Researchers explore influences on auditor decision-making

Marietta Peytcheva, assistant professor of accounting at Lehigh, was recently awarded the 2015 Best Paper Award by the journal of Behavioral Research in Accounting (BRIA).

The Best Paper Award is given annually to a study published in BRIA with the greatest impact or greatest potential impact on behavioral and/or organizational research in accounting.

The paper, The Impact of Principles-Based versus Rules-Based Accounting Standards on Auditors’ Motivations and Evidence Demands, co-authored by Peytcheva, Arnold M. Wright of Northeastern University and Barbara Majoor of Nyenrode Business Universiteit, compares the two types of accounting standards used in the United States and abroad—rules-based versus principle-based—and analyzes how the use of each influences an auditor’s judgment and decision-making processes.

While prior research looked at how transactions recorded by company’s management is affected by principle versus rule-based accounting standards, Peytcheva and her co-authors are among the first to analyze how these standards influence auditor decision-making.

“Auditors are the public watchdog,” Peytcheva says. “Therefore, it is crucial to understand how the different accounting standards influence their decision-making process.”

Through an experiment in which accounting standards were manipulated, the judgment of experienced auditors from the United States and the Netherlands were analyzed based on three factors: how the different accounting standards affected their perception of process accountability, how it affected their epistemic motivations and if it increased their overall demand for evidence.

While the study didn’t conclude that one form of accounting standard is preferable to the other, it did find some indicators that auditors’ processes are likely to be more effective under principle-based standards. Peytcheva suggests this may be because auditors working under such standards perceive themselves as more process accountable, have higher epistemic motivations and have a higher desire to learn more relevant information about the situation.

The study also found that auditors under principle-based standards often analyzed more irrelevant evidence, which could potentially have a negative influence on their decisions.

Peytcheva also has received attention for her latest paper, Perspective Taking in Auditor-manager Interactions: An Experimental Investigation of Auditor Behavior, which was published in the August 2015 addition of Accounting, Organization and Society. The paper highlights the “boomerang” auditors trend, or auditors who leave their auditing position to work as a manager or chief financial officer of a company, and then return to auditing under the assumption that learning from the perspective of a manager makes for a better auditor.

"Our findings show that when an auditor has been in the shoes of a manager, he/she is not only better at assessing whether a manager is exaggerating earnings, but is even better at guessing by how much that manager is overstating them," says Peytcheva.

Peytcheva plans to continue researching auditor judgment and decision-making, with the overall intention of improving auditors’ judgments.

She is currently researching how audit committee effectiveness influences auditor’s skepticism. Peytcheva is working with co-authors to determine how the effectiveness of auditor committee’s increases or decreases an auditor’s skepticism.

Her current studies include understanding how auditors make decisions under different conflicting ethical tones from within and outside their auditing organizations. Peytcheva and co-authors aim to propose a way for auditors to reconcile these conflicting ethical tones in order to improve their ability to make the correct ethical decision.

Peytcheva has been teaching Introduction to Financial Accounting, Intermediate Accounting, and Auditing at Lehigh since 2008. She is a certified public accountant in New Jersey (inactive) and worked as an auditor at PricewaterhouseCoopers for two years.

Story by Emma Fried