Inspectors’ Incentive Perceptions and Assessment Timing: Inspectors’ Requests and Auditors’ Responses

ABSTRACT I examine inspector-auditor interactions and test proposed changes to the existing inspection process using a stylized experiment with real-effort and repeated interactions. I first show that when holding incentives constant, if inspectors perceive incentives to request additional audit work, they escalate their deficiency assessments and request more additional audit work. I then show that increasing inspector-auditor discussions before inspectors formally assess auditors’ work tempers those heightened requests. For auditors, I find that, over time, they begin to anticipate inspectors’ requests and perform additional audit work before inspection. Supplemental analyses show that auditors view inspectors more positively when auditors may perform the inspector-requested work after inspection without added penalty, which is unlike the current inspection process. Inspectors view auditors similarly, regardless of the inspection process used. JEL Classifications: C91; M42; M48; M52.