Experiment 1, 2 and 3

As a result of the high profile allegations of audit failure in the Enron case and the failure to detect the unhealthy financial status of banks during the recent financial crisis, demands for quality control in audit have emerged strongly in recent years. A key mechanism for the securing of quality control in accounting firms has been the practical embedding of internal review activities in the process of audit work routines. The internal review itself generally involves more experienced auditors reviewing the work performed by less experienced auditors. Chapter Two reviewed prior literature of audit review (see Section 2.6). Early research sought evidence for the effectiveness and efficiency of review on improving audit judgment (e.g., Libby and Trotman, 1993; Trotman and Yetton, 1985). The findings provided empirical support for the benefit of internal review as a quality control mechanism. Later research acknowledged the fact that as a result of review, the preparers of the audit work are made more accountable for the judgments they make. The accountability feature of review is integral to audit work routines. As discussed in Chapter Two (Section 2.5), the perception, or expectation, of a review requirement alone was proved to have impact on auditor‘s judgment (e.g., DeZoort et al., 2006). As auditors do not work in a social vacuum so that are implicitly or explicitly always affected by accountability. The psychology of accountability has also been discussed (in Section 2.5 of Chapter Two). It is hypothesized that accountability functions as an intensifier / amplifier of self-regulation so that it intensifies the effect of regulatory focus on audit judgment. In the prior literature there is also recognition of the fact that persuasion pervades the audit review process (e.g., Rich, Solomon and Trotman, 1997). A research trend emerged since 2000s acknowledges the multi-personal aspects of review and investigates the interactions during the process of review. Most studies in this trend were inspired by the persuasion framework proposed by Rich et al. (1997a) (see Section 2.6.4). The framework suggested that the audit review process could be best understood as a set of persuasion interactions between preparers of the audit work and reviewers.

People pay selective attention in information processing, as influenced by their regulatory focus. Promotion focused individuals are primarily concerned with gains and sensitive to information concerning the presence and absence of positive outcomes. Prevention focused individuals are primarily concerned with losses and sensitive to information concerning the presence or absence of negative outcomes. As discussed in Chapter One (Section 1.3), the positive and negative outcomes can be any types, (which is associated with common sense of ‗good things‘ and ‗bad things‘ in life). It is thus reasonable to expect regulatory focus to influence an individual‘s information processing in audit judgment. Moreover, people experience fit when employing goal pursuit strategies that sustain their regulatory focus disposition. The experience of regulatory fit increases individuals‘ motivational intensities (Higgins and Spiegel, 2004) and creates feelings of rightness (see Section 1.4.2 in Chapter One, for fuller explanations on these two basic components of regulatory fit). It has been found to affect information processing in terms of the feeling of rightness (or wrongness) about information received that fit (or misfit) can generate (Camacho, Higgins and Luger, 2003), and the fluency in processing information associated with fit (Lee and Aaker, 2004).

Regulatory fit can enhance the persuasiveness of messages received (Aaker and Lee, 2006).

The influence of regulatory fit on persuasion has been researched in the context, for example, of consumer behaviour where empirical evidence has been gathered to explore and explain the impact of regulatory focus / fit on persuasion appeals. There has, however, been no study of the relationship between regulatory focus / fit and persuasion in audit, and auditors‘ judgments differ in kind from those made in contexts where the interaction has previously been studied, such as consumer choice or attitude change.

The aim of Experiment 1, 2 and 3 is to contribute to the existing literature by examine the effect of regulatory focus and regulatory fit on information processing and the persuasiveness of accounting information in audit settings. A two (regulatory foci) by two (regulatory fit / misfit) design was adopted. Participants comprised a mix of students from University of Glasgow and University of Strathclyde. They were randomly primed with either promotion focus or prevention focus at the beginning of each experiment. To assume the role as independent adviser invited to help the committee of a student drama club on activity planning decision, the experiment was tailored as analogy of audit judgment. (The research instrument used in Experiment 1, 2 and 3 will be explained in details in Chapter Six.) Utilizing the same set of case information about the club, each experiment required participants to make a series of judgment based on provided case information. Participants were required to perform likelihood assessments and estimation judgments on the club‘s funds that would be available, and to form a final recommendation regarding the number

of productions to be planned for the year in the last section. Specified sub-hypotheses for testing in various required judgments in the experiments are outlined in Table 4.1.

4.6.2 Experiment 4

Chapter Two has briefly reviewed prior research on heuristics and biases in audit judgment that generally examined the problem of cognitive limitation in audit (see Section 2.3). It is proposed in this thesis that the distinct effects of promotion focus versus prevention focus on human cognition can be applied to better account for difference in judgment among people, e.g., why some auditors fall into judgmental fallacies and others do not.

Experiment 4 (reported in Chapter Ten in this thesis) sought to demonstrate the effect of regulatory focus on individuals‘ consideration of accounting information through an investigation boundary setting task. This experiment examined the influences of regulatory focus on the significance of information in judgment over uncertainty by manipulating temporal distance of past accounting information (Experiment 4a) and information processing style (procedural versus intuitive) (Experiment 4b).

Prospect theory suggests that people discount utility of a prospective outcome over uncertainty. Research on intertemporal choice (i.e., the choice among options with different outcomes at different points in time) introduced time as another dimension in judgment and manifested devaluation of future outcomes that utility is discounted over temporal distance. It is hypothesized that the effect of temporal distance on individuals‘

perception of relevance of the accounting information is associated with differences in their regulatory foci (H13); and the effect of discount over temporal distance on the relevance of the accounting information is more dominant with prevention focus (H14).

These two hypotheses are tested in Experiment 4a.

Psychology studies on judgment over uncertainty often examine the effect of heuristics and bias on individuals‘ intuitive judgment (e.g., Kahneman and Tversky, 1979 and 1984) rather than procedural judgment made from more effortful thinking. Auditors most often make judgment in procedural processing style. They make calculations, interpreting information gathered, and running audit tests on accounting information available and evidence gathered. Procedural information processing can be expected to reduce difference in judgments made by individuals with different regulatory foci (H15). This hypothesis is tested in Experiment 4b.

Table 4.1 Summary table of research questions and hypotheses

Page 105 RQ1: Do the distinct effects of promotion focus and prevention focus concerning sensitivity to gains (positive outcomes) and losses

(negative outcomes) respectively also apply to the processing of accounting information in audit judgment?

H1: Promotion focused people are more sensitive to and tend to be primarily concerned with ‗positive‘ accounting information;

whereas, prevention focused people are more sensitive to and tend to be primarily concerned with ‗negative‘ accounting information.

H1a: Therefore, individuals with different regulatory foci will make different judgments as a result of differences in their sensitivities to

prevention focus are more sensitive to ‗negative‘ accounting information.

Experiment 4a

Table 4.1 Summary table of research questions and hypotheses (cont‘d)

RQ2: Does the effect of persuasion fit also apply to audit judgment? Is the persuasiveness of accounting information processed be improved under persuasion fit induced

(i) by matching message framing with individuals‟ regulatory foci;

(ii) integrally, when the manner of task performance sustains individuals‟ regulatory focus;

(iii) incidentally, after performing a separate task applying strategic means that fits individuals regulatory focus?

RQ2(i) – message matching

H2: Message matching improves the persuasiveness of positive accounting information among promotion focused individuals.

H2a: in likelihood assessments; and, Experiment 1a-1 H2a Page 154

H2b: in estimations. Experiment 1a-3 H2b Page 157

H3: Message matching improves the persuasiveness of negative accounting information among prevention focused individuals.

H3a: in likelihood assessments; and, Experiment 1a-1 H3a Page 154

H3b: in estimations. Experiment 1a-3 H3b Page 157

H4: The effect of persuasion fit created by message matching affects the persuasiveness of accounting information processed and leads to variations in judgments among people.

H4a: in likelihood assessments; and, Experiment 1a-1 H4a Page 154

H4b: in estimations. Experiment 1a-3 H4b Page 157

Page 106

Table 4.1 Summary table of research questions and hypotheses (cont‘d)

RQ2(ii) – integral fit

H5: (Integral) Regulatory fit improves the persuasiveness of positive accounting information among promotion focused individuals.

H5a: in likelihood assessments; and, H6: (Integral) Regulatory fit improves the persuasiveness of negative accounting information among prevention focused individuals.

H6a: in likelihood assessments; and, H7: The effect of persuasion fit induced integrally affects the persuasiveness of accounting information processed and leads to variations in judgments among people.

Table 4.1 Summary table of research questions and hypotheses (cont‘d)

RQ2(iii) – incidental fit

H8: (Incidental) Regulatory fit improves the persuasiveness of positive accounting information among promotion focused individuals.

H8a: in likelihood assessments; and, Experiment 3a-2 H8a Page 219

H8b: in estimations. Experiment 3a-1 H8b Page 216

H9: (Incidental) Regulatory fit improves the persuasiveness of negative accounting information will be improved among prevention focused individuals.

H9a: in likelihood assessments; and, Experiment 3a-2 H9a Page 219

H9b: in estimations. Experiment 3a-1 H9b Page 216

H10: The effect of persuasion fit induced incidentally affects the persuasiveness of accounting information processed and leads to variations in judgments among people.

H10a: in likelihood assessments; and, Experiment 3a-2 H10a Page 219

H10b: in estimations. Experiment 3a-1 H10b Page 216

Page 108

Table 4.1 Summary table of research questions and hypotheses (cont‘d)

RQ3: Do people feel more confident about judgment made under regulatory fit?

H11: Individuals are more confident about their judgment when induced with regulatory fit, (i) by message matching; (ii) integrally;

and, (iii) incidentally.

H11a: in likelihood assessment; and,

Experiment 1a-2 Experiment 1b-3 Experiment 2a-3 Experiment 2b-3 Experiment 3a-3 Experiment 3b-3

H11a(i) H11a(ii) H11a(iii) H11a(iv) H11a(v) H11a(vi)

Page 157 Page 165 Page 191 Page 199 Page221 Page228

H11b: in final recommendation.

Experiment 1c Experiment 2c Experiment 3c

H11b(i) H11b(ii) H11b(iii)

Page 168 Page 202 Page232

Page 109

Table 4.1 Summary table of research questions and hypotheses (cont‘d)

RQ4: What would be the effect of regulatory misfit on promotion and prevention focused individuals in audit judgment?

H12: Individuals are likely to take more careful thinking in processing the messages when induced with regulatory misfit, and therefore, there will be no difference between judgments by individuals with different regulatory foci.

H12a: in likelihood assessments; and,

Experiment 1a-1 Experiment 2a-2 Experiment 2b-2 Experiment 3a-2

H12a(i) H12a(ii) H12a(iii) H12a(iv)

Page 154 Page 188 Page 197 Page 219

H12b: in estimations.

Experiment 1a-3 Experiment 2a-1 Experiment 2b-1 Experiment 3a-1

H12b(i) H12b(ii) H12b(iii) H12b(iv)

Page 157 Page 186 Page 195 Page 216

Page 110

Table 4.1 Summary table of research questions and hypotheses (cont‘d)

RQ5: How do regulatory focus orientations and the temporal distance of accounting information interact to affect the cognition and use of that information in audit judgment?

H13: The effect of temporal distance on individuals‘ perception of relevance of the accounting information is associated with differences in their regulatory focus orientations.

Experiment 4a H13 Page 252

H14: The effect of discounting over temporal distance on the relevance of the

accounting information is more dominant with prevention focus. Experiment 4a H14 Page 252

RQ6: How does regulatory focus affect individuals‟ attention in information processing under procedural versus intuitive style of information processing?

H15: Procedural information processing reduces difference in judgments made

by individuals with different regulatory foci. Experiment 4b H15 Page 259

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