Can Moral Reasoning Reduce Auditor Misreporting? An Experimental Examination of Investor Salience and an Auditor Sign-Off Requirement

Researchers have questioned whether individual differences in moral reasoning might partly account for the variation in auditor misreporting behavior documented in prior experimental-markets research in auditing. In the first experimental market study to directly test the relation between moral reasoning and auditor misreporting, however, Schatzberg et al. (2005) find that auditor misreporting is more likely with higher than with lower moral reasoning participants as measured by the DIT (Rest 1979). We re-examine the link between moral reasoning and auditor misreporting by manipulating two factors expected to increase moral reasoning and by using alternative measures of moral reasoning from the JPI-R (Jackson 1994). Using the same experimental audit market setting in Schatzberg et al., we find that auditor misreporting is lower when the investor is another participant in the experiment than when the investor is an abstract robot. Auditor misreporting is also lower when the auditor is required to sign off on the audit report, but only when the investor is another participant. In fact, auditor misreporting essentially disappears when the sign-off requirement is present and the investor is another participant in the experiment. Finally, we find that auditor misreporting is negatively associated with the auditor's score on two measures of moral reasoning from the JPI-R: Traditional Values and Responsibility. Our results provide strong evidence that moral reasoning can reduce auditor misreporting in a market setting where financial incentives to misreport are present