The effects of group affiliation and expectation formation on judgment skepticism : implications for auditing

Accounting researchers and regulators have often debated the issue of auditor rotation, and, specifically, the possibilities of auditors becoming too close to their clients. There has been less discussion, however, on the notion that auditors could also compromise their professional skepticism over time because of over-reliance on their own firms’ prior decisions in repeat engagements. The impact of prior judgments on judgment skepticism could depend on whether the prior judgments are associated with an affiliated or a competitive source and on whether an independent expectation is formed before viewing these prior judgments. Affiliated prior-year judgments could promote an in-group bias that leads current-year auditors to overweight prior judgments made by own-firm auditors and/or to increase their confidence in their own judgments. This in turn may lead to ineffective audits. However, in-group bias can potentially be mitigated if auditors form explicit expectations prior to reviewing prior-year work. This study uses an experiment to examine the conditions under and degree to which in-group bias exists and how it affects individuals’ use of information (i.e., the extent of judgment disagreement) and confidence in judgments. Results indicate that although group affiliation does not significantly influence judgment disagreement, it does affect self-reported confidence in judgments. Conversely, the forming of prior expectations increases judgment disagreement, but does not influence confidence. I explore the implications of these results for auditing.