Experimental Evidence of How Prior Experience as an Auditor Influences Managers' Strategic Reporting Decisions

We design an experiment to examine the influence of prior audit experience on subsequent reporting decisions when auditors become managers of audited firms. In contrast to the independence issues that can arise when auditors and their clients are related by prior affiliation, we focus this study on the more common case in which auditors assume subsequent employment with other firms' clients. In a bi-matrix experimental game that captures key features of the tension between auditors and reporters, we find that reporters who have experience as an auditor are more sensitive to large penalties for misreporting than are reporters who have the same amount of experience exclusively in the reporter role. This finding is particularly strong among reporters who were relatively diligent in their former role as auditors. These results suggest implications for regulators in predicting the effects of changes in the consequences of aggressive reporting behavior, and for firms in deciding whether to employ individuals who have CPA experience in positions with corporate reporting responsibility