Academic journal article Auditing: A Journal of Practice & Theory

The Effects of Small Monetary Incentives on Response Quality and Rates in the Positive Confirmation of Account Receivable Balances

Academic journal article Auditing: A Journal of Practice & Theory

The Effects of Small Monetary Incentives on Response Quality and Rates in the Positive Confirmation of Account Receivable Balances

Article excerpt

The AICPA Professional Standards (AICPA 1997, AU330) considers the confirmation of accounts receivable balances to be a generally accepted auditing procedure. A major drawback to the procedure is that auditors are often confronted with high nonresponse rates that can result in time-consuming alternative auditing procedures. Several research studies have found that response rates can be significantly improved with the use of small monetary incentives and the AICPA has encouraged the use of incentives in a document titled: Auditing Procedure Study: Confirmation of Accounts Receivable (AICPA 1996). However, auditing researchers have not studied the potential effects of monetary incentives on the "quality" of confirmation responses. This study focuses on this issue by investigating the relationship between monetary incentives and two relevant dimensions of response quality--misstatement detection rate and self-reported completion time.

Data were gathered by mailing 7,200 positive confirmations to retail and classified advertising customers of four large metropolitan newspapers. The sample consisted of a cross section of commercial businesses, governmental entities, and not-for-profit organizations. One-third of the confirmations contained a seeded error that overstated the account balance, one-third that understated the account balance, and one-third was not intentionally misstated. Each of the three groups was further subdivided such that one-third received a confirmation with a quarter incentive, one-third received a confirmation with a dollar incentive, and one-third received a confirmation with no incentive. Consistent with prior research, the use of the monetary incentives significantly improved response rates and a quarter incentive proved as effective as a dollar. However, when monetary incentives were used, there was a significant reduction in both dimensions of response quality and the quality effect of the quarter and dollar was not significantly different. This result occurred for both the understated and overstated accounts. Response quality was higher for overstated than understated accounts and the response rate also was higher for overstated than understated accounts.

While this study supports a significant body of prior research regarding the response-enhancing effectiveness of small monetary incentives, it has produced some disturbing evidence related to the negative effects of monetary incentives on confirmation response quality. It must be emphasized that definitive conclusions, much less policy decisions, should not be made based upon the limited amount of existing research evidence. Until further research is concluded, the auditing profession should take a "wait and see" approach regarding the use of monetary incentives in the audit confirmation process.

INTRODUCTION

The Auditing Standards Division of the American Institute of Certified Public Accountants (AICPA) has encouraged the use of incentives in an effort to improve confirmation response rates. Specifically, in a document titled Auditing Procedure Study: Confirmation of Accounts Receivable (AICPA 1996), the use of small monetary incentives is included among a variety of practical suggestions for improving the effectiveness and efficiency of the confirmation procedure.

While prior auditing research has produced evidence suggesting that confirmation response rates can be improved with small monetary incentives (e.g., Engle 1991), research in nonaccounting disciplines reports disturbing information suggesting that the quality of survey-based responses can deteriorate when small monetary incentives are used (e.g., Hansen 1980; Schneider and Johnson 1994, 1995). A limited number of studies have focused on response quality in an auditing confirmation context (e.g., Armitage 1990; Caster 1990), but none of these investigations examined the potential effects of small monetary incentives on quality. The current study was designed to provide information regarding this issue. …

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