The Effect of Client Lies on Auditor Memory Resistance and False Memory Acceptance

Abstract

SUMMARY In this study, I examine the conditions that moderate auditor resistance toward and susceptibility to believing client-provided lies. In particular, I predict that auditors who cannot directly refute incorrect management explanations with their own evidence-related memories are susceptible to the misinformation effect. This effect describes a phenomenon where an individual recalls false memories, based on client lies, instead of his/her own real memories. I use a laboratory experiment involving professional auditors who must compile industry-related evidence to corroborate an invalid management explanation. As expected, I find that auditors with better-developed evidence memories provide lower evaluations of management credibility and explanation sufficiency when presented with a blatantly incorrect explanation. When subsequently prompted to access the related information, auditors with poorly developed evidence memories give responses that are consistent with management-provided false memories instead of their own previously gathered evidence memories. Auditors identifying the incorrect explanation did not succumb to the misinformation effect and exhibited recall more consistent with their own evidence memories. Overall, results show that client discussion can produce a delayed effect by inducing a form of memory error when the auditors subsequently retrieve evidence stored in their memory. Data Availability: Contact the author for data availability.

Systems-Thinking in Complex Audit Situations

“…The three studies we summarize here, however, successfully prompted auditors to use systems-thinking skills in experimental laboratory tasks. Participants were upperlevel accounting students (Brewster 2011) and professional auditors (Brewster 2016;Bucaro 2019). In this research, certain participants (hereafter called systems-thinkers) received a brief training tutorial that emphasized system dynamics concepts using general non-business topics (e.g., blowing up a balloon or filling a bathtub) and/or business topics unrelated to the audit issue to which they would soon be exposed.…”

“…All participants in each study were exposed to identical study-specific client and industry information. They made audit-related judgments including whether and how inherent and control risks affect processes and financial statements in a complex environment (Brewster 2011; Bucaro 2019), whether management is credible and their information is reliable (Brewster 2011(Brewster , 2016, and whether large potential financial misstatements are likely to impact investors' decisions when reason suggests that the misstatements should have no impact (Bucaro 2019).…”

“…The three auditing studies summarized here are: "How a Systems Perspective Improves Knowledge Acquisition and Performance in Analytical Procedures" (Brewster 2011), "The Effect of Client Lies on Auditor Memory Resistance and False Memory Acceptance" (Brewster 2016), and "Enhancing Auditors' Critical Thinking in Audits of Complex Estimates" (Bucaro 2019). Together, they examine how systems-thinking skills enhance the way individuals acquire and build knowledge that ultimately improve their information processing and audit decisions.…”

External Auditors' Judgment and Decision Making: An Audit Process Task Analysis

“…Brewster () investigates how client lies affect an auditors' evidence‐based recollection and whether a decision‐aid can assist auditors in resisting these lies. Results show that auditors provided with a decision‐aid to help them understand a complex situation better are less susceptible to managements' lies and provide lower evaluations of management credibility.…”

An examination of auditor hypothesis testing strategies in ‘tone at the top’ evaluations: Evidence of diagnostic knowledge structures

“…Although the audit literature examines how auditors evaluate behavioural attributes, such as competence, of internal and other external auditors (e.g., Brown, 1983; Han et al, 2011; Harding & Trotman, 2009; Kennedy & Peecher, 1997; Margheim, 1986; Schneider, 1984; Tan & Jamal, 2001; Tan & Jamal, 2006), considerably less research has examined how auditors test such characteristics of client management. Research that has examined characteristics of client management (e.g., Brewster, 2016; Brewster et al, 2021; Hirst, 1994) has focused on the evaluation of evidence made available to auditors, not the steps auditors take to actively generate such evidence. Better understanding these steps can enable development of decision aids to assist in the crucial evidence gathering process.…”