Good financial statement audits are essential to protect investors, and skeptical auditors are essential to good audits. A recent study reveals that skepticism is discouraged among listeners and that there are unexpected challenges and opportunities to foster skepticism among listeners in the future.
“In auditing, skepticism is having the intelligence to identify red flags and the courage to investigate them,” said Joe Brazel, lead author of the study and Jenkins Distinguished Professor of Accounting at Poole College. of Management from North Carolina State University. âWithout skepticism, you will not identify the fraud.
âBut skepticism is not free. Investigating red flags is expensive – you can go over budget. This can strain relationships with customers. This delays extra work. And in the end, most red flags have innocent explanations. “
The researchers called the skepticism that was reasonable, but came at a cost and did not reveal any fraud or error in the financial statements, as “costly skepticism.”
“We know that costly skepticism can lead to professional sanctions for listeners,” says Brazel. “With this study, we wanted to see whether rewarding costly skepticism makes people more likely to find and follow red flags. And we found that under the right circumstances, it can make a positive difference, but it can also make a difference. turn against us. “
The study consisted of three experiments.
In the first experiment, researchers recruited 112 practicing auditors who had 3-5 years of professional experience. All participants were given an audit scenario, with a minor, moderate, or severe red flag present. Half of the study participants were told at the start of the scenario that they had been rewarded for engaging in costly skepticism earlier at work. All study participants were then invited to review the information contained in the scenario.
âWe wanted to see if a previous award for skepticism had influenced a participant’s ability to identify the red flag and the likelihood of them acting on it,â Brazel said. âCommon sense would tell you that participants who were rewarded for costly skepticism would be more likely to take action. This is not what we found.â
Participants who had been rewarded for costly skepticism were actually less likely to act on red flags. Through a post-experience questionnaire completed by participants, researchers learned that people who had been rewarded for costly skepticism were surprised.
âBasically they thought they were lucky with their reward for costly skepticism and decided to quit when they were early,â says Brazel. “The reward backfired on him.”
The second experiment was similar to Experiment 1, but it only included 36 professional auditors and 52 graduate students in accounting. The professional listeners in Experiment 2 responded similarly to the participants in Experiment 1. However, graduate students who were rewarded for costly skepticism were actually more likely to follow the red flags.
âIn short, Experiment 2 showed that graduate students weren’t surprised to be rewarded for engaging in costly skepticism,â Brazel said. “This tells us that the surprise and ‘giving up while ahead’ that we saw from professional listeners in Experiments 1 and 2 was learned behavior. Practicing listeners are sometimes discouraged from being skeptics. “
Experiment 3 involved 71 undergraduate and graduate accounting students. The scenarios remained the same, but half of the study participants were told that their supervisor consistently supported costly skepticism. This has led to a more pronounced increase in red flag identification and investigations.
“This tells me that if we support the skepticism from the start with the next generation of listeners, we can expect these listeners to do the right thing – when they see a warning sign of fraud, they investigate it.” Says Brazel.
âListeners need to feel supported in identifying and pursuing red flags, otherwise the workplace essentially trains them to avoid investigating potential issues,â says Brazel. “This matters because if the red flags are not investigated, no fraud is detected and investors are hurt.”
The article “Do rewards encourage professional skepticism? It depends” is published in The accounting review.
Financial pressure makes CFOs less likely to report potential fraud
Joseph F. Brazel et al, Do Rewards Encourage Professional Skepticism? It depends, The accounting review (2021). DOI: 10.2308 / TAR-2019-0361
Provided by North Carolina State University
Quote: Challenges of Encouraging Skepticism Among Financial Statements Auditors (2021, August 19) Retrieved September 21, 2021 from https://phys.org/news/2021-08-skepticism-financial-statement-auditors.html
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