Evaluating the Effects of Auditor Expertise on the Accuracy of Complex Financial Reporting Standards

Posted: Oct 24, 2022

• Ember Wells
• Vivienne Davis
• Arianna Rivera

Abstract

The landscape of financial reporting has undergone significant transformation in recent decades, characterized by the proliferation of complex accounting standards that require substantial professional judgment in application. Standards such as ASC 606 (Revenue from Contracts with Customers) and ASC 842 (Leases) represent paradigmatic shifts from rules-based to principles-based accounting, demanding sophisticated interpretation and application by financial statement preparers and auditors alike. This evolution has raised critical questions about the capacity of auditing professionals to consistently apply these standards accurately, particularly given the cognitive demands inherent in interpreting principles-based guidance. While the auditing literature has extensively documented the importance of auditor expertise generally, the specific mechanisms through which expertise influences accuracy in complex standard application remain inadequately understood. Our research addresses this gap by examining the cognitive foundations of auditor expertise in complex standard interpretation. Traditional audit quality research has relied predominantly on outcome-based measures and archival data, which while valuable, cannot illuminate the cognitive processes underlying professional judgment. We introduce an innovative methodological approach that bridges neuroscience and auditing research, employing functional near-infrared spectroscopy (fNIRS) to monitor neural activity during audit