Austin, Hammersley, and Ricci 2019]. The current study

shows that salient intrinsic motivation that focus individuals more on the intrinsic aspects and the

process of a task rather than on the extrinsic aspects and outcome of a task is a promising

solution to this challenging problem.

This study informs the auditing literature by showing that directional incentives influence

audit judgment via two routes: a direct path from incentives to audit judgment and an indirect

path through information processing. While auditors’ judgment is affected by incentives through

the direct path regardless of the salience of intrinsic motivation, only auditors whose intrinsic

motivation is salient are able to offset the direct impact of incentives via the indirect path: they

do so by attending to relatively more contradictory information and evaluate information less

consistently with the incentive-preferred conclusion. The “overcorrection” manifested by

intrinsically motivated auditors in their information processing helps them to arrive at less biased

audit judgment. On the other hand, auditors whose intrinsic motivation is not salient put similar

emphasis on positive and negative evidence in their information process, which does not seem to

be sufficient to offset the direct impact of incentives on judgment, resulting in an overall biased

audit judgment. Therefore, in order to compensate for the direct impact of incentives on auditor

judgment, auditors may need to move further away from a neutral information processing model

in order to arrive at a final audit judgment that is “immune” from the impact of directional

incentives. This is consistent with regulators’ repeated emphasis on the importance to consider

contrary evidence in forming audit judgment [PCAOB 2012, 2016, 2017, 2018].

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 This study also provides evidence that the effects of salient intrinsic motivation are likely to

persist in the presence of extrinsic incentives rather than being crowded out by the incentives.

This suggests that salient intrinsic motivation could benefit auditor judgment similarly in

workplace where auditors face various incentives as it does in controlled experiments [e.g.,

Kadous and Zhou 2018]. Based on the findings of this study, firms could develop their own

tools to increase the salience of their employees’ intrinsic motivation. Such tools can include

periodically reminding auditors about the intrinsic motivators they have for their job via formal

and informal communications, similar to the intervention used in the current paper. Firms can

also make employees’ intrinsic motivation salient through leadership and firm culture that

emphasize intrinsic value of the work [e.g., Kadous et al. 2018].17 Another factor that has been

consistently shown to foster intrinsic motivation among employees is an autonomy-supportive

work environment [e.g., Gagné and Deci 2005; Williamson 2008]. In addition, prior research

shows that simply observing others intrinsically motivated to perform a task can prompt the

observer to act intrinsically herself [Friedman, Deci, Elliot, Moller, and Aarts 2010]. This

suggests that firms can strategically place their more intrinsically motivated staff on certain

teams or certain tasks as role models to help orient other team members toward their intrinsic

motivation. Moreover, a number of studies has established that repeated emphasis of intrinsic

value of a task can have long-lasting effects, ranging from a few days [Vansteenkiste, Simons,

Lens, Sheldon, and Deci 2004] to a few months [Vansteenkiste, Simons, Soenens, and Lens

2004], or even more than a year [Aunola, Leskinen, and Nurmi 2006], on one’s motivation and

17
Many accounting firms have incorporated key aspects of intrinsic motivation into their firm culture. For example,
Ernst Young includes “Engagement – We want all our people to feel enthused by their work…” (i.e., the enjoyment
aspect of intrinsic motivation) as one of the three key elements of their culture (https://www.ey.com/us/en/about-
us/our-people-and-culture, accessed on January 15, 2019). Grant Thornton emphasizes the importance of
overcoming challenges in two of its six core principles: “We challenge each other to be the best we can be” and
“find a better way every time – we never get complacent” (https://www.grantthornton.global/en/about/culture-and-
values/, accessed on January 15, 2019).

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performance. Therefore, firms can use abovementioned tools repeatedly to reinforce auditors’

intrinsic motivation for their work to counteract the negative directional impact of extrinsic

incentives.

Finally, directional bias in judgment caused by one’s incentives is not unique to auditors.

Other decision makers, such as managers [e.g., Boiney, Kennedy, and Nye 1997], tax

professionals [e.g., Cloyd and Spilker 1999], analysts [e.g., Jollineau, Tanlu, and Winn 2014],

rating agencies [Tang, Peytcheva, and Li 2018], and investors [e.g., Hales 2007; Thayer 2011],

are also motivated by their incentives to engage in a biased reasoning process, which can lead to

low judgment quality. I expect that the theory and findings in this study about how salient

intrinsic motivation can inoculate auditors against the impact of their incentives will be

informative to other professions and decision makers as well. Future research can investigate

this issue directly.

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 APPENDIX A
Additional Evidence Items

Evidence item title Type

Improved Economic Conditions and Consumer Confidence Positive
Strong Sales in Early FY 2016 Positive
Positive Market Reactions to the New Product Positive
Strong Marketing Plans for the New Product Positive
Positive Synergies between Product B and Product C Positive
Highly Experienced Leadership Team Positive
Step 1 Test Highly Sensitive to the Revenue Growth Assumption Negative
Intensified Market Competition Negative
Bias in Historical Projections Negative
More Optimistic Revenue Projection than Peer Firms Negative
Stagnant Market for High-end Electronic Products Negative
Potential Delayed Launch of Product C Negative
No Significant Capital Expenditure in the Near Future Neutral
Stable Operating Expense Neutral

Notes:
This appendix lists the fourteen evidence items that are available for auditors to search for and evaluate
before they make a final reasonableness assessment of the client’s revenue growth assumption. The
positive (negative) evidence items are items with a title that indicates supporting (contradicting) evidence
for the management’s revenue growth assumption. The neutral evidence items are items that are not
related to the revenue growth assumption.

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 APPENDIX B
Intrinsic Motivation Intervention

Condition Reasons
1. I enjoy learning about a client’s business.
2. I feel good when I solve complex audit tasks.
3. My job provides me with opportunities for increasing my analytical skills.
Intrinsic 4. Curiosity is the driving force behind much of what I do.
motivation 5. I want to find out how good I really can be at my work.
6. I enjoy the challenges that my job provides me on a daily basis.
7. No matter what the outcome of a project, I am satisfied if I feel I gained a
new experience.
1. I like restaurants that provide a variety of food options.
2. I want to try restaurants that have good reviews or are highly recommended
by my friends.
3. I prefer restaurants that are family-friendly.
Control
4. I enjoy restaurants that have excellent service.
5. I like restaurants that offer healthy and nutritious food.
6. I like restaurants that provide reasonably-priced dishes.
7. I enjoy restaurants with good ambience.

Note:
This appendix lists the reasons that participants were asked to rank in different experimental conditions.
Both lists are adopted from Kadous and Zhou [2018]. The reasons listed in the intrinsic motivation
condition are found to be strongly associated with people’s intrinsic motivation for their jobs [Amabile et
al. 1994]. Items in the control condition are related to reasons for choosing a restaurant, which is not
expected to change the salience of intrinsic motivation.

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 FIGURE 1
Overview of the Experiment

Read general instructions

Receive the motivational orientation intervention

Learn about the audit firm’s concerns (incentives)

Read background information

Make preliminary assessment

Ready to make Yes

final assessment?

No

Select additional information items

(up to four items per round)

Review and evaluate each requested information item

Reassess the revenue assumption based on

all previously viewed information

Make final assessment of the revenue assumption

Answer post-experimental questionnaire

Receive feedback on the task

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 FIGURE 2
Counteracting Effects of Salient Intrinsic Motivation on Audit Judgment

Auditor Incentives
Link 1 Link 2
Ctrl: -0.03 Ctrl: +0.02
IM: -0.70** IM: -0.18**

Link 5
Information +0.70** Information
Search Evaluation

Link 3 Link 4
Ctrl: 0.27 Ctrl: 5.70***
IM: 0.65*** IM: 3.78***

Audit Judgment

Notes:
The figure summarizes how auditor incentives affect audit judgment directly as well as indirectly via
information processing. The model fits the data well (χ21 = 0.15, p = 0.70; Comparative Fit Index = 1.00;
and Root Mean Squared Error of Approximation = 0.00).

Auditor Incentive is coded as 1 for auditors in the credence-inducing incentive conditions and 0 for
auditors in the skepticism-inducing incentive conditions. Information search is the factor score of two
information search measures (i.e., Search). Information evaluation is measured by first dividing each
auditor’s evaluation of an information item by the average evaluation of the same item by all participants
and then taking the mean of the standardized information evaluation of all the items viewed by an auditor
to obtain an overall information evaluation measure for that auditor (i.e., Evaluation). Audit judgment
(i.e., Judgment) measures auditors’ responses to “…how likely is it that the management’s 7.8% revenue
growth assumption is reasonable?” on a scale of 1 (not at all likely) to 11 (extremely likely).

***, **, and * indicate two-tailed significance level at less than 1%, 5% and 10% respectively.

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 TABLE 1
The Impact of Auditor Incentive and Motivational Orientation on Audit Judgment

Panel A. Mean (Std. Dev.) of Audit Judgment

Credence Skepticism
Incentive Incentive
4.32 4.86
(2.25) (2.16)
Intrinsic Motivation n = 25 n = 28
A B
5.08 4.21
(2.14) (1.32)
Control n = 25 n = 29
C D

Panel B. ANOVA for Audit Judgment

Source SS df MS F p -value
Intrinsic Motivation (IM) 0.08 1 0.08 0.02 0.89
Auditor Incentive (AI) 0.75 1 0.75 0.19 0.66
IM × AI 13.24 1 13.24 3.36 0.07
Residual 405.47 103 3.94

Panel C. Hypothesis Test

Contrast t 103 p -value
H1: (A - B) < (C - D) * 1.83 0.03

Panel D. Simple Effects Test

Simple effect t p -value
Intrinsic/Credence vs. Intrinsic/Skepticism t 51 = 0.89 0.38
Control/Credence > Control/Skepticism * t 52 = 1.83 0.04

* I use a p-value from a one-tailed test for this directional prediction. All non-indicated p-values are two
sided.

Notes:
This table reports descriptive statistics (Panel A), an ANOVA model (Panel B), hypothesis test (Panel C),
and simple effects tests (Panel D) for auditors’ assessments of the reasonableness of the revenue
assumption.

The dependent variable (Judgment) measures auditors’ responses to “…how likely is it that the
management’s 7.8% revenue growth assumption is reasonable?” on a scale of 1 (not at all likely) to 11
(extremely likely).

Auditor Incentive was manipulated by varying whether the firm is concerned with auditors undertaking
costly investigations of explanations (credence-inducing incentive condition) or uncritically accepting the
client’s explanations (skepticism-inducing incentive condition).

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Intrinsic Motivational Orientation was manipulated by asking auditors to rank order a list of intrinsic
reasons that they like their job (intrinsic motivation condition) or a list of reasons that they eat at a
restaurant which is not expected to change the salience of intrinsic motivation (control condition).

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 TABLE 2
The Impact of Auditor Incentive and Motivational Orientation on Information Search

Panel A. Mean (Std. Dev.) of Information Search

Credence Incentive Skepticism Incentive
View Time Search View Time Search
0.32 0.28 -0.35 0.43 0.46 0.35
(0.24) (0.24) (1.13) (0.19) (0.24) (0.94)
Intrinsic Motivation n = 25 n = 25 n =25 n = 27 n = 27 n = 27
A B
0.36 0.35 -0.09 0.37 0.36 -0.05
(0.14) (0.21) (0.78) (0.21) (0.26) (1.07)
Control n = 25 n = 25 n = 25 n = 29 n = 29 n = 29
C D

Panel B. ANOVA for Information Search

Source SS df MS F p -value
Intrinsic Motivation (IM) 0.12 1 0.12 0.13 0.72
Auditor Incentive (AI) 3.51 1 3.51 3.57 0.06
IM × AI 2.90 1 2.90 2.95 0.09
Residual 100.08 102 0.98

Panel C. Hypothesis Test

Contrast t 102 p -value
H2: (A - B) < (C - D) * 1.72 0.04

Panel D. Simple Effects Test

Simple effect t p -value
Intrinsic/Credence vs. Intrinsic/Skepticism t 50 = 2.42 0.02
Control/Credence vs. Control/Skepticism t 52 = 0.13 0.90

* I use a p-value from a one-tailed test for this directional prediction. All non-indicated p-values are two
sided.

Notes:
This table reports descriptive statistics (Panel A), an ANOVA (Panel B), hypothesis test (Panel C), and
simple effects tests (Panel D) for auditors’ information search behaviors. One participant did not view
any evidence items; therefore, this table only includes 106 participants who have viewed at least one
evidence item.

Panel A reports descriptive statistics of three information search variables. The first dependent variable,
View, is calculated as the number of positive items viewed divided by the total number of positive and
negative items viewed. The second dependent variable, Time, is calculated as the amount of time spent
viewing positive items divided by the total time spent viewing positive and negative items. The last
dependent variable, Search, is the factor score of View and Time. Auditors with a higher value of Search
searched for relatively more positive evidence (as opposed to negative evidence) than did auditors with a

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lower value of Search. Results in Panel B, Panel C, and Panel D are based on the factor score Search as
the dependent variable.

The condition manipulation is described in the notes to Table 1.

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 TABLE 3
The Impact of Auditor Incentive and Motivational Orientation on Information Evaluation

Panel A. Mean (Std. Dev.) of Information Evaluation

Credence Skepticism
Incentive Incentive
0.93 1.11
(0.24) (0.27)
Intrinsic Motivation n = 25 n = 27
A B
1.02 1.00
(0.17) (0.17)
Control n = 25 n = 29
C D

Panel B. ANOVA for Information Evaluation

Source SS df MS F p -value
Intrinsic Motivation (IM) 0.00 1 0.00 0.05 0.83
Auditor Incentive (AI) 0.17 1 0.17 3.60 0.06
IM × AI 0.25 1 0.25 5.32 0.02
Residual 4.75 102 0.05

Panel C. Hypothesis Test

Contrast t 102 p -value
H2: (A - B) < (C - D) * 2.31 0.01

Panel C. Simple Effects Test

Simple effect t p -value
Intrinsic/Credence vs. Intrinsic/Skepticism t 50 = 2.48 0.02
Control/Credence vs. Control/Skepticism t 52 = 0.37 0.71

* I use a p-value from a one-tailed test for this directional prediction. All non-indicated p-values are two
sided.

Notes:
This table reports descriptive statistics (Panel A), an ANOVA (Panel B), hypothesis test (Panel C), and
simple effects tests (Panel D) for auditors’ information evaluation. One participant did not view any
evidence items; therefore this table only includes 106 participants who have viewed at least one evidence
item.

The dependent variable (Evaluation) is the auditors’ evaluation of information items relative to other
auditors. Auditors evaluate the implications of each requested individual evidence item for the
management’s revenue growth assumption on an 11-point Likert scale, where the end points are labeled
1: “very NEGATIVE revenue growth implications” and 11: “very POSITIVE revenue growth
implications.” To calculate the dependent variable, I first divide each auditor’s evaluation of an evidence
item by the average evaluation of the same item by all participants. The resulting measure for each item

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viewed by an auditor is then averaged to obtain an overall information evaluation measure for that
auditor. Auditors with a higher value of Evaluation evaluated the evidence more positively than did
auditors with a lower value of Evaluation.

The condition manipulation is described in the notes to Table 1.

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 TABLE 4
The Impact of Auditor Incentive and Motivational Orientation on Judgment Change

Mean (Std. Dev.) of Change in Audit Judgment

Credence Skepticism
Incentive Incentive
-1.80 -0.93
Intrinsic Motivation (2.25) (2.24)
n = 25 n = 28
-0.68 -0.79
Control (2.08) (1.93)
n = 25 n = 29

Notes:
This table reports descriptive statistics of change in auditors’ reasonableness assessments before and after
they view additional evidence items.

The dependent variable (Judgment Change) measures the change in auditors’ reasonableness assessments
of the revenue assumption from their preliminary reasonableness assessment before viewing any
additional evidence item to their final reasonableness assessment. Both the preliminary assessment and
the final assessment are measured on a scale of 1 (not at all likely reasonable) to 11 (extremely likely
reasonable).

The condition manipulation is described in the notes to Table 1.

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