Auditors told to think like investors rate CEO crimes as more material

About 109 of the 163 respondents came from audit ^[14]. That makes the comparison mostly auditors against auditors: people with similar training, sorted into an "auditor" role or an "investor" role ^[4]. The design suits the question. Had the investor group been outsiders, a difference could simply reflect what each side knows about accounting. Holding background roughly constant isolates the role as the variable, provided the audit professionals were spread evenly across both groups. The phys.org account does not say how respondents were assigned or how large the difference between the groups was ^[4].

So the summary supports a direction. In the investor role, auditors were significantly more likely to rate corporate leaders' crimes as material to the investing public, according to the phys.org report on the Poole research ^[1]. In the auditor role, respondents more often treated leaders' illegal acts as having little bearing on their firms' financial statements, "while investors believe there is a strong connection between a CEO's illegal behavior and the company's performance," the paper states ^[5].

The direction matters because of how the standard is written. Under PCAOB auditing standards, information is material if there is a "substantial likelihood" that it "significantly alters the 'total mix' of information made available" to a "reasonable investor" ^[6]. The test is framed from the investor's side. When trained auditors move to that side and their ratings rise, professional habit, more than the definition, appears to set the threshold.

Taylor described that habit as quantitative. She recalled a paper arguing the Enron fraud "wasn't material because it was such a big company and millions of dollars wasn't material from an auditor's perspective, if you look at it as a quantitative percentage of the business" ^[10]. "But investors think it matters because it speaks to how well they can trust management," she said ^[10].

She also named the incentive. "There's fear that if we have to know all kinds of other laws and rules, we're going to be held responsible for this person's bad behavior if we don't report it," said Taylor, who is a certified public accountant ^[7][12]. "But if we report it, we're imperiling our relationship with the client. That's the tension, and it all comes back to the initial setup of how auditors are paid by their clients." ^[7] Because the audited company pays the auditor, she called the arrangement "a built-in independence issue" ^[11].

Taylor doubts the correction can come from inside the profession. "Psychologically, once people are in that auditor role, I don't know if they can really take themselves out of it," she said. "They're trained as auditors, so they think a certain way." ^[9] She suggests asking a focus group of investors whether they see a problem ^[9].

The study cannot say what practicing investors would think. Its investors were survey respondents given a role, and most of the pool came from audit ^[3][4]. A survey also records judgments made on paper, so it cannot show whether auditors would rate a CEO's illegal acts the same way when signing an actual audit opinion.