Improving Experienced Auditors’ Detection of Deception in CEO Narratives

Abstract

We experimentally study the deception detection capabilities of experienced auditors, using CEO narratives from earnings conference calls as case materials. We randomly assign narratives of fraud and nonfraud companies to auditors as well as the presence versus absence of an instruction explaining that cognitive dissonance in speech is helpful for detecting deception. We predict this instruction will weaken auditors’ learned tendency to overlook fraud cues. We find that auditors’ deception judgments are less accurate for fraud companies than for nonfraud companies, unless they receive this instruction. We also find that instructed auditors more extensively describe red flags for fraud companies and more accurately identify specific sentences in narratives that pertain to underlying frauds. These findings indicate that instructing experienced auditors to be alert for cognitive dissonance in CEO narratives can activate deception detection capabilities.

The Information Role of Earnings Conference Call Tone: Evidence from Stock Price Crash Risk

“…Since the 1990s, earnings conference calls have emerged as an important channel for voluntary corporate disclosures (Bushee et al 2003). These calls reduce information asymmetry between firms and investors (Brown et al 2004;Matsumoto et al 2011), and provide useful information to financial market participants such as sell-side and buy-side financial analysts, individual investors and auditors (e.g., Hobson et al 2017;Jung et al 2016;Matsumoto et al 2011). Previous research highlights that attributes of these calls (including their tone) are informative for investors.…”

The Information Role of Earnings Conference Call Tone: Evidence from Stock Price Crash Risk

“…Since the 1990s, earnings conference calls have emerged as an important channel for voluntary corporate disclosures (Bushee et al 2003). They reduce information asymmetry between firms and investors (Brown et al 2004;Matsumoto et al 2011), and provide useful information to financial market participants, such as sell-side and buy-side financial analysts, individual investors and auditors (e.g., Hobson et al 2017;Jung et al 2016;Matsumoto et al 2011).…”

Auditing Research: A Review of Recent Research Advances

“…The study conducted by Hobson et al (2017) documented that instructing experienced auditors to be alert for cognitive dissonance in CEO narratives has the potential to increase their deception detection capabilities. Ge et al (2017) assessed the costs and benefits of exempting firms from auditor oversight of internal effectiveness disclosures, documenting higher costs due to non-remediation and failure to disclose ineffective internal controls.…”