Document Type : Research Paper
Authors
1 Professor of Accounting in department of management and Accounting Shiraz university,Shiraz,Iran
2 Ph.D. student in accounting , Shiraz university, Shiraz, Iran.
3 Ph.D. student in accounting, Shiraz university, Shiraz, Iran.
Abstract
This research explores the impact of mental accounting on audit quality, particularly focusing on how auditors' cognitive biases influence their judgments and decision-making. By understanding these biases, auditors can better identify risks and improve audit processes. The study is applied, quantitative, and descriptive, conducted through surveys with 203 certified accountants in Iran. The findings indicate that mental accounting affects auditors' judgments, the allocation of partners' working time, and performance defense costs in lawsuits, but it does not impact auditor independence. The research concludes that mental accounting influences overall audit quality. By increasing auditors' awareness of mental accounting and its effects, the quality of their audits can improve. These insights highlight the importance of recognizing behavioral biases in auditing to enhance the effectiveness and accuracy of audit practices.
Introduction
In a world without audits, trust in financial reporting would erode, leading to chaos in financial statements. Audit quality is essential for ensuring reliability and transparency, serving as a safeguard against errors and fraud. Understanding auditors' cognitive processes, particularly mental accounting, is crucial for enhancing audit quality and improving decision-making in the classification of financial resources.
In the 1980s, Richard Thaler and Amos Tursky popularized the concept of mental accounting, demonstrating how mental limitations can lead to irrational financial decisions. This theory, widely accepted by psychologists, economists, and auditors, consists of three key elements: the coding, classification, and evaluation of mental accounts. Additionally, expectations theory addresses decision-making under risk. By understanding mental accounts, auditors can gain valuable insights into financial behaviors, ultimately improving audit quality. This makes mental accounting a vital tool for combating financial abuses and enhancing overall financial integrity.
Research hypotheses
Mental accounting influences audit quality.
Mental accounting affects the auditor's judgment.
Mental accounting impacts the ratio of partners' work time to the total work time in the audit budget.
Mental accounting influences the auditor's independence.
Mental accounting affects the process of defending performance costs in lawsuits.
Literature Review
Audit quality is rooted in trust and confidence, stemming from auditors' adherence to professional standards and their ability to provide reliable information. It can be likened to a trustworthy friend who keeps promises, relying on key elements such as competence, independence, honesty, and professional skepticism. Definitions of audit quality vary but generally emphasize auditors’ ability to detect violations and ensure high-quality financial reporting. Compliance with audit standards serves as a key indicator of audit quality. Furthermore, the theory of mental accounting enhances audit quality by enabling auditors to better understand financial processes and how individuals categorize their resources, making it a valuable tool for improving overall audit practices.
Integrating mental accounting with audit quality can significantly enhance the audit process and build trust in financial reporting. Mental accounting identifies behavioral biases that influence auditors' decision-making by examining how financial resources and decisions are categorized. By recognizing these biases, auditors can implement strategies to mitigate their effects, thereby improving audit quality. Additionally, applying mental accounting principles helps auditors select effective methods for gathering and interpreting evidence, ensuring more reliable and accurate audits. This synergy fosters greater accuracy and reliability in financial reports, ultimately strengthening public trust in the audit system.
Methodology
This research adopts an applied approach and a survey method to enhance auditing knowledge, focusing on partners, managers, and certified accountants from A-grade audit institutions in Iran. Data collection was conducted using a questionnaire, whose validity was confirmed through face validity and necessary revisions. Reliability was established using Cronbach's alpha, ensuring the questionnaire is a reliable tool for measuring the research variables.
Conclusion
This research highlights the role of mental accounting in enhancing audit quality, building on Thaler's foundational work. It identifies four specific variables to measure audit quality, demonstrating that mental accounting affects auditors' judgments, partners' work time allocation, and defense costs in lawsuits, but not auditor independence. The findings confirm that mental accounting positively influences audit quality, aligning with earlier studies by Bonabi Ghadim and Karbasi Yazdi (2013) and Stephen (2018).
Additionally, the research examined the influence of participants' demographic information on the hypotheses, concluding that these factors did not affect the outcomes, as the results remained consistent across all demographic groups.
Acknowledgments
In conclusion, we extend our gratitude to the partners, managers, and members of the public accountants’ community in Iran for their invaluable assistance and the generous time they dedicated to supporting this research.
Keywords
- Audit quality
- Auditor independence
- Auditor judgment
- Mental a lawsuits.ccounting
- The trend of performance defense costs in
Main Subjects
- Aobdia, D. (2019). Do practitioner assessments agree with academic proxies for audit quality? Evidence from PCAOB and internal inspections. Journal of Accounting and Economics, 67(1), 144-174. Doi: 0.1016/j.jacceco.2018.09.001.
- Austin, Ch. R., Donna D. B., Marcus M. D., & Shane R. S. (2024). How does tax timing affect spending in retirement? Journal of the American Taxation Association, 1-29. Doi: 10.2308/JATA-2022-020.
- Bloomberg. (2018). Maybe the big 4 auditing firms do need to be broken up. URL: https://www.bloomberg.com/view/articles/2018-06-18/maybe-the-big-fourauditing- firms-do-need-breaking-up.
- Bonner E. S., Shana M. C., & Lisa, K. (2014). Mental accounting and disaggregation based on the sign and relative magnitude of income statement items. The Accounting Review, 89(6), 2087–2114. Doi: 10.2308/accr-50838.
- DeAngelo, L. (1981). Auditor independence, ‘low balling’, and disclosure regulation. Journal of Accounting & Economics, 3(2), 113-127. Doi: 10.1016/0165-4101(81)90009-4.
- DeFond, M., & Zhang, J. (2014). A review of archival auditing research. Journal of Accounting and Economics, 58(2-3), 275-326. Doi: 10.1016/j.jacceco.2014.09.002.
- Francis, J. R., Michas, P. N., & Yu, M. D. (2013). Office size of big 4 auditors and client restatements. Contemporary Accounting Research, 30(4), 1626-1661. Doi: 10.1111/1911-3846.12011.
- Hahnel, G. Ch., Beatrice, C., Valentino, P., & Tobias, B. (2020). Mental accounting mechanisms in energy decision-making and behavior. Nature energy, 5, 952–958. Doi: 10.1038/s41560-020-00704-6.
- Kinney, W. R., Palmrose, Z., & Scholz, S. (2004). Auditor independence, non-audit services, and restatements: Was the U. S. government right? Journal of Accounting Research, 42(3), 561-588. Doi: 10.1111/j.1475-679X.2004.t01-1-00141.x.
- Mitchell, T., Presslee, A., Axel K-D. S., & Alan Webb, R. (2022). Needs versus wants: The mental accounting and effort effects of tangible rewards. Journal of Management Accounting Research, 34(1), 187–207. Doi: 10.2308/JMAR-2019-505.
- Nathan, C., Kathleen, H., & Thomas, C. (2022). Does task-specific knowledge improve audit quality: Evidence from audits of income tax accounts. Accounting, Organizations and Society, 99. Doi: 10.1016/j.aos.2021.101320.
- Public Company Accounting Oversight Board (PCAOB). (2015). Audit committee dialogue. URL: http://pcaobus.org/sites/digitalpublications/audit-committee-dialogue.
- Qihui, G., Huilong, L., Jing X., & Lingling Z. (2023). How does establishing a branch office affect audit quality? Evidence from China. Journal of Accounting and Public Policy, 42(6). Doi: 10.1016/j.jaccpubpol.2022.107049.
- Shivaram, R., Suraj, S., & Xin, Zh. (2021). Measuring audit quality. Review of Accounting Studies, 6, 559–619. Doi: 10.1007/s11142-020-09570-9.
- Simon, D., Xianjie, H., Tusheng, X., & Luo, Z. (2023). Auditor industry range and audit quality. Journal of Accounting and Economics, 77(2-3). Doi: 10.1016/j.jacceco.2023.101669.
- Stephen, D. (2018). Alpha brain: How a group of iconoclasts are using cognitive science to advance the business of alpha generation. Chapter 8. URL: https://www.amazon.com/AlphaBrain-Iconoclasts-Cognitive-Business-Generation/dp/1119335566.
- Thaler, R. (1980). Toward a positive theory of consumer choice. Journal of Economic Behavior and Organization, 1(1), 39-60. Doi: 10.1016/0167-2681(80)90051-7.
- Thaler, R. (1990). Anomalies: Saving, fungibility, and mental accounts. The Journal of Economic Perspectives, 4(1), 193-205. URL: http://www.jstor.org/stable/1942841.
- Bayazidi, P., Marfou, M., & Seddighi, R. (2022). Impact of auditor intelligence quotient on audit quality. Accounting and Auditing Review, 29(3), 425-446. doi: 10.22059/acctgrev.2021.321658.1008541 [In Persian]
- Bonabi Ghadim, R., & Karbasi Yazdi, H. (2014). Application of mental accounting (from theory to action). Journal of Accounting and Social Interests, 4(2), 117-133. Doi: 10.22051/ijar.2014.499 [In Persian]
- Ebrahimi, F., & Najafi, Z. (2020) The role of mental accounting in self-employed business owners' tax behavior (Case study: self-employed taxpayers of Fars Province). Journal of Value and Behavioral Accounting, 5(9), 371-394. URL: https://aapc.khu.ac.ir/article-1-748-fa.html [In Persian]
- Farhadi, Z., Masoudi, Y., & Ebrahim Zadeh Pirshahid, M. (2023). The effect of mental accounting on people's decision-making behavior. The 6th National Conference of Economics, Management and Accounting. URL: https://civilica.com/doc/1970409 [In Persian]
- Imani Barandagh, M., Mehrani, K., & Hojat Shamami, R. (2016). Determining factors of audit quality in perspective of Iranian certified public accountants. Journal of Accounting Knowledge, 7(25), 167-189. Doi: 10.22103/jak.2016.1449 [In Persian]
- Kian, A., Pourheydari, O., & Kamyabi, Y. (2017). The impact of mental accounting on the investor’s behavior: Financial reporting perspective. Financial Accounting Research, 9(2), 1-22. Doi: 10.22108/far.2017.103495.1062 [In Persian]
- Kian, A., Pourheydari, O., & Kamyabi, Y. (2018). Investigating of managers behavior in using mental accounting in income statement reporting. Empirical Studies in Financial Accounting, 15(58), 1-26. Doi: 10.22054/qjma.2018.9424 [In Persian]
- Molanazari, M., & Geramirad, F. (2022) Scientific flow analysis of behavioral accounting research in web of science database. Journal of Value and Behavioral Accounting, 6(12), 27-55. URL: http://aapc.khu.ac.ir/article-1-1068-en.html [In Persian]
- Molanazari, M., Parsaei, M., & Taghimollaee, S. (2021). The effect of debt financing on capital investment decisions based on mental accounting theory. Accounting and Auditing Review, 28(4), 713-738. Doi: 10.22059/acctgrev.2021.314162.1008473 [In Persian]
- Nikbakht, M. R., & Mahmoodi Khoshroo, O. (2017). Investigation on the factors affecting the audit quality in Iran according to the indicators of the public company accounting oversight board (PICAOB). Accounting and Auditing Review, 24(3), 441-462. Doi: 10.22059/acctgrev.2017.240093.1007679 [In Persian]
- Safarzadeh, M. H., & Hooshmand, A. (2020). Auditor attributes, professional and commercial orientations, and the implications for audit quality. Empirical Studies in Financial Accounting, 17(68), 145-165. Doi: 10.22054/qjma.2021.50466.2132 [In Persian]
- Setayesh, M. H., Azizi, P., & Moghimi, F. (2021). Investigating the effect of quadruple variables of client characteristics on audit fees. Budget and Finance Strategic Research, 2(3), 43-86. URL: https://fbarj.ihu.ac.ir/article_207046.html [In Persian]
- Soleymani Amiri, Gh., Zeraati, L., & Goodarzi, N. (2011). Metal accounting and its relationship with portfolio management. Accounting and Social Benefits, 1(1), 123-136. Doi: 10.22051/ijar.2013.432 [In Persian]
- Vatandoost silab, S., Sepasi, S., & Rezazadeh, J. (2023). Mental accounting and financial reporting quality using simultaneous equations. Empirical Research in Accounting, 13(2), 157-182. Doi: 10.22051/jera.2023.37681.2977 [In Persian]