Does level of CPA firm assurance affect investing decisions

Purpose The purpose of this paper is to examine whether the level of assurance associated with financial statements affects individual investing decisions. Design/methodology/approach A between-subjects behavioral experiment is used with a control condition and three treatment conditions involving different levels of auditor assurance. Findings As the level of assurance progresses from none to compilation to review to audit, investors’ perceptions of risk associated with the investment decrease. However, the type of certified public accounting (CPA) firm association did not seem to influence the amounts that individuals were willing to invest. Research limitations/implications The results for the investment scenario in this paper cannot necessarily be generalized to other types of investment scenarios. Also, individuals often obtain more information about an investment prospect than what appeared in this study’s questionnaire. Another limitation is that this study did not have economic incentives such as suffering financial losses from poor investing decisions. Practical implications Findings about risk assessments suggest that companies might be willing to pay more for greater levels of CPA firm assurance, but the results pertaining to amounts invested suggest that companies need not consider incurring additional costs to obtain more assurance. Originality/value No prior study has unambiguously examined the effects of compilations, reviews and audits on investing decisions. This study explores this issue by conducting an experiment whereby investing judgments are compared across groups who received information about one of four levels of auditor assurance.