Three Essays in Experimental Accounting

Abstract

In this dissertation, I present three economic experiments in the area of accounting written during my doctoral studies at the University of Konstanz. I will present the three articles in the chronological order in which I started working on the respective projects. The first project is on the implications of audit market regulations on the behavior of market members and the market structure. In this project different approaches discussed by standard setters and even legal principles (e.g. joint audits and audit firm rotation) are compared. The second study investigates the effect of IFRS16 on the evaluation process of knowledgeable non-professional investors. Employing the eye-tracking technique, we are able to show the changes in information acquisition, weighting, interpretation and finally evaluation caused by IFRS16, which is legally binding by 1 January 2019. My third project explores the methodological issues related to process tracking (i.e. eye-tracking and mouse-tracking) research. In this study we measure the influence of the tracking method used on the information acquisition process.The first paper is entitled “The Effects of Mandatory Audit Firm Rotation and Joint Audits on Audit Quality and Market Structure: Experimental Evidence”. Starting with the financial crisis and the green papers issued in 2010, a regulatory debate about the restructuring of the auditor market emerged. Both, audit firm rotation and joint audits have played a prominent role in this debate. Whereas audit firm rotation is mandatory in the European Union since 2016, the regulator in the Unites States decided against this requirement. Academics and regulators also have frequently proposed joint audits, which are currently mandatory only in France. We present the results of a market experiment that compares the effects of both mandatory audit firm rotation and joint audits against two extremes: an unregulated market and a setting in which the experimental software matches those auditors providing the highest quality with the most dishonest clients. We compare across these settings the clients’ decisions to report truthfully, the auditors’ decisions on audit effort and reporting, the resulting quality of audited client reports, and audit market concentration. We find that the quality of audited client reports is lowest in an unregulated market, higher under rotation, even higher with joint audits, and highest with a matching based on reputation. A higher probability that auditors will exert a sufficient effort level and a higher degree of auditor independence explain the difference in the quality of audited client reports between joint audits and rotation. We also find that joint audits and audit firm rotation result in a lower degree of market concentration than observed in an unregulated market. From the regulator’s perspective, joint audits seem more advantageous than mandatory audit firm rotation.In the second paper “The new Leases Standard, Information Processing, and Evaluation: Experimental Evidence from an Eye-Tracking Study” we used eye-trackers to study the effects of a legal change in the presentation format of financial statements on the evaluation process of knowledgeable non-professional investors. The IASB issued the standard IFRS 16 (Leases), which is legally binding by 1 January 2019. The former distinction between the recognition of operating and finance lease becomes invalid and the lessee must capitalize all of its leases by recognizing the present value of the unavoidable future lease payments (IFRS 16.24) and presenting them in the balance sheet as leased asset (right-of-use assets). Research has shown that the location of information influences the evaluation of financial statement users. Prior studies empirically examined legal changes on the presentation format ex post, while we use an experiment with eye-tracking technology to investigate the effects of the changed presentation format under IFRS 16 on the evaluation process of the financial statement before this standard is legally binding. We find that the changed presentation format of IFRS 16 increases the acquisition rate of the lease liabilities and the leased asset and increases the weight readers put on these numbers. Additionally, key metrics like long-term debt, assets, and total debt are interpreted comparably higher when the respective information is recognized rather than disclosed. These changes in the acquisition, in the weighting, and in the interpretation lead to an overall worse evaluation of the financial situation of the company whose financial statement is assessed. Comparing eye-tracking data with decision data allows us to distinguish between the intuitive and deliberate processes of individuals when assessing financial statements. We thus extend prior research on individuals’ decision-making processes by comparing decision data with evidence from individuals’ eye movements.The third paper “Data Collection in Information Search Processes” focuses on the methodological issues related to research on information search processes. Using mouse-tracking techniques like Mouselab, MouselabWeb, or Flashlight as an alternative to eye-tracking experiments has become popular in the past decades. Several studies on the question of whether the technique used has an effect on the decision observed have been published. In contrast, we investigate whether the technique used for recording information search processes influences the search process itself. We show that both – the occlusion of information and the necessity of using the mouse cursor to uncover information – influence the information search process of participants and significantly change key metrics used to describe this process. Conducting an experiment using the city size task, we are able to show that participants obliged to use a Mouselab alike framework with occluded informational cues changes an intuitive search behavior into a deliberate informational search process. Additionally, the direction of information search is influenced by the necessity of unveiling information via mouse cursor movement. While the outcome in our task is not influenced by the method used for process tracing, the metrics deduced from the recorded process data is highly depending on the method of choice. Moreover, the choice of information differs, when a Mouselab design is used. Thus, our findings challenge the assumption that mouse-tracking and eye-tracking are technologies to collect process data that are directly comparable.