Accounting, Organizations and Society 28 (2003) 699714 www.elsevier.

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The eect of constrained processing on auditors judgments

Vicky B. Homana, Jennifer R. Joeb, Donald V. Mosera,*
b a Katz Graduate School of Business, University of Pittsburgh, Pittsburgh, PA 15260, USA Georgia State University, School of Accounting, 35 Broad Street, Atlanta, GA 30303, USA

Abstract This study examines whether constraining experienced auditors processing by having them process evidence in a pre-established sequence (an experimental control technique used in previous studies) prevents them from using their usual processing strategies and thereby aects their judgments. We compare the relative attention to evidence and judgments of experienced and inexperienced auditors in a constrained versus an unconstrained processing condition. Consistent with expectations, experienced auditors going-concern judgments diered from inexperienced auditors judgments only when processing was unconstrained. This dierence in judgments was the result of dierential attention to evidence. These results demonstrate that the failure to consider how experienced auditors process evidence can result in inadvertently adopting control techniques that limit the generalizability of experimental ndings. Although our study used a going-concern task, our conclusions are likely to apply to a variety of ill-structured audit tasks that require a goal-oriented, directed evaluation of evidence. # 2002 Elsevier Ltd. All rights reserved.

Introduction Many auditing experiments constrain the way experienced auditors are permitted to process information in order to achieve experimental control. Such processing constraints are often necessary to isolate the eect of interest. To the extent that the processing constraints used in experiments are consistent with constraints found in the natural audit environment, constraining auditors processing in the lab is not a problem. For example, when examining recency eects, experimenters present information cues to auditor-subjects in a pre-established order to determine whether the most recent cues received have the greatest inuence on auditors judgments (see Trotman & Wright, 2000 for a review of such studies). While
* Corresponding author. Fax: +1-412-648-1693. E-mail address: dmoser@katz.pitt.edu (D. V. Moser).

the techniques used in these recency-eect experiments are simplications of the natural environment, auditors on actual audits are sometimes similarly constrained because they receive dierent information items at dierent times. Thus, in these types of studies, constraining processing does not prevent the researcher from providing insights into auditors judgments in natural settings. However, experimental researchers need to be careful not to use processing constraints that prevent experienced auditors from evaluating evidence the way they normally do in actual audit settings. While such processing constraints might achieve experimental control, they could also force auditors to evaluate information in an unnatural way, and thereby limit the ability to generalize the experimental results to real-world audit settings. Thus, when employing a processing constraint in the lab, researchers need to consider how experienced auditors would normally perform the task

0361-3682/02/$ - see front matter # 2002 Elsevier Ltd. All rights reserved. doi:10.1016/S0361-3682(02)00068-5

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in actual audit settings. In this study we examine how imposing processing constraints on experienced auditors in the lab can inuence their judgments and decisions. Previous studies in psychology and accounting demonstrate that experienced auditors tend to perform a goal-oriented, directed evaluation of audit evidence (e.g. Bedard & Chi, 1993). That is, experienced auditors typically do not process evidence sequentially in the manner in which it is presented to them, but instead use processing goals that guide their evaluation of information. Therefore, if one is studying how experienced auditors make ill-structured audit judgments or decisions (e.g. going-concern judgments, fraud risk judgments, client acceptance decisions), presenting information in a pre-established sequential order could prevent experienced auditors from making the judgment or decision the way they normally would. Indeed, Krull, Reckers, and Wong-on-Wing (1993) call for research on this issue, speculating that asking more experienced auditors to process information sequentially when they are unaccustomed to that mode of processing could have a detrimental eect on their judgments. Trotman and Wright (2000) concur with Krull et al. (1993), and suggest that it is important to understand the eects of forcing experienced auditors to use an information search process in an experiment that does not match the process they normally use.1 The purpose of this study is to examine whether constraining experienced auditors processing in a going-concern task by making them process information items in a pre-established sequence prevents them from using their usual processing strategies and alters their judgments. We test this by comparing the relative attention to information
1 In this study we use experience as a surrogate for expertise because, as Marchant (1990, p. 23) argues in his discussion of Bonner and Lewis (1990), using years of experience as a measure of expertise is appropriate when examining general auditing expertise. He notes that auditors with more years of general auditing experience will have well-developed strategies for organizing and representing knowledge. Because the task in this study requires general audit knowledge, we expect that experienced auditors processing will be more expert than that of inexperienced auditors.

and the judgments of experienced auditors in a constrained processing condition versus an unconstrained processing condition. In the constrained processing condition, we use an experimental control technique used in previous experiments (e.g. Phillips, 1999; Ricchiute, 1992). That is, subjects are provided with information sequentially, and are not allowed to refer back to and reorganize the information. In the unconstrained processing condition, subjects are provided with the same information, but the information is presented simultaneously and subjects are allowed to process the information in any manner they wish. In this study, we also examine the judgments of inexperienced subjects (i.e. auditing students). We use this group for comparison purposes because previous literature (e.g. Larkin, McDermott, Simon, & Simon, 1980; Patel, Evans, & Groen, 1989) suggests that inexperienced individuals normally do process information sequentially in the order it is presented to them. Thus, the constrained processing condition would not be unnatural for inexperienced auditors. Our inexperienced subjects serve as a benchmark in two ways. First, in contrast to our expectations for experienced auditors, we expect inexperienced auditors to process information similarly in the constrained and unconstrained processing conditions, and, therefore, we expect their going-concern judgments to be similar in the two processing conditions. Second, the inexperienced auditors judgments provide a benchmark against which to compare experienced auditors judgments in the constrained processing condition. We expect that constraining experienced auditors from using their usual search and evaluation strategies will make them perform more like inexperienced auditors. Our results show that when experienced auditors processing is constrained they perform like inexperienced auditors, and it is only when experienced auditors can apply their usual processing strategies that their judgments reect their expert processing. Specically, we nd that experienced auditors in the unconstrained processing condition made more positive going-concern judgments than auditors in any other condition,

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where judgments were all very similar to each other. Further analysis shows that the reason that experienced auditors going-concern judgments were more positive in the unconstrained versus the constrained processing condition was that they were able to attend to more mitigating information in the unconstrained condition. Finally, we nd that the reason that inexperienced auditors going-concern judgments did not dier across the constrained and unconstrained processing conditions was that there was no dierence in how they attended to mitigating information across these conditions. These results suggest that failure to consider how experienced auditors process evidence can result in inadvertently adopting experimental control techniques that constrain their processing in ways that limit the generalizability of the experimental results to actual audit environments. This concern is an example of the broader concern regarding experimental auditing research raised by Gibbins and Swieringa (1995). They point out that auditors in experiments are expected to act as they normally would in practice, but under closer scrutiny and with more structure imposed on the task. In order to maintain experimental control it is often necessary to develop an experimental task that is a simplied representation of an actual audit task. Although maintaining experimental control is essential to any good experiment, care must be taken to ensure that in attempting to achieve control, the experimental techniques employed do not prevent auditors from successfully performing the task in the manner they would in the natural environment.2 The next section describes our hypotheses. The two subsequent sections describe the experimental method and the results of our experiment. The paper concludes with a discussion of our results and their implications.

Theory and hypothesis development On every audit, auditors are required to evaluate the companys ability to continue as a going concern. We use a going-concern task in our experiment for several reasons. First, making a going-concern judgment is an example of an ill-structured task that requires experience (Kennedy, 1993; Trotman & Wright, 1996). Second, professional guidance (SAS No. 59, AICPA, 1988) instructs auditors how to perform the going-concern task, which is useful in understanding how experienced auditors make such judgments. Third, the going-concern task requires auditors to integrate information from a number of separate audit areas. As such, it provides the auditor with a processing objective that leads to the purposeful evaluation of relevant items of evidence, rather than a passive evaluation of evidence in the order that it is received (e.g. Shelton, 1999). In this way, the going-concern judgment task is a good example of a situation in which requiring auditors to process evidence in a pre-established order is inconsistent with their normal processing tendencies. Thus, the going-concern task provides a useful context in which to examine the eects of a potential mismatch between experimental and real-world processing conditions. Previous studies suggest that when auditors make going-concern judgments, negative information looms larger than positive information (e.g. Abdolmohammadi & Wright, 1987; Anderson & Maletta, 1994; Asare, 1992; Kaplan & Reckers, 1989; Kida, 1984; Libby & Trotman, 1993; Smith & Kida, 1991; Trotman & Sng, 1989). Although the current study takes into account this general tendency toward conservative information processing, it is not the primary focus of this study. Rather, the current study focuses on the eect of constrained versus unconstrained processing on auditors attention to information and the impact of the resulting dierential attention on their going-concern judgments. A considerable amount of prior research suggests that experienced individuals perform goaloriented, directed evaluations of evidence (e.g. dard & Chi, 1993; Biggs, SelfAnderson, 1988; Be ridge, & Krupka, 1993; Bouwman, Frishko, & Frishko, 1987; Cuccia & McGill, 2000; Hodge,

2 As Swieringa and Weick (1982) note, it is not necessary to model every aspect of the natural environment in the laboratory (i.e. the experimental task need not possess mundane realism). However, care should be taken not to omit an element essential to understanding how the task is performed (i.e. the experimental task should possess experimental realism).

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Kennedy, & Maines, 2002; Larkin et al., 1980; Patel et al., 1989; Thibodeau, 2001).3 In addition, experienced individuals have well-developed knowledge structures (e.g. Frederick, HeimanHoman, & Libby, 1994; Tubbs, 1992) that help them consider not only consistent evidence, but also inconsistent evidence (e.g. Bouwman, 1982, 1984; Choo & Trotman, 1991; Fiske, Kinder, & Larter, 1983; Mautz & Sharaf, 1961; Myles-Worsley, Johnston, & Simons, 1988; Taylor & Crocker, 1981; Waller & Felix, 1984). Experienced individuals can more eectively consider inconsistent evidence because repeated performance of a task leads to the routinzation of basic aspects of the task (Bargh, 1984; Fazio, 1986, 1990; Langer, 1978; Rau & Moser, 1999; Schneider & Shirin, 1977). This routinization of the basic aspects of the task (i.e. attending to consistent evidence) frees up processing capacity for performing the more cognitively demanding parts of the task (i.e. attending to and integrating inconsistent evidence). Thus, in the current study, we expect experienced auditors well-developed knowledge structures to guide their processing of information (Ricchiute, 1992; Shelton, 1999), allowing them to not only consider evidence consistent with a goingconcern problem (i.e. negative evidence), but also evidence inconsistent with a going-concern problem (i.e. positive or mitigating evidence). Interestingly, the going-concern judgment guidelines specied in SAS No. 59 (AICPA, 1988) are consistent with this expectation regarding experienced auditors processing. The standard guides auditors to rst determine whether substantial doubt exists regarding the rms ability to continue as a going concern, and then if substantial doubt exists, to look for mitigating evidence that might alleviate this doubt. Consistent with SAS 59, Biggs et al. (1993) found that experienced auditors rst

recognize that there is a going-concern problem and then evaluate mitigating factors.4 There are additional reasons that experienced auditors may attempt to attend to evidence inconsistent with a going-concern problem. For example, experienced auditors are likely to have a sense of the infrequency of actual failures (i.e. base-rate knowledge) and the importance of client retention (i.e. knowledge of the rms loss function), both of which would lead them to attend to information that could mitigate going-concern problems. Therefore, when cues are presented in a manner that allows experienced auditors to process evidence any way they wish (i.e. the unconstrained processing condition), they are expected to attend to and integrate both consistent (i.e. negative) and inconsistent (i.e. positive or mitigating) information the way they normally would when making going-concern judgments. In contrast to the unconstrained processing condition, in the constrained processing condition (in which the cues are presented in a one-time-only sequential manner) experienced auditors are expected to have diculty processing evidence in their usual manner. Specically, they will be unable to perform a directed search for evidence that might suggest specic going-concern problems. Instead, the processing constraint forces them to evaluate the evidence in the sequence it is presented, interfering with their search strategies and making it more dicult to identify potential going-concern problems.5 As a result, much of the auditors cognitive capacity will be used up trying to perform this basic aspect of the task (i.e. identifying going-concern problems), leaving less capacity to focus on inconsistent evidence (i.e. positive evidence that could mitigate such problems). Furthermore,
In a process-tracing study, Biggs et al. (1993) identied four reasoning processes that auditors use when making goingconcern judgments. The rst two processes relate to determining that there is a going-concern problem, while the third and fourth processes relate to evaluating the eect of mitigating evidence. 5 Cuccia and McGill (2000) make a similar argument regarding tax professionals, suggesting that forcing them to process evidence in a predetermined order can produce a recency bias in their judgments, whereas giving them a choice over the order in which they examine evidence can mitigate this bias.
4

3 Cuccia and McGill (2000) suggest that experienced tax practitioners conduct a goal-oriented evaluation of evidence, and that this can mitigate recency bias in their judgments. In going-concern studies, Biggs et al. (1993) and Thibodeau (2001) found that experienced auditors know where problems are likely to arise (e.g. liquidity and operating performance) and use this knowledge to guide their evaluation of the evidence.

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until potential going-concern problems are identied, experienced auditors will not focus much attention on the positive evidence that could mitigate such problems. When the auditors nally are provided with the evidence necessary to identify potential going-concern problems, the processing constraint prevents them from revisiting and attending to any positive evidence that was presented earlier, or from looking ahead for specic types of positive evidence in places they might expect to nd it. Consequently, experienced auditors in the constrained processing condition are expected to attend to relatively less positive or mitigating evidence than experienced auditors in the unconstrained processing condition. That is, even if the processing constraint results in experienced auditors attending to fewer total cues than when their processing is unconstrained, our prediction is that it will be particularly dicult for them to attend to the positive cues when their processing is constrained. Thus, when their processing is constrained, we expect experienced auditors to attend to fewer positive cues as a proportion of the total cues to which they attend. This dierence in relative attention to positive information is expected to lead to dierences in going-concern judgments. Specically, because experienced auditors are expected to be able to attend to relatively more positive information in the unconstrained processing condition than in the constrained processing condition, their going-concern judgments are expected to be more positive in the unconstrained condition than in the constrained condition. Thus our rst hypothesis is: H1. Experienced auditors going-concern judgments will be more positive in the unconstrained processing condition than in the constrained processing condition because they will be able to attend to relatively more positive cues in the unconstrained condition. In order to provide a benchmark against which to compare the performance of our experienced auditor subjects, we also had inexperienced subjects (auditing students) perform the going-concern task under the same two processing conditions. In contrast to experienced auditors,

inexperienced auditors typically lack a welldeveloped knowledge structure to guide their evaluation of evidence, and thus are more data driven in their processing (e.g. Taylor & Crocker, 1981; Waller & Felix, 1984). That is, individuals who lack experience with a task tend to process information sequentially in the order it becomes available rather than performing a goal-oriented integrative evaluation of the evi dard & Chi, 1993; dence (e.g. Anderson, 1988; Be Larkin et al., 1980; Patel et al., 1989). Therefore, irrespective of the processing condition, inexperienced auditors are expected to start at the beginning of the list of presented information and proceed sequentially through the list (e.g. Yates, 1990). When evaluating evidence sequentially, inexperienced auditors are expected to attend more to evidence consistent with a going-concern problem (i.e. negative evidence) than inconsistent with a going-concern problem (i.e. positive or mitigating evidence) for several reasons. First, inexperienced auditors have been shown to process information conservatively and attend more to negative information than positive information (e.g. Anderson & Maletta, 1994). Second, inexperienced auditors are less likely to be inuenced by issues learned through experience such as base rates of company failure, the importance of client retention, or the specic guidelines of SAS No. 59. Finally, because inexperienced auditors will not have regularly performed the going-concern task, the task will not be routine for them, and thus most of their processing capacity will be consumed attending to the basic aspects of the task (i.e. attending to evidence consistent with a going-concern problem). Consequently, irrespective of the processing condition, inexperienced auditors are likely to have diculty attending to and integrating positive or mitigating evidence (i.e. evidence inconsistent with a going-concern problem). Thus, our second hypothesis is: H2. Inexperienced auditors going-concern judgments will not dier in the unconstrained versus the constrained processing condition because their relative attention to positive cues will not dier in the two processing conditions.

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As mentioned earlier, the results for our inexperienced subjects provide a benchmark against which to compare the results for our experienced subjects. The judgments of the two groups can be compared to determine whether constraining experienced auditors processing results in them performing more like inexperienced auditors. Because the constrained processing condition prevents experienced auditors from using the very essence of their expert processing strategies (i.e. their tendency to perform a directed, goal-oriented evaluation of evidence), we expect experienced auditors in the constrained processing condition to perform like inexperienced auditors, whose performance is not expected to dier in the constrained and unconstrained processing condition (see H2). However, in the unconstrained processing condition, where experienced auditors are able to process evidence in their usual manner, we expect that they will attend to and integrate relatively more mitigating evidence, resulting in relatively more positive judgments (see H1). Thus, our third hypothesis predicts that experienced auditors judgments in the unconstrained processing condition will be more positive than the judgments in all other conditions. H3. Experienced auditors in the unconstrained processing condition will make more positive going-concern judgments than auditors in the other three conditions, which will not dier from each other.

accounting majors in their last week of an auditing course.6 Design Our study is designed to examine the eect of manipulating the processing condition on both experienced and inexperienced auditors goingconcern judgments. There are two independent variables: processing condition (constrained versus unconstrained) and experience level (experienced and inexperienced). The two dependent variables collected were: (1) subjects going-concern judgments, and (2) the cues subjects recalled. We collected cues recalled as a measure of subjects attention to evidence (e.g. Choo & Trotman, 1991; Libby & Trotman, 1993; Phillips, 1999; Rau & Moser, 1999; Tan, 1995). We use the proportion of positive cues recalled (i.e. the number of positive cues recalled divided by the sum of positive and negative cues recalled) as a proxy for relative attention because our predictions regarding dierences in going-concern judgments are based on auditors relative attention to positive information. Using the proportion versus the raw number of cues recalled also has the advantage of adjusting for any dierences in the total number of positive and negative cues recalled across experimental conditions. Materials and procedures The experimental session consisted of four parts: (1) processing of information cues, (2) making a going-concern judgment, (3) performing a cued-recall task, and (4) making a second goingconcern judgment. Subjects could not look ahead to subsequent parts of the experiment or return to parts completed previously. In the rst part of the experiment, subjects viewed 48 workpaper cues that were adapted from Ricchiute (1992) to create an at margin case regarding the companys ability to continue as a
6 The undergraduate students were enrolled in an auditing class at one of three universities. Students from each of the three universities were included in each of the experimental conditions. There were no statistical dierences in subjects responses across the three universities.

Method Subjects Two groups of subjects participated in the experiment: experienced and inexperienced. The experienced subjects were 64 in-charge auditors from an international public accounting rm who had an average of 3.5 years of experience. Incharge auditors typically perform a going-concern evaluation and their assessments are generally documented in the workpapers (Choo & Trotman, 1991; Libby & Trotman, 1993; Ricchiute, 1999). The inexperienced subjects were 35 undergraduate

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going concern.7 The cues were categorized as they would appear in audit workpapers under the following headings: Audit Planning, Cash, Accounts Receivable, Long-Term Assets, Long-Term Debt, Sales, Expenditures, Review of the Minutes, and Contracts, Commitments, and Contingencies (see Appendix). Following Ricchiute (1992), our experimental task included four types of cues: positive, negative, both, and neither. Using various types of cues served several purposes. First, a mix of cues is typical of information included in audit workpapers, and thus increases the realism of the task. Second, including some clearly positive cues (11 cues) and clearly negative cues (14 cues) provides a means of subsequently checking whether subjects understood and attended to the experimental materials. Third, cues that have both positive and negative aspects (14 cues) are an inherent part of the going-concern task. For example, as explained by Ricchiute (1992, p. 51), the cue The company will try to issue bonds next year has both positive and negative aspects; it is positive in that the company will have more cash, but it is also negative because of the additional burden associated with an increase in the companys debt. Finally, cues that are neither positive nor negative with respect to the going-concern task (9 cues) not only add realism to the task, but also allow us to control for order eects.8 While using this mix of cues served the design purposes described earlier, for reasons discussed later, our analysis is based on subjects self-reports of how they thought the cues they attended to aected the rms viability. Subjects in each of the two experience-level conditions were randomly assigned to either the

constrained or unconstrained processing conditions. All subjects were provided with instructions that briey described a medium-sized company and the nature of the audit engagement. They were also informed that they would subsequently make a going-concern judgment based on the workpaper information presented. The two processing conditions were administered in separate rooms. The only dierence between the two conditions was the manner in which the cues were presented. In the constrained processing condition, subjects were informed in advance that each heading and cue would be presented in sequence and shown only once on a monitor in front of the room. Each cue remained on the monitor long enough for subjects to read and comprehend each fact (as determined by pilot testing).9 Subjects were not permitted to take notes or to return to any cue shown previously. The total presentation time was approximately 8 min. In the unconstrained processing condition, subjects were given a page containing all of the headings and cues, and were allowed to process the cues in any manner they wished. Total processing time was held constant between this condition and the constrained processing condition described earlier. The page of cues was collected from the subjects before they made their going-concern judgments.10 After they viewed the cues, subjects in both the constrained and unconstrained processing conditions assessed the probability that the company

We conducted pilot testing to develop an at margin case in order to avoid a ceiling or oor eect on subjects judgments. Pilot subjects were PhD and MBA students who were former auditors with at least 3 years of audit experience. 8 We controlled for both primacy and recency order eects. We controlled for primacy eects by presenting cues that were neither positive nor negative with respect to the going-concern task at the beginning of the list. We controlled for recency eects by presenting positive and negative cues on an alternating basis at the end of the list.

9 Because the cues diered in length, we could not present them to subjects for a uniform duration of time. Instead, we performed pilot testing to determine how long it took to read and comprehend each cue while still attending to the task. We determined that to understand the meaning of the cue, it should be kept on the monitor long enough for a subject to read it aloud twice. In the experiment, we kept each cue on the monitor for this duration of time. 10 It is possible that processing on a monitor could be more dicult generally than reading from a page, but any eect due to such diculty should be the same for both experienced and inexperienced subjects. In contrast, our prediction is that the constrained processing condition causes a dierential eect on experienced and inexperienced auditors relative attention and judgments.

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would continue as a going concern.11 Subjects placed their going-concern judgments in envelopes and set them aside. Subjects then performed a cued-recall task. They were provided with category headings and asked to recall as many cues as they could. Subjects listed each cue they recalled on a separate line, and raised their hands when they had completed the recall task. When subjects raised their hands, the experimenter gave them an instruction sheet asking them to indicate whether they thought each cue they recalled was positive (indicating the company was more likely to continue), negative (indicating the company was less likely to continue) or neutral (does not aect whether the rm will continue). We asked subjects to indicate how they interpreted the cues they recalled because previous studies (e.g. Greenwald, 1968; Hastie & Pennington, 1989; Lingle & Ostrom, 1979; Moser, 1992) have shown that it is subjects interpretation of information rather than the experimenters classication that inuences subjects judgments. Moreover, because, by design, some cues had both positive and negative aspects, it was critical that our analysis be based on subjects interpretations of such cues. Subjects placed their completed recall instruments in a second envelope and set it aside. After all subjects completed the recall task, they were asked to make a second going-concern judgment, and to place their responses in a third envelope. Subjects were asked to provide a second going-concern judgment to determine whether the act of recalling cues changed their judg-

ments.12 All three envelopes were collected from the subjects, and this concluded the experiment.

Results We begin by testing H3 because the rst two hypotheses are embedded in H3, which predicts the overall pattern of going-concern judgments. We then test H1 and H2 to assess the reasoning underlying the overall pattern predicted in H3. H3 predicted that experienced auditors in the unconstrained processing condition would make more positive going-concern judgments than subjects in the other three conditions, and that in the other three conditions subjects going-concern judgments would not dier from each other. The pattern of results predicted by H3 is the nonsymmetrical ordinal interaction illustrated in Buckless and Ravenscroft (1990, Fig. 2, p. 938). We follow Buckless and Ravenscrofts (1990) recommendation to use contrast analysis to test for this pattern. Fig. 1 depicts subjects going-concern judgments. Using the contrast weights recommended by Buckless and Ravenscroft (1990, Table 4, p. 939) we nd that the overall pattern of results is consistent with H3.13 That is, the contrast is statistically signicant
The rst and second going-concern judgments are highly correlated (r=0.87, P < 0.001) and the results of the study are the same regardless of which judgment is used as the dependent variable. This indicates that the order of collection of the recall and the judgment data did not inuence the results. Thus, all results are presented in terms of the rst going-concern judgment only. 13 Contrast analysis is a renement of a conventional ANOVA. In contrast analysis the weights are based on a specic theoretical prediction, rather than being selected by default as in a conventional ANOVA. Contrast analysis is computed using the same sum of squares as a conventional ANOVA. However, in a conventional ANOVA, three orthogonal contrasts are performed, one for each of the two main eects and one for a specic type of interaction (i.e. a disordinal, crossover interaction with contrast weights 1, 1, 1, 1). When the predicted eect is entirely due to one experimental condition (i.e. experienced auditors in the unconstrained processing condition) being dierent from the other three conditions (which are approximately equal to each other), the appropriate contrast weights to use are 1,1,1,3 (Buckless & Ravenscroft, 1990, p. 939). This approach assigns all of the variance to this single contrast, rather than spreading it across the three contrasts described earlier for a conventional ANOVA.
12

11 Subjects responded on either a continue scale or a fail scale. If they thought the company would continue, they indicated their estimate of the probability that the company would continue (from 50 to 100%) on the continue scale. If they thought the company would fail, they indicated their estimate of the probability that the company would fail (from 50 to 100%) on the fail scale. We explained to subjects that probabilities from 0 to 50% were not included on either scale because a less than 50% chance of continuing (failing) would mean that the subject really thought the company would fail (continue). All analysis of going-concern judgments reported in the paper are based on the probability that the company would continue as a going concern.

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(F=6.42, P < 0.02), indicating that the going-concern judgments of experienced auditors in the unconstrained processing condition (mean=60%) exceed those of subjects in the other three conditions. Furthermore, a semiomnibus F-test indicates that,

consistent with the assumption of the contrast, the going-concern judgments of subjects in the other three conditions (means=51, 47, and 46%) are statistically indistinguishable from each other (F=0.37, P=0.69).

Fig. 1. Mean going-concern judgments of experienced and inexperienced auditors in constrained and unconstrained processing conditions.

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We now test the reasoning underlying H3 by testing H1 and H2. H1 predicted that experienced auditors going-concern judgments would be more positive in the unconstrained processing condition than in the constrained processing condition because they would be able to attend to relatively more positive cues in the unconstrained condition. We test this hypothesis by performing a path analysis examining whether the processing condition inuences experienced auditors relative attention to positive cues, which in turn inuences their going-concern judgments. We measure subjects relative attention to positive cues as the proportion of positive cues recalled (i.e. the number of positive cues recalled divided by the sum of positive and negative cues recalled) and refer to this measure as Relative Attention.14 Table 1 presents mean Relative Attention measures, the mean number of positive and negative cues recalled, and mean going-concern judgments for experienced and inexperienced auditors in each processing condition.15 We test the causal path hypothesized in H1 using three regressions. The rst is a univariate regression of subjects going-concern judgments on Processing Condition, which shows that, consistent with H1, experienced auditors made signicantly more positive going-concern judgments (t=1.6, P=0.055, one-tailed) in the unconstrained processing condition (mean=0.60) than in the constrained processing condition (mean=0.51). The second is a univariate regression of Relative

Attention on Processing Condition, which shows that, as expected, experienced auditors relative attention to positive information was signicantly greater (t=1.8, P < 0.04, one-tailed) in the unconstrained processing condition (Relative Attention=0.45) than in the constrained processing condition (Relative Attention=0.38). To complete the test of the causal path predicted in H1, we regressed subjects going-concern judgments on both Processing Condition and Relative Attention simultaneously. The results show that the eect of Relative Attention on experienced auditors goingconcern judgments is signicant (t=3.5, P < 0.01), while the eect of Processing Condition on goingconcern judgments drops to nonsignicance (t=0.95, P > 0.34) when the eect of Relative Attention is taken into account. These results indicate that the eect of processing condition on experienced auditors judgments was mediated by their relative attention to positive cues. That is, consistent with H1, it is the increase in relative attention to positive cues in the unconstrained processing condition that leads experienced auditors to make more positive going-concern judgments in that condition. H2 predicted that the processing condition would not aect inexperienced auditors goingconcern judgments because it would not inuence their relative attention to positive cues. This hypothesis was tested using the rst two regressions described earlier for experienced auditors.

To calculate this measure, we used subjects classication of the cues they recalled because, as explained earlier, previous studies have shown that it is the subjects interpretation of cues that aects their judgments. To verify that subjects understood the task and knew how various factors aect the rms viability, we examined how subjects classied cues designed to be clearly positive or clearly negative. Subjects almost never misclassied clearly positive cues as negative or clearly negative cues as positive. This was true for both experienced and inexperienced subjects, indicating that subjects understood and conscientiously attended to the experimental task. In addition to cues they classied as positive and negative, subjects also recalled cues that they viewed as neutral (i.e. cues that do not aect whether the rm would continue). Specically, experienced auditors recalled 6.0 (6.6) cues they viewed as neutral in the unconstrained (constrained) processing condition and inexperienced auditors recalled 3.5 (3.7) cues they viewed as neutral in the unconstrained (constrained) processing condition.

14

Because subjects judgments would not be inuenced by cues they viewed as neutral, such cues are not included in our analysis. We also analyzed the ex ante neutral cues to determine how subjects interpreted them. While experienced auditors recalled more of the ex ante neutral cues than inexperienced auditors, subjects in all conditions coded these cues similarly. Specically, subjects recalled a similar number of ex ante neutral cues in the constrained and unconstrained processing conditions and their interpretation of these cues as positive, negative, or neutral did not dier across processing conditions. 15 Consistent with previous literature demonstrating conservative information processing (e.g. Smith & Kida, 1991), both experienced and inexperienced auditors tended to recall more negative than positive information in all conditions. However, this overall tendency to recall more negative information does not relate to the main focus of our study, which is the differential eect that constrained processing has on experienced and inexperienced auditors attention and judgments.

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Table 1 Mean (standard deviation) of positive and negative cues recalled, relative attention measure, and going-concern judgments of experienced and inexperienced auditors in the constained and unconstrained processing conditions Positivea Cues Experience auditors Unconstrained processing Condition Constrained processing Conditons Inexperienced auditors Unconstrained processing Condition Constrained processing Conditons
a b

Negative Cues

Relativeb Attention

Going-concernc Judgment

9.2 (3.8) 6.6 (3.6)

11.8 (5.4) 10.6 (4.8)

0.45 (0.16) 0.38 (0.15)

0.60 (0.23) 0.51 (0.22)

5.7 (2.1) 5.4 (3.6)

8.2 (2.7) 8.7 (5.0)

0.41 (0.13) 0.40 (0.18)

0.46 (0.21) 0.47 (0.23)

Cue type is based on subjects classications of the cues they recalled. The measure of Relative Attention for each subject is the proportion of positive cues divided by the sum of positive and negative cues recalled. The mean of individual subjects proportions is reported here (not the proportion of the mean positive divided by the mean negative cues). c Going-concern judgment is the probability that the company will continue.

Consistent with H2, the rst univariate regression shows that inexperienced auditors going-concern judgments were not signicantly dierent (t=0.126, P=0.90) in the unconstrained (mean=0.46) and constrained (mean=0.47) processing conditions. Likewise, the second univariate regression shows that inexperienced auditors relative attention to positive information was not signicantly dierent (t=0.31, P > 0.75) in the unconstrained (Relative Attention=0.41) and constrained (Relative Attention=0.40) processing conditions. Thus, consistent with H2, processing condition did not aect either inexperienced auditors relative attention to positive information or their going-concern judgments. Because there was no eect of processing condition on inexperienced auditors going-concern judgments, there is no reason to test for the mediating eect of relative attention on judgments (i.e. no reason to perform the third regression performed for the experienced auditors earlier). Overall, the results above indicate that experienced auditors going-concern judgments were

more positive in the unconstrained processing condition because they were able to attend to relatively more positive information. Moreover, inexperienced auditors judgments did not dier across processing conditions because their relative attention to positive information did not dier across processing conditions. In combination with the results of H3, these results show that when experienced auditors are constrained from using their usual processing strategies, they do not perform the way they normally would when unconstrained, but instead perform more like inexperienced auditors.

Discussion This study examined whether constraining the processing of experienced auditors by forcing them to process information items in a pre-established sequence prevents them from processing information in their usual manner, and thereby alters their judgments. We examined this issue

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using a going-concern task, but expect our conclusions to apply to a variety of ill-structured decision tasks that require experienced auditors to perform a goal-oriented, directed evaluation of evidence. We found that constraining experienced auditors processing prevented them from attending to as much positive evidence as they did when their processing was unconstrained, and this resulted in lower going-concern judgments in the constrained processing condition. For comparison purposes, we also examined the relative attention to positive evidence and the going-concern judgments of inexperienced auditors. As expected, the processing condition manipulation did not aect either inexperienced auditors relative attention to evidence or their going-concern judgments. Finally, because constraining experienced auditors processing prevented them from using the very essence of their expert processing strategy, their going-concern judgments were statistically indistinguishable from those of inexperienced auditors. This study provides evidence regarding Krull et al.s (1993) and Trotman and Wrights (2000) speculations that forcing experienced auditors to process information sequentially when they are more accustomed to processing it simultaneously can have a detrimental eect on their judgments (i.e. it can cause them to perform like inexperienced subjects). As such, our results have potential implications for previous auditing studies that constrained auditors information processing in a way that is inconsistent with their normal processing strategies. Phillips (1999) and Ricchiute (1992) are two studies that used the same experimental control technique used in the constrained processing condition of the current study (i.e. requiring subjects to view the evidence items in a pre-established sequential order without being able to reorganize or revisit the cues). Our study extends their studies by manipulating the processing condition to be either constrained or unconstrained to demonstrate the importance of this factor. Like the current study, Ricchiute (1992) examined auditors going-concern judgments. Because his research question concerned the eect on judgment of two dierent ways of organizing audit

workpapers (i.e. causal order versus workpaper order), the processing constraint was necessary to attain experimental control and to answer the research question. However, to the extent that experienced auditors would naturally reorganize evidence and perform a goal-oriented evaluation of that evidence, it might not be necessary to change how workpapers are ordered on actual audits. Phillips (1999) examined auditors judgments in a workpaper review task. His research question was whether viewing riskier items earlier in the review process would inuence the interpretation of ambiguous cues viewed later. Again, to achieve experimental control to answer his research question, Phillips needed to restrict the order in which his experienced auditors evaluated the evidence items. However, to the extent that auditors in actual audit settings normally review high-risk accounts earlier in the review process, it would not be necessary to change the order in which workpapers are reviewed. Our study also has potential implications for studies of expertise. Libby (1995) and Libby and Luft (1993) propose guidelines to help predict and explain how experienced auditors superior knowledge aects their performance. They point out that it is critical to consider the knowledge necessary to perform the experimental task and when and how that knowledge is acquired. They also note the importance of considering the process by which auditors knowledge is brought to bear on their judgments. Although many previous auditing studies (e.g. Abdolmohammadi & Wright, 1987; Bonner, 1990; Frederick & Libby, 1986) have adopted the rst suggestion (i.e. selected an experimental task that required superior knowledge), little attention has been paid to how experienced auditors processing strategies inuence their judgments. The current study demonstrates that in addition to selecting an expert task that requires superior knowledge, it is critical to consider whether the experimental procedures allow experienced auditors to process evidence in their usual manner. In our study, experienced auditors knowledge and the task they were asked to perform were both held constant across the two processing condi-

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tions. The only factor that diered was the manner in which they were permitted to process the evidence. While experimentally manipulating processing condition (constrained versus unconstrained) inuenced experienced auditors attention to information and their going-concern judgments, it had no eect on inexperienced auditors attention or judgments. These results reect the fact that the constrained processing condition is incompatible with experienced auditors natural processing, but is more compatible with inexperienced auditors processing. Thus, consistent with the guidelines proposed by Libby (1995) and Libby and Luft (1993), our results demonstrate the importance of considering how experienced auditors normally process evidence to ensure that the experimental procedures adopted do not inadvertently prevent such processing, resulting in experienced auditors performing like inexperienced ones. Finally, our results show that relative attention to mitigating factors mediated the relation between the processing condition and experienced auditors judgments. However, it is possible that in addition to attending to a greater number of mitigating factors (as documented in this study), attention to mitigating factors reduces subjects relative weighting of the negative information to which they attend. Although our study was not designed to assess the relative weights subjects placed on positive and negative cues, such weights could potentially add explanatory power beyond the number of positive versus negative cues examined in this study. This additional aspect of the going-concern judgment process could be investigated in future studies.

Appendix. Cues used in experiment Note: The design of the experiment included four types of cues: 11 cues that were clearly positive (+), 14 cues that were clearly negative (), 14 cues that have both positive and negative aspects (B), and 9 cues that are neither positive nor negative with respect to the going-concern task (N). These classications are indicated below. However, subjects own classications of the cues they recalled are used in data analysis, because it is subjects interpretations of the cues that are expected to drive their judgments. AUDIT PLANNING Inherent risk is low. Control risk is low. Allowable detection risk is high. The preliminary estimate of materiality is moderate. The company will report a net loss for the second consecutive year. CASH There are various arrangements with nancial institutions for compensating balances. The companys current ratio is the lowest in the industry. A conrmation veried that one of the companys bank accounts is overdrawn.

N N N N

N N

ACCOUNTS RECEIVABLE All trade receivables more than 30 days old have been factored. + The number of days sales in receivables is lower than in any of the previous ve years. + There are no trade-receivable accounts more than 90 days old. B LONG-TERM ASSETS + Unused xed assets are readily marketable. B The company plans to delay scheduled maintenance on some of its productive xed assets. B The replacement cost of xed assets is not fully insured. B The company is operating at 70% capacity. A patent for a unique production process expires next year.

Acknowledgements We are grateful to KPMG Peat Marwick for nancial support to Jennifer Joe through the PhD Project. We also appreciate the comments of workshop participants at Duke University, the University of Connecticut, the University of Iowa, New England Behavioral Accounting Research Series (NEBARS), and the University of Pittsburgh on earlier versions of the paper.

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LONG-TERM DEBT + The debt-to-equity ratio is down slightly this year. B A director has agreed to accept deferred payment on a loan he made to the company. + The company has no bond indebtedness outstanding. SALES + Total revenues rose 5% over last year. The companys market share has declined. EXPENDITURES Results of tests of controls indicate that projected error did not exceed tolerable error for any expenditures. Substantive tests did not reveal any problems with reported expenditures. The company postponed a consulting project related to new product development. The company plans a 50% reduction in budgeted research and development expenditures.

The companys largest customer, representing 30% of sales, has not placed an expected order. The company sought to nance the purchase of a subsidiary that had signicant NOL carry-forwards. Domestic demand for wire and cable products is down. The companys production employees voted not to strike. CONTRACTS, COMMITMENTS AND CONTINGENCIES The company defaulted a payment on its only bank loan. The company renegotiated its only bank loan. Loan covenants restrict the disposal of some xed assets. The lawyers representation letter indicates no current litigation outstanding against the company. A newspaper clipping indicates the company may be sued for patent infringement. There were no violations of standards requiring disclosure of a loss contingency. The company entered into an unprotable long-term purchase commitment for copper. The company entered into a long-term contract to supply copper tubing to a new domestic customer.

+ +

N B B

B +

REVIEW OF THE MINUTES B The company will try to issue bonds next year. B The company contemplates an initial public oering of preferred stock next year. Competition from foreign imports has risen sharply. N Two competitors reported net losses last year. + The company is negotiating a long-term contract to ship copper products to a Pacic rim country. The president has accepted a job oer from a competitor, and a successor has not been found. In midyear, there was a two-day work stoppage related to employee fringe benets. B A dividend has not been declared in four consecutive quarters. B A personal injury insurance policy was canceled. The company was denied credit from a copper supplier. The vice-president for manufacturing announced his resignation eective in six months.

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