The Effect of Partner Communications of Fraud Likelihood and Skeptical Orientation on Auditors' Professional Skepticism

Abstract

SUMMARY:We investigate the effect of partner communication on the level of professional skepticism in auditor judgments and actions within the context of the fraud brainstorming discussion meeting where the partner is of the view that there is a low likelihood of fraud. Across two studies, we examine the effect on professional skepticism of the partner's communication on the likelihood of fraud (making their own view known, making management's view known, or not making any view known) and the skeptical orientation being encouraged (outward orientation toward the veracity of management representations and/or inward toward the fallibility of the auditor's judgment processes). We find that auditors exhibit higher levels of professional skepticism when the partner expresses management's view, rather than their own view or no view, that there is a low likelihood of fraud. We also consider what causes these differences. Emphasizing an inward skeptical orientation was not found to be more effective in encouraging professional skepticism in audit judgments than emphasizing an outward skeptical orientation. Importantly, emphasizing both an inward and outward skeptical orientation was more effective in encouraging professional skepticism in audit actions than emphasizing only an outward orientation.

Professional skepticism: The combined effect of partner style and team identity salience

“…Interestingly, language used when communicating a task influences the demonstration of skepticism in different settings. For example, accountability to a partner who stresses the importance of being skeptical encourages skepticism (Carpenter & Reimers, 2013), and auditors exhibit higher levels of skepticism when the partner expresses management's view that there is a low likelihood of fraud (Harding & Trotman, 2017). Accountability is the expectation of being called upon to justify one's beliefs (Kennedy, 1993;Lerner & Tetlock, 1999;Tetlock, 1992), and prior research has considered how individuals react when being held accountable in a range of settings.…”

Comments of the Auditing Standards Committee of the Auditing Section of the American Accounting Association on International Auditing and Assurance Standards Board Exposure Draft, Proposed International Standard on Auditing 220 (Revised):Quality Management for an Audit of Financial Statements

“…We support the material provided in ED-220 on the appropriate exercise of professional skepticism in managing quality at the engagement level. Research provides ample evidence that professional skepticism is a requirement for making appropriate professional judgments and quality decisions in audits (Carpenter and Reimers 2013;Hurtt, Brown-Liburd, Earley, and Krishnamoorthy 2013;Brazel, Jackson, Schaefer, and Stewart 2016;Harding and Trotman 2017;Brazel, Gimbar, Maksymov, and Schaefer 2018;Eutsler, Norris, and Trompeter 2018). We highlight a few expositional issues and offer a few minor suggestions for the Board's consideration.…”

Wat wetenschappelijk onderzoek ons leert over de fraude-detectievaardigheid van de controlerend accountant

“…Ook is het van invloed hoe de partner de kickoff meeting begint. Als de partner bijvoorbeeld vertelt dat het management van mening is dat het frauderisico laag is, wordt er meer professionele en kritische input van de deelnemers verkregen (Harding and Trotman 2017). Ook door een simpele korte instructie blijken accountants beter in staat frauderisico's uit earnings calls van beursgenoteerde bedrijven met analisten te identificeren (Hobson et al 2017).…”