The effect of accounting uncertainty and auditor reputation on auditor objectivity

This paper reports results of experimental markets that examine whether acc ounting uncertainty impacts auditor objectivity in a setting where the audi tor also has an incentive to build a reputation for objectivity. While prio r research has examined the impact of uncertainty on auditor objectivity, o ur research is the first to explicitly incorporate auditor reputation into the research design. The results provide strong evidence that accounting uncertainty impacts aud itor objectivity despite the damage to auditor reputation. Our markets sugg est that in the absence of accounting uncertainty auditors remain objective due to concerns about their reputation with managers and investors. Howeve r, in the presence of accounting uncertainty auditors impair their objectiv ity by misreporting in favor of managers. Our results suggest that regulato rs should focus on enhancing auditor incentives to maintain objectivity whe n faced with accounting uncertainty, but do not need to be concerned about auditor objectivity violations when accounting pronouncements provide unamb iguous guidance.