Do Strategic Reasoning and Brainstorming Help Auditors Change Their Standard Audit Procedures in Response to Fraud Risk?

2008 ◽  
Author(s):  
Vicky B. Hoffman ◽  
Mark F. Zimbelman
Keyword(s):  
Strategic Reasoning ◽  
Fraud Risk

Do Strategic Reasoning and Brainstorming Help Auditors Change Their Standard Audit Procedures in Response to Fraud Risk?

2009 ◽  
Vol 84 (3) ◽  
pp. 811-837 ◽  
Author(s):  
Vicky B. Hoffman ◽  
Mark F. Zimbelman
Keyword(s):  
Academic Research ◽  
Strategic Reasoning ◽  
The Public ◽  
Fraud Risk ◽  
Planning Decisions ◽  
Public Company

ABSTRACT: The Public Company Accounting Oversight Board recently reported that its inspections show that auditors fail to effectively modify their standard audit procedures in response to fraud risk. Prior academic research is consistent with this finding. Our study examines the effects of two interventions on auditors' planning decisions in a high-fraud-risk setting: strategic reasoning and brainstorming in groups. Both interventions are predicted to lead auditors to more effectively modify their planned audit procedures. We use a panel of fraud experts to identify effective modifications to the audit plan of a specific fraud case. The experts' recommendations are then used to evaluate the effectiveness of practicing auditors' audit plans with and without the two interventions. We predict and find that each intervention leads to more effective modifications to the standard audit procedures and that the combination of the interventions is not significantly more effective than either intervention used alone.

scholarly journals How Strategic Reasoning and Brainstorming Can Help Auditors Detect Fraud

2012 ◽  
Vol 6 (2) ◽  
pp. P25-P33 ◽  
Author(s):  
Vicky B. Hoffman ◽  
Mark F. Zimbelman
Keyword(s):  
Fraud Detection ◽  
Strategic Reasoning ◽  
Fraud Risk ◽  
Planning Judgments

SUMMARY Auditors often fail to effectively modify their standard audit procedures in response to fraud risk. Two audit interventions, strategic reasoning (i.e., considering how the audit client may be concealing a fraud from the auditor) and brainstorming in groups, have been suggested to help auditors design better fraud detection procedures. This paper summarizes a recent study (“Do Strategic Reasoning and Brainstorming Help Auditors Change Their Standard Audit Procedures in Response to Fraud Risk?” [Hoffman and Zimbelman 2009], The Accounting Review) in which an experiment was conducted in a high-fraud-risk setting to see whether these interventions helped audit managers design better fraud procedures. The study found that both interventions improved auditors' planning judgments, but that combining them was not more effective than either one alone. That is, once individual audit managers reasoned strategically, adding more audit managers to the process in a brainstorming group did not result in better judgments, and brainstorming groups did not obtain additional benefits from reasoning strategically together.

Using Game Theory and Strategic Reasoning Concepts to Prevent and Detect Fraud

2004 ◽  
Vol 18 (3) ◽  
pp. 173-184 ◽  
Author(s):  
T. Jeffrey Wilks ◽  
Mark F. Zimbelman
Keyword(s):  
Game Theory ◽  
Financial Reporting ◽  
Academic Research ◽  
Future Research ◽  
Fraudulent Financial Reporting ◽  
Plan Implementation ◽  
Strategic Reasoning ◽  
Audit Planning ◽  
Fraud Risk ◽  
Auditing Standards

This commentary examines academic research that can assist auditors in detecting and preventing fraudulent financial reporting. We review theoretical and empirical research from game theory, social psychology, judgment and decision making, and auditing to identify improvements in audit practice and promising areas for future research. This review focuses on the strategic fraud setting and suggests modifications in auditing standards that should facilitate auditors' use of strategic reasoning in this setting. We emphasize three critical audit tasks—fraud risk assessment, audit planning, and audit plan implementation—and recommend changes to current auditing standards and identify potential research questions for each task.

Fraud Risk Awareness and the Likelihood of Audit Enforcement Action

2016 ◽  
Vol 30 (3) ◽  
pp. 379-392 ◽  
Author(s):  
Jared Eutsler ◽  
Erin Burrell Nickell ◽  
Sean W. G. Robb
Keyword(s):  
Financial Reporting ◽  
Financial Distress ◽  
Professional Community ◽  
Securities And Exchange Commission ◽  
Counterfactual Reasoning ◽  
Going Concern ◽  
Enforcement Action ◽  
Fraud Risk ◽  
Regulatory Perspective ◽  
Going Concern Opinion

SYNOPSIS Prior research indicates that issuing a going concern opinion to financially stressed clients generally reduces the risk of litigation against the auditor following a bankruptcy (Kaplan and Williams 2013; Carcello and Palmrose 1994). However, we propose that a going concern report may indicate prior knowledge of financial distress, an important fraud risk factor, and this may have repercussions for the auditor if a fraud is subsequently uncovered. Consistent with counterfactual reasoning theory, experimental research suggests that a documented awareness of fraud risk actually increases the likelihood of litigation against the auditor following a fraud (Reffett 2010). This concern has been echoed by the professional community (AICPA 2004; Golden, Skalak, and Clayton 2006) and may be exacerbated by the current outcome-based regulatory environment (Peecher, Solomon, and Trotman 2013). To examine this issue we review Auditing and Accounting Enforcement Releases (AAERs) issued by the Securities and Exchange Commission (SEC) for alleged financial reporting frauds between 1995 and 2012. Results suggest that going concern report modifications accompanying the last set of fraudulently stated financials are associated with a greater likelihood of enforcement action against the auditor. This finding is consistent with counterfactual reasoning theory and suggests that, from a regulatory perspective, auditors may be penalized for documenting their awareness of fraud risk when financial statements are later determined to be fraudulent.

The Effects of Judgments of New Clients' Integrity upon Risk Judgments, Audit Evidence, and Fees

2001 ◽  
Vol 20 (2) ◽  
pp. 85-99 ◽  
Author(s):  
Philip R. Beaulieu
Keyword(s):  
Source Credibility ◽  
Prospective Audit ◽  
Fraud Risk ◽  
Audit Evidence ◽  
Risk Judgments

Client integrity concerns auditors when they plan new audit engagements because it is related to both fraud risk and the source credibility of clients. Auditors may increase audit work and fees when they judge integrity to be below normal. In an experiment, a sample of 63 Canadian audit partners read information about a prospective audit client, including information about the client's CFO. This information was manipulated to support a judgment of either high or low integrity. As hypothesized, judgments of client integrity were negatively related to risk judgments, audit evidence extent recommendations (indirectly through risk judgments), and fee recommendations (indirectly through risk judgments and extent recommendations).

Investor Perceptions of Government Deregulation: Evidence from Section 404 of the Sarbanes-Oxley Act

2020 ◽  
Author(s):  
Benjamin W Hoffman ◽  
John L. Campbell ◽  
Jason L. Smith
Keyword(s):  
Financial Reporting ◽  
Government Regulation ◽  
Abnormal Returns ◽  
Reporting Quality ◽  
Internal Controls ◽  
Litigation Risk ◽  
Section 404 ◽  
Fraud Risk ◽  
Sarbanes Oxley ◽  
Public Company

We investigate the stock market's reaction to events leading up to the Securities and Exchange Commission's (SEC) and Public Company Accounting Oversight Board's (PCAOB) 2007 regulatory changes that reduced the scope of and documentation requirements for assessments of firms' internal controls over financial reporting (ICFR), as required by Section 404 of the Sarbanes-Oxley Act. The stated goal of these regulations was to reduce firms' and auditors' compliance costs with mandatory ICFR assessments, while maintaining the effectiveness of these assessments. We examine abnormal returns surrounding key dates leading to the passage of these regulations and offer two main findings. First, investors reacted negatively on key event dates, suggesting that investors viewed the regulations as likely to reduce financial reporting quality rather than to drive firm and audit efficiencies. Second, this negative market reaction is larger when ICFR effectiveness should matter most - when firms are more complex, have higher litigation risk, and greater fraud risk. In additional analysis, we find that restatements increase in the post-regulation time period, consistent with investors' concerns that the effect of the legislation would be a reduction in ICFR effectiveness. Overall, our results may imply that investors prefer stronger government regulation when it comes to the assessments of a firm's internal controls over financial reporting.

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