2017B05 - The effects of expert status on the audit of complex estimates

Does status equal substance? The effects of specialist social status on auditor assessments of complex estimates

Accepted for publication in TAR: Auditing standards require that auditors’ reliance on a specialist is commensurate with the specialist’s competence. In assessing competence, auditors encounter cues diagnostic of the specialist’s social status but less so of competence. In an experiment, we manipulate specialist status and find that auditors mistake status for competence unless they are prompted to separate the constructs. This raises the possibility that auditors could over-rely on high-status specialists. However, auditors also assess high-status specialists as more influential and, when the specialist disagrees with the client, they rely more on high-status specialists because of this perceived influence. Thus, high-status specialists can increase auditors’ willingness to challenge the client by providing a strong ally. Additional analyses suggest that auditors are aware that they rely on the specialist’s influence rather than competence, indicating that auditors do not use the process that auditing standards envision to evaluate and rely on specialists.

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The effects of expert status on the audit of complex estimates

Auditing complex estimates frequently requires input from specialists. However, auditors struggle to assess specialists’ capability and work quality, in part because auditors by definition lack the expertise to precisely evaluate a specialist’s skills and work processes. Specialists can improve the audit of estimates, but any potential improvement first requires appropriate assessments of the adequacy of specialist’s work. Specifically, scholarly literature provides evidence that complex estimates provide client management with leeway to report in a manner consistent with its incentives, and that specialists are often hesitant to challenge these estimates. Thus, overestimating the specialist’s skills or work quality may lead the auditor conclude that an estimate is reasonable based on insufficient evidence, increasing audit risk and reducing financial reporting quality. This study examines whether a specialist’s high status leads to higher auditor evaluations of specialist work quality and greater reliance on this work as persuasive evidence. By status, we refer to prestige indicated by the respect of peers, elite university or company affiliations, and/or membership in exclusive social circles. U.S. and international auditing standards direct auditors to assess specialists based on information such as the specialist’s experience with an audit issue, but also on “softer” factors such as the specialist’s credentials, reputation, and standing among peers. The IAASB has recently expressed concern about auditor “over-reliance on the qualifications of the expert with no further consideration as to their appropriateness.”

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The Effects of Expert Status on the Audit of Complex Estimates

This practice note explores whether auditors confuse a specialist’s status with actual work quality when auditing complex estimates. Professional standards require auditors to assess specialists based on experience and reputation, but the study finds that auditors often attribute high status to irrelevant factors such as social connections, confidence, and any certification, regardless of relevance. This can lead to overreliance on specialists and increased audit risk.

Preliminary survey results show that status strongly influences auditors’ perceptions, even when substantive evidence is weak. The authors recommend focusing on evaluating the specialist’s work rather than background, and suggest centralizing specialist assignments within firms to reduce bias.

Future experiments aim to test how status interacts with justification strength and client alignment in shaping auditor judgments.

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The Effects of Expert Status on the Audit of Complex Estimates

The study explores how expert status influences auditors’ evaluation of specialists involved in auditing complex estimates. Auditors often rely on specialists due to the technical nature of such estimates, but they struggle to assess the quality of specialist input. The research suggests that high-status specialists—those with prestigious affiliations or reputations—may receive more favorable evaluations, even when their work lacks strong justification. This can lead to audit risk if auditors substitute status for substance. Three key findings emerge:

Auditors rate high-status specialists more positively, regardless of actual work quality.
When specialists agree with clients, auditors are less critical if the specialist has high status.
When specialists disagree with clients, high status lends credibility to the dissent, improving audit quality.

The study warns against overreliance on status cues and calls for more balanced evaluations based on the substance of expert input. Literature Review

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