Assistant professor Ben Commerford’s paper (co-authored with Jessica Buchanan of Providence College and Elaine Wang of University of Massachusetts - Amherst) titled, "Auditor Actions and the Deterrence of Manager Opportunism: The Importance of Communication to the Board and Consistency with Peer Behavior" has been accepted for publication at The Accounting Review.
Informed by perceptual deterrence theory, Commerford and his colleagues conduct multiple experiments to investigate when and how auditor actions can help deter manager opportunism. They find evidence that managers are less likely to use real earnings management (REM) when they expect auditors to both increase scrutiny and communicate their observations to the board. However, this effect occurs only when managers' operational decisions are inconsistent (versus consistent) with peer behavior.
Findings also suggest that increased auditor scrutiny alone (without auditor-board communication) is not likely to deter REM. In addition, they find that increased auditor scrutiny with communication to the board effectively deters both accruals-based earnings management (AEM) and REM, reducing the total level of manager opportunism. However, without communication, increased auditor scrutiny deters AEM, but also induces more REM. These findings highlight the importance of auditor-board communication and demonstrate how auditor actions can contribute to the deterrence of manager opportunism.
