An experimental analysis of potential unintended consequences of Sarbanes-Oxley on auditors' professional judgments and the expectation gap

Two experiments were conducted to explore potential unintended consequences of the Sarbanes-Oxley Act on (i) auditors' professional judgments and (ii) the general public's expectation gap boundary. The first experiment examined auditors' judgments and decision behaviors in the presence of jointly imposed organizational (internal) and environmental (external) pressures. Differing pressure levels relating to an audit budget (an internally imposed pressure), and the likelihood of a public company inspection of the same attest engagement by the newly formed Public Company Accounting Oversight Board (an externally imposed pressure), were manipulated. These competing pressures were hypothesized to influence the way auditors perform certain required tasks, with potentially adverse and unintended effects. A model was proposed that predicted environmental pressure would moderate the effect of organizational pressure on auditors' completion of such tasks. Participants were 93 practicing auditors from a large international public accounting firm. The main effects of internal and external pressure did not influence respondents' methodological preference for completing the required audit task. However, the participating auditors preferred a qualitatively superior method of completing a required audit task under all pressure combinations. The hypothesized moderation was not supported. The second experiment examined whether newly mandated reporting requirements by senior managements and independent auditors on the effectiveness of internal controls over financial reporting would exacerbate the expectation gap by increasing the general public's degree of assurance expected of management and the auditor related to internal control reporting. In a hypothetical shareholders' lawsuit relating to an alleged failure to prevent or detect a significant deficiency in internal controls over financial reporting, participants were asked to attribute liability and award monetary damages, if any, against management and the auditor. Under Sarbanes-Oxley requirements, senior managements of public companies and their independent auditor must now publicly report on the effectiveness of a company's internal control over financial reporting. This increased reporting transparency was hypothesized to increase the degree of assurance that mock jurors believe management and the auditor must provide on the effectiveness of internal control over financial reporting. The new method of reporting was also hypothesized to increase the extent of liability and size of monetary damages awarded against management and the auditor in a jury setting, relative to jury awards in the prior method of reporting. A model was proposed that predicted the relationship between level of reporting on internal controls and jury awards would be mediated by the participants' degree of assurance beliefs. The experiment was conducted as a between-groups analysis with three methods of auditor/management reporting. Participants were 66 volunteers recruited from a southwestern university. Results suggest that the mode of reporting had no influence on participants' degree of assurance expected of senior management and the auditor. Similarly, the reporting method had no influence on the attribution of liability or the award of monetary damages against either senior management or the auditor. However, the degree of assurance expectations were found to significantly influence jury awards. The hypothesized mediation was not supported.