Reducing Underreporting by Aggregating Budgeted Time

Abstract

Underreporting, or reporting fewer hours than actually worked, is a prevalent behavior among auditors at all levels. Underreporting can result in negative consequences such as tight budgets and reductions in future audit quality. In this paper, I propose a low cost reporting procedure that reduces underreporting. Using an experiment, I document that individuals with incentives to underreport report more accurately when reporting aggregated—relative to disaggregated—time. In contrast, when individuals do not face underreporting incentives aggregation does not influence reporting. Building on mental accounting theory, I also provide evidence suggesting that the utility loss that individuals mitigate by underreporting mediates the relation between the level of aggregation, underreporting incentives, and the degree of underreporting. In a second experiment, I document another reporting procedure—percentage reporting—that firms can use in concert with aggregation to mitigate the loss of data richness that results from aggregation. This study provides important insights to audit firms, partners, managers, and regulators who rely on audit hours for budgets, measures of staff efficiency, and measures of audit quality.