[PDF] - State of the Ar t Re se ar c h Re late d to Auditor Pr ofe PDF Document

SLIDE 1

12/2/2015 1

State of the Ar t Re se ar c h Re late d to Auditor Pr

fe ssional Ske ptic ism

Jose ph Br aze l Nor th Car

lina State Unive r

sity T ammie Sc hae fe r Unive r sity of Missour i-Kansas City 2013 - 2015

T ask

 Summa rize a c a de mic re se a rc h in the a re a o f a udito r

pro fe ssio na l ske ptic ism (he re a fte r, PS) fro m 2013 to 2015

 59 to ta l studie s ide ntifie d!  I

nc lude d:

Co mmissio ne d studie s / Synthe se s Pub lishe d pa pe rs Unpub lishe d pa pe rs (wo rking pa pe rs)

* Pa pe rs will b e c o lo r-c o de d thro ug ho ut the pre se nta tio n

SLIDE 2

12/2/2015 2

Cate gor ie s of Re se ar c h

Co mmissio ne d Re se a rc h / Synthe se s I

nc e ntive s

T

ime

Mindse t / Pro mpts (I

nde pe nde nc e o f Mind / Ob je c tivity)

E

nviro nme nta l & Co nte xtua l F a c to rs

Co mpe te nc e (F

ra ud De te c tio n & Othe r)

T

ra its (I nte g rity, F

rtitude , & E

xpe rie nc e )

Commissione d Re se ar c h / Synthe se s Ne lso n (2009) Auditing Pra c tic e s Bo a rd (2010) Hurtt e t a l. (2013) Glo ve r a nd Pra witt (2014)

SLIDE 3

12/2/2015 3

Pro fe ssio na l Ske ptic ism: I nte ra c tio ns a nd Co nte xtua l F a c to rs (So urc e : I AASB dra ft I T C)

E thic s Standar ds

(IE SBA Code )

E duc ation Standar ds

(IE Ss)

ISQC 1 Auditor s’ Char ac te r istic s

Inde pe nde nc e of mind
Obje c tivity
Compe te nc e
E

xpe r ie nc e

Inte g r

ity

F
r

titude

Auditor s’ De c ision Making

E

xe r c ise of:

Pr
fe ssiona l Ske ptic ism
Pr
fe ssiona l Judg me nt
Due c a r

e

Doc ume nta tion

Dir e c t Influe nc e r s

E

duc a tio na l Institutio ns

Me mb e r Bo die s
F

ir ms/ Ne twor k of F ir ms

Standar

d Se tte r s

Audit Co mmitte e s/ T

CWG

Ove rsig ht

Autho ritie s

Re gulator

s

Manage me nt

Auditing Standar ds

(ISAs)

F ir m- Spe c ific F ac tor s

Inc e ntive s
F

ir m Cultur e

T

e a m Dyna mic

Sta ffing
T

ime

Supe r

vision & On- the - Job T r a ining

E nvir

nme ntal and

Conte xtual F ac tor s

Busine ss E

nviro nme nt

L

a w a nd Re g ula tio n

Culture

Big Pic tur e Obse r vations

Mo st studie s b e ing c o nduc te d a re e xpe rime nta l /

US a udito rs o r da ta fro m US c o mpa nie s (78%)

Mo re inte rna tio na l re se a rc h / q ua lita tive me tho ds

Ma ny unpub lishe d pa pe rs – this is a n impo rta nt,

time ly issue re se a rc he rs a re a tte mpting to ta c kle

Mo st o f the pa pe rs o n fra ud de te c tio n a re

pub lishe d

SLIDE 4

12/2/2015 4

Big Pic tur e Obse r vations

L

ts o f re se a rc h sta rting to e xa mine PS a s a tra it o r

a udito r c ha ra c te ristic (se ve ra l wo rking pa pe rs)

Ro le o f sc re e ning a nd mo nito ring

Re se a rc h o fte n a ims to e nha nc e a udit pra c tic e ,

no t ne c e ssa rily e nha nc e a udit re g ula tio n.

Big Pic tur e Obse r vations

Ma jo rity o f studie s de fine PS a s: a q ue stio ning mind

… c ritic a l a sse ssme nt o f a udit e vide nc e .

But the me asur

e me nt o f PS va rie s tre me ndo usly

b a se d o n the study’ s c o nte xt:

 Asse ssing a n a c c o unt a s mo re risky Co lle c ting mo re e vide nc e / spe nding mo re time /

se a rc hing fo r inc o nsiste nt e vide nc e (c ha ng ing NT E

f

te sting , le ss SAL Y)

 Cha lle ng ing a n a g g re ssive a c c o unting tre a tme nt  E

stima te s o f a c c o unts tha t diffe r fro m c lie nt e stima te s

SLIDE 5

12/2/2015 5

Big Pic tur e Obse r vations

 Mo st studie s lo o k a t wha t c a use s var

iation in PS judg me nts

r PS a c tio ns (le ss re se a rc h o n a c tio ns)

E

xa mple s: I nhe re nt Risk a nd Ma na g e me nt Pe rso na litie s L ike liho o d o f I nve nto ry Va lua tio n Pro b le m (L

w to Hig h)

OR

Audito r K no wle dg e Do e s the a udito r g a the r a dditio na l, e xte rna l e vide nc e to te st ma na g e me nt e stima te s (Ye s o r No )

Inc e ntive s

 E

va lua to rs ra te sta ff b a se d o n the o utc o me o f ske ptic a l b e ha vio r vs. whe the r the ske ptic a l b e ha vio r wa s a ppro pria te (Bra ze l e t a l. 2015) K

e e ping the supe rio r “in the lo o p” o r g a ining the ir a ppro va l b e fo re e ng a g ing in ske ptic a l b e ha vio r did NOT mitig a te the pro b le m

 So urc e s o f pre ssure tha t inc re a se / de c re a se PS (We ste rma nn e t a l.

2015)

I

nc re a se : so urc e s tha t ho ld a udito rs a c c o unta b le fo r q ua lity (inspe c tio ns / wo rkpa pe r re vie ws)

De c re a se : so urc e s tha t pro mo te de fe nsib ility o r pro fita b ility

(time b udg e t pre ssure / e xc e ssive do c ume nta tio n)

SLIDE 6

12/2/2015 6

Inc e ntive s

 T

a ke a wa ys:

T

he e va lua tio n o f PS ma y de pe nd mo re o n o utc o me tha n pro c e ss.

Ca n this e ro de PS b e ha vio r o ve r time ? I

nfo rm inspe c tio ns o f firm e va lua tio n syste ms / q ua lity c o ntro l.

I

nspe c tio n pre ssure “g o o d” fo r PS, unle ss e xc e ssive do c ume nta tio n is o ve r-riding c o nc e rn.

 F

uture Re se a rc h:

Wha t a re the ro le s o f me nto rs / supe rviso rs re la te d to PS? Who a re the supe rviso rs tha t re wa rd PS b a se d o n pro c e ss?

Ho w do the ir e xpe rie nc e s diffe r?

Do inc e ntive s fo r PS c ha ng e a s yo u pro g re ss in c a re e r?

T ime

 T

ime pre ssure & wo rklo a d impa c t (Bra ze l e t a l. 2015)  SE

C 10-K filing a c c e le ra tio ns in the 2000s  Audit pa rtne rs surve ye d sa id the a c c e le ra tio ns  mo re time pre ssure & le ss PS

We ha d to c ra m 45 da ys o f ske ptic ism into 30 da ys a nd I fo und tha t we we re no t asking good follow up que stions b e c a use we ha d 50% mo re q ue stio ns o utsta nding a t a ny po int in time . I wa s ve ry c o nc e rne d a b o ut the risk tha t lo ng ho urs mig ht a dve rse ly impa c t the de gr

e e of pr

fe ssional ske ptic ism

ma inta ine d b y the sta ff. Our a udito rs we re ve ry b usy a nd the y re c o g nize d tha t pushing the c lie nt for

mor e answe r s in a re a s

b e ing a udite d to da y wo uld o nly de la y the c lie nt's de live ry o f sc he dule s ne e de d fo r a udit a re a s sc he dule d to b e sta rte d to mo rro w. Our te a ms ha d le ss time to sit-bac k and think a b o ut a lte rna tive sc e na rio s fo r c o mple x c lie nt tra nsa c tio ns.

SLIDE 7

12/2/2015 7

T ime

 800 a udito rs surve ye d…wo rklo a d is hig h e no ug h tha t a udit

q ua lity suffe rs (Pe rse llin e t a l. 2015) Wo rklo a d: de a dline s & sta ffing sho rta g e s (still a pro b le m in 2014) 5 – 20 (b usy se a so n) ho urs a b o ve thre sho ld: 40% indic a te impa ire d

judg me nt, re duc e d PS

T

wa rds the e nd o f the a udit, the re b e c a me mo re o f a ‘ ho w c a n I

do c ume nt tha t this wo rks’ inste a d o f a ‘doe s this wor

k’ appr

ac h. Whe n

pro fe ssio na l ske ptic ism is lowe r

e d, I

b e lie ve a udit q ua lity is g re a tly impa c te d . Whe n the re is a time c o nstra int a ppro a c hing a nd a pile o f wo rk to c o mple te , yo u wo rk lo ng e r ho urs, yo u try to b e c o me mo re e ffic ie nt, b ut yo u a lso fe e l so me pre ssure to trust yo ur o wn g ut o n c e rta in issue s. F

r

e xa mple if a jo urna l e ntry do e sn't a ppe a r in line with e xpe c ta tio ns a nd it’ s la te a t nig ht, yo u ma y try to just e xpla in it yo urse lf, ra the r tha n spe nding

the time to disc uss with the c lie nt to ge t a full unde r standing.

T ime

 T

a ke a wa ys:

Sub sta ntia l time pre ssure , pa rtic ula rly a t ye a r-e nd, c a n impa ir

PS.

Will a future re po rting a c c e le ra tio n o r o the r re g ula tio n c urta il

ye a r-e nd a udit time ?

So lutio ns to ye a r-e nd time pre ssure : Mo re inte rim te sting ,

re sc he duling o the r wo rk, a nd wo rking mo re ho urs.

 F

uture Re se a rc h:

Budg e t fo r PS? Use o f I

T a udit, CAAT s, use o f I A, a nd o utso urc ing no t se e n a s e ffe c tive stra te g ie s, why no t? Wha t o the rs?

SLIDE 8

12/2/2015 8

Mindse t / Pr

mpts

 Sa lie nc e o f a udito rs’ pro fe ssio na l ide ntity  PS (Ba ue r 2015)

T

hink a b o ut pro fe ssio na l no rms & va lue s

 I

ntrinsic mo tiva tio n fo r the ir jo b  PS (K

a do us & Zho u 2015)

 Ve rific a tio n to de lib e ra tive mindse t  PS (Griffith e t a l. 2014)

Co nside ring pro s & c o ns o f a c hie ving a g o a l

 Pro c e ss vs. o utc o me a c c o unta b ility…justific a tio n o f

pro c e ss  PS (K

im & T ro tma n 2015)

 I

ntuitive vs. a na lytic a l thinking …thinking intuitive ly  PS (Wo lfe

e t a l. 2015)

 Re a ding me ta pho rs  PS (Pa rle e e t a l. 2015)

Mindse t / Pr

mpts

 T

a ke a wa ys:

Ca n the se pro mpts b e te ste d in a udit tra ining se ssio ns

with re a l c lie nt e vide nc e a nd a udit do c ume nta tio n?

Ca n e ffe c tive pro mpts b e pra c tic a lly inc o rpo ra te d into

a udit so ftwa re (o r b e a n o ptio na l pro c e dure c o nside re d during pla nning )? F ie ld E xpe rime nt?

 F

uture Re se a rc h:

Off-sho ring le ss c o mple x a udit a re a s, mo re c o mple x

a re a s pushe d do wnwa rd: Unde rsta nding Mindse t vs. Que stio ning Mindse t?

While “mo re ” inte rna tio na l re se a rc h, no c urre nt “c ulture ”

studie s.

SLIDE 9

12/2/2015 9

E nvir

nme ntal & Conte xtual F

ac tor s

 T

he Clie nt

I

ntimida tio n  a vo ida nc e , le ss e vide nc e c o lle c tio n (Be nne tt & Ha tfie ld 2013)

Clie nt pe rso na lity/ b e ha vio r…o ve rly nic e / a va ila b le c lie nt 

g re a te r PS in lo w risk se tting (b ut no t in hig h risk) (Olse n & Stua rt 2015)

Ma na g e me nt c a n stra te g ic a lly dive rt a udito r’ s a tte ntio n to

c le a n a c c o unts  de c re a se s a udito r’ s a b ility to de te c t e a rning s ma na g e me nt (L uippo ld e t a l. 2015)

 T

he F irm E nviro nme nt

I

T usa g e  sta ff do n’ t le a rn ho w to “re a d pe o ple ,” think c ritic a lly, & pro b e fo r a nswe rs (We ste rma nn e t a l. 2015)

E nvir

nme ntal & Conte xtual F

ac tor s

 Sta nda rds / F

irm Guida nc e

 Whe n a uditing c o mple x e stima te s, e xpe rie nc e d a udito rs

fo c us o n c o rro b o ra ting ma na g e me nt’ s a ssumptio ns (Griffith e t a l. 2015)

Wo rd c ho ic e o f g uida nc e  PS (fa ir va lue e stima te s) (Co he n

e t a l. 2015)

Guida nc e  “suppo rt,” “o ppo se ,” o r b o th…b o th = mo re

PS

SLIDE 10

12/2/2015 10

E nvir

nme ntal & Conte xtual F

ac tor s

 T

a ke a wa ys:

T

he c ha ra c te ristic s a nd a c tio ns o f ma na g e me nt ma y impa c t PS, b ut in hig h risk se tting s a udito rs a ppe a r to g e ne ra lly e xe rc ise mo re PS.

T

he fra ming / wo rd c ho ic e o f ta sks a lte rs the mindse t o r a ppro a c h a udito rs ta ke , le a ding to mo re / le ss PS.

 F

uture Re se a rc h:

Are diffe re nt ma na g e me nt ta c tic s mo re / le ss suc c e ssful

de pe nding o n a udit e xpe rie nc e ?

Wha t a dditio na l risks/ b e ne fits to PS do e s to da y’ s I

T e nviro nme nt intro duc e ?

Compe te nc y - F r aud De te c tion

 Pa rtne r to ne a t the to p  PS in a udit ma na g e rs (Ca rpe nte r & Re ime rs 2013)

Mo re e ffe c tive ly & e ffic ie ntly I

D fra ud risks & c ho o se a ppro pria te te sts

 Adding “c a pa b ility” to the fra ud tria ng le  inc re a se s PS (hig he r

fra ud risk a sse ssme nts) (Bo yle e t a l. 2015)

 Audito rs a re no t se nsitive to NF

M fra ud re d fla g s (Bra ze l e t a l. 2014) Pro mpts o nly wo rk if risk is hig h

 Audito rs strug g le to de te c t pe rso na lity-drive n fra udule nt

te nde nc ie s…tra ining a udito rs to c o nside r ma na g e me nt life style a s a risk fa c to r mig ht he lp (Co he n e t a l. 2015) E

xa mina tio n o f c o rpo ra te fra ud c a se s

SLIDE 11

12/2/2015 11

Compe te nc y - Othe r

Sing a po re study – impo rta nt skills, kno wle dg e , & a ttitude s fo r

e ntry le ve l a udito rs (Siriwa rda ne e t a l. 2014)

Mo st impo rta nt  pro fe ssio na l inte g rity, a sse ssing a udit

e vide nc e , PS

Strug g le with the mo st  b usine ss c o mpe te nc y Dive rg e nt & c o nve rg e nt thinking  suspe nsio n o f judg me nt

(hig he r PS), hig he r q ua lity e xpla na tio ns, & mo re like ly to c ho o se the rig ht e xpla na tio n (Plumle e e t a l. 2015)

T

ra ining a udito rs to g e ne ra te e xpla na tio ns & the n to se a rc h fo r a so lutio n se pa ra te ly

Compe te nc y

 T

a ke a wa ys:

T

he fo c us o f mo st c o mpe te nc y-re la te d studie s is o n the e xte nt a udito rs c a n de te c t a nd re spo nd to fra ud re d fla g s/ risks.

Audito rs do no t g e ne ra lly re spo nd a ppro pria te ly to pe rso na lity-

drive n fra ud te nde nc ie s in ma na g e me nt.

T

ne a t the to p ma tte rs, sug g e sting the impo rta nc e o f firm

c ulture o n PS.

 F

uture Re se a rc h:

I

s the c urre nt a c c o unting c urric ulum g iving a udito rs a pro pe r unde rsta nding o f no n-fina nc ia l da ta , so ft skills suc h a s inte rvie w, c o mmunic a tio n, e tc .?

Ho w c a n pa rtne rs/ ma na g e rs e sta b lish a to ne tha t pro mo te s PS?

SLIDE 12

12/2/2015 12

T r aits – Inte gr ity, F

r

titude & E xpe r ie nc e

 Hig he r tra it PS  g re a te r PS (Hurtt e t a l. 2015)

Whe n de te c ting inc o nsiste nc ie s in a udit do c ume nta tio n

 I

nte ra c tio n b e twe e n sta te & tra it PS (Ro b inso n e t a l. 2015) Whe n inhe re nt risk inc re a se s (sta te PS), lo w tra it PS a udito rs

inc re a se ske ptic ism mo re tha n hig h tra it PS a udito rs

 I

n ne g o tia tio ns with c lie nts (simula te d), hig he r PS  mo re c o nse rva tive & sta nd mo re re so lute (Bro wn-L

ib urd e t a l. 2013)

T r aits – Inte gr ity, F

r

titude & E xpe r ie nc e

 Pre sumptive do ub t vs. ne utra lity  me a sure me nt o f

pre sumptive do ub t is mo re pre dic tive o f PS tha n ne utra lity

(Qua da c ke rs e t a l. 2014)

 PS  re te ntio n (Co he n e t a l. 2015)

Pre sumptive do ub t  ne g a tive ly a sso c ia te d with jo b fit a nd

rg a niza tio na l trust, hig he r turno ve r inte ntio ns

Ne utra l  po sitive ly a sso c ia te d with jo b fit & pro fe ssio na l

ide ntific a tio n, lo we r turno ve r inte ntio ns

 T

ra it PS & E xpe rie nc e (Sa rg e nt 2015) Mo re e xpe rie nc e = hig he r PS PS c ha ng e s o ve r the c o urse o f a c a re e r

 Hurtt sc a le vs. pe rso na lity sc a le (Olse n e t a l. 2015)

Hurtt sc a le pre dic ts ske ptic a l judg me nt b ut no t ske ptic a l a c tio n

SLIDE 13

12/2/2015 13

T r aits – Inte gr ity, F

r

titude & E xpe r ie nc e

 T

a ke a wa ys:

 Audito r c ha ra c te ristic s pre dic t a udito rs’ PS judg me nts.  Audito rs with g re a te r PS sta nd mo re re so lute whe n issue s a rise with ma na g e me nt.  Audito r c ha ra c te ristic s impa c t PS diffe re ntly thro ug ho ut the a udito r’ s c a re e r.

 F

uture Re se a rc h:

 Audito rs tha t ra te hig h o n pre sumptive do ub t me a sure s a re mo re ske ptic a l, b ut a lso ha ve the hig he st turno ve r inte ntio ns. Do e s this me a n the a udit pro fe ssio n is fa iling to re ta in the “b e st” a udito rs?  Ca n the se tra its b e use d in the sc re e ning / hiring o f c a ndida te s?

L inking Bar r ie r s to Solutions – An E xample

Barrier identified  Audit Evaluators reward appropriate PS based on outcomes (identified a misstatement or not) Auditors testing in the field (seniors/interns) are aware of this bias If the evaluator’s HS bias is “BIGGER” – auditors in the field are less likely to identify and convey FRAUD red flags or evidence inconsistencies. Solution 1: AC SUPPORT may not “help” Solution 2: CONSULTATI ON “helps” but does not eliminate the bias Next Step: Superiors that do not exhibit HS bias likely foster staff that identify and convey fraud red flags.  Pinpoint how their experiences differ: Increase overall audit (detection of fraud) and financial reporting quality.

SLIDE 14

12/2/2015 14

Mor e Dir e c tion for F utur e Re se ar c h

Ca n we tra in a udito rs to b e mo re ske ptic a l? I

f so , ho w? ! Wha t type s o f a dditio na l skills do the y ne e d?

T

he re se e ms to b e a disc o nne c t b e twe e n judg me nts & a c tio ns…ho w c a n we c lo se this g a p?

Wha t ro le c a n the AC se rve to e nha nc e PS? Only studie s tha t find re sults a re typic a lly pub lishe d,

c a n we find o ut wha t did no t wo rk?

Wha t c a n we le a rn fro m re la te d re se a rc h stre a ms

utside o f a c c o unting tha t ma y b e a pplic a b le ?