Firm-Level Formalization and Auditor Performance on Complex Tasks

Abstract

ABSTRACT Formalization has been studied in a variety of contexts and continues to be a relevant and important construct. This study compares the performance of auditors from two public accounting firms with different degrees of formalization in their audit decision processes on four different tasks characterized by low or high levels of complexity. Results indicate that performance depends on the interaction between task complexity and degree of firm formalization. For the two less-complex tasks, auditors from both firms demonstrate comparable performance. In contrast, for the two relatively complex tasks, auditors from the less formalized firm outperform auditors from the more formalized firm. We argue that the use of less formalized processes affords increased opportunities for auditors to learn underlying concepts and to exercise judgment. These results contribute to the existing body of research, indicating that the decision to employ different levels of formalization can significantly impact the development of a firm's human resources.