SUMMARY: This paper examines the impact of mood on the hypothesis generation and ethical judgments of auditors. Prior psychology research documents different effects of negative and positive mood on information processing such that negative (positive) mood leads to more systematic (heuristic) processing (e.g., Forgas 1995a; Bless 2000). Theoretical accounting research (Gaudine and Thorne 2001) proposes a positive relation between positive mood and ethical decision‐making. Based on this research, we predict that negative (compared with positive) mood will enhance performance on a hypothesis generation task and impair performance on two ethical tasks. These predictions are tested in an experiment in which auditors perform an analytical procedures task involving the generation of explanations for fluctuations in financial ratios and two ethical tasks involving the truthful reporting of information. Consistent with predictions, the results show that auditors' judgments are influenced by their mood state. Specifically, auditors in a negative (compared with a positive) mood generated more correct explanations for fluctuations in financial ratios, but made less ethical judgments. The implications of these results are discussed, and suggestions for future research are offered.

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