Auditors rate CEO misconduct more material when assigned an investor role

North Carolina State University highlighted research in an October 9 Q&A published by Phys.org showing that audit-experienced participants assigned an investor role judged CEO misconduct more material than those assigned an auditor role. The finding points to a difference between professional judgments and investment concerns, without establishing that actual audits would improve.

The paper, by Eileen Z. Taylor and Nicole S. Wright, was published October 5 in the Journal of Business Ethics. The new Q&A explores its implications for the gap between what investors expect auditors to consider and how auditors understand their responsibilities.

How the auditor and investor roles differed

The study involved 163 participants, roughly two-thirds of whom were current or former audit professionals, according to the university account. Recruitment included 62 participants from MTurk, 61 from LinkedIn and 40 graduate accounting students. Audit experience was self-reported.

Only participants with audit experience could be assigned either the auditor or investor role. Those without audit experience received the investor role. Participants rated the misconduct on nine-point scales; the experiment compared different people in assigned roles, rather than tracking the same auditors before and after a prompt.

Written explanations offered another view of those judgments. The researchers report that 23 of 55 participants without audit experience referred to integrity or ethical leadership. Among the 108 audit-experienced participants, 24 mentioned leadership perceptions or company reputation.

What existing audit standards cover

The Public Company Accounting Oversight Board’s AS 2105 standard frames materiality around information’s significance to a reasonable investor. Assessing material misstatement requires attention to qualitative factors as well as numerical amounts: the size of an item alone does not settle the question.

The standard permits lower materiality levels for particular accounts or disclosures where smaller misstatements could influence investors. It also recognizes a practical limit: audit procedures ordinarily cannot be designed to detect misstatements material solely for qualitative reasons. These are longstanding provisions, not a regulatory response to this study.

A separate standard, AS 2405, draws a boundary especially relevant to personal misconduct. It defines client illegal acts as conduct attributable to the entity or personnel acting on its behalf, explicitly excluding employees’ personal misconduct unrelated to their business activities.

AS 2405 also says determining whether conduct is illegal normally lies beyond an auditor’s professional competence and generally depends on qualified legal advice or a court determination. Investor concern about an executive’s behavior therefore does not itself establish an audit requirement to disclose every personal transgression.

Why Taylor suggests asking investors

In the university Q&A, Taylor, an accounting professor and certified public accountant, describes an expectation gap: auditors may separate executives’ personal illegal conduct from financial statements, while investors connect it with management trustworthiness and company performance.

Taylor argues that the client-paid audit model creates tension. Reporting misconduct may damage a client relationship, while failing to report it may raise concerns about responsibility. That is her interpretation of professional incentives, rather than a finding that any particular auditor concealed wrongdoing.

One suggestion is to seek investors’ views through a focus group. “Getting someone from outside the group to look at it could help,” Taylor said. She presented outside input as a possible response to professional in-group thinking, not an intervention the experiment had tested.

What the experiment leaves unanswered

The sample included students and former practitioners, limiting automatic generalization to all working auditors or investors. Its results concern judgments in a scenario, not completed audits. They do not demonstrate improved disclosures, fewer audit failures, reduced executive misconduct or financial gains.

The authors interpret the role difference through motivated reasoning. Their findings do not establish that individual auditors knowingly ignored misconduct, or that asking auditors to think like investors would produce better real-world outcomes.

Taylor also described another paper examining how auditors, investors and customers assess integrity in environmental, social and governance disclosures, using a car-battery disclosure scenario. The Q&A provides no publication timetable. The current study lists funding from an NCSU Poole College of Management grant and says its data are available upon request.