Do Rewards Encourage Professional Skepticism? It Depends

2021 ◽  
Author(s):  
Joseph F. Brazel ◽  
Justin Leiby ◽  
Tammie Schaefer

In three experiments, we find that rewarding professional skepticism can backfire and decrease skepticism on future audit tasks where red flags are present. We focus on rewards for costly skepticism: skepticism that is ex ante appropriate but generates incremental ex post costs and does not identify a misstatement. Auditors interpret a reward for costly skepticism as a better-than-expected outcome and view subsequent tasks from a risk-averse gain frame. As a result, auditors seek to avoid the downside risk of skeptical action, which decreases auditors' sensitivity to red flags and their willingness to communicate severe red flags to their managers, compromising audit quality. However, we also find that a supervisor consistently rewarding costly skepticism decreases auditors' risk aversion and increases their skepticism. In sum, auditors believe skeptical action has downside risk. A cultural shift towards credible, consistent rewards for appropriate skepticism likely helps ensure that rewards have their intended effect.

2019 ◽  
Vol 33 (6) ◽  
pp. 2772-2795 ◽  
Author(s):  
Yaron Levi ◽  
Ivo Welch

Abstract Our paper explores whether a symmetric plain or an asymmetric down-beta is a better hedging measure (Roy 1952; Markowitz 1959). Unlike Ang, Chen, and Xing (2006) and Lettau, Maggiori, and Weber (2014), we find that the prevailing plain market beta is the better predictor, even for crashes. It also predicts the subsequent down-beta (i.e., beta measured only on days when the stock market had declined) better than down-beta itself. Stocks with higher down-betas ex ante also do not earn higher average rates of return ex post. Thus, down-betas are useful for neither hedging nor risk-pricing purposes.


2021 ◽  
Vol 8 (9) ◽  
pp. 102-114
Author(s):  
Shabrina Tri Asti Nasution

The purpose of this study is to detect factors that encourage an increase in auditor professionalism skepticism so that they are able to produce quality audits. It is realized that audit quality comes from a good audit process and the auditor puts forward a good attitude of professional skepticism. The results of this study indicate that the experience and competence of auditors can increase the attitude of skepticism of auditor professionalism and audit quality. In addition, the skepticism of the auditor's professionalism is able to mediate the experience of the auditor and the competence of the auditor affects the quality of the audit. For KAP, especially in the city of Medan, it has an obligation to provide an equal portion of audit assignments to all auditors and provide opportunities for auditors to improve their abilities by attending education and training from both formal and non-formal educational institutions. Keywords: Experience, Competence, Skepticism, Audit Quality.


2021 ◽  
Author(s):  
Derek Chan ◽  
Nanqin Liu

This paper presents an economic framework to study strategic interactions along the analyst-auditor-owner disciplinary chain, in which the auditor examines the financial reports prepared by the owner, and the analyst uncovers financial misreporting as well as audit failure. We find that although analyst scrutiny ex post detects misreporting, it ex ante aggravates the owner's misreporting behavior and further impairs financial statement reliability if the legal penalties for the auditor and the owner are small. We also show how the effects of a regulation depend on its target's disciplinarian(s). Specifically, (i) although enhancing the auditor's legal liability always increases audit quality and financial statement reliability, it decreases investment efficiency if and only if the analyst is highly independent; and (ii) increasing the owner's misreporting penalty decreases investment efficiency if and only if either of (but not both) the regulations on the auditor and the analyst is strict.


2020 ◽  
Vol 8 (1) ◽  
pp. 9
Author(s):  
Muslim Muslim ◽  
Syamsuri Rahim ◽  
Muhammad Faisal AR Pelu ◽  
Alma Pratiwi

The purpose of this study was to determine the effect of audit fees and audit risk on audit quality with auditor professional skepticism as a moderating variable. This research was conducted at 8 public accounting firms in Makassar city with 40 respondents. The analytical method used is multiple regression analysis (Moderated Regression Analysis) which is used to measure the strength of the relationship between two or more variables. The results of this study found that the audit fee variable had a negative and not significant effect on audit quality. These results illustrate that the higher the audit fee received by the auditor, the audit quality will decrease. While audit risk is not a significant positive effect on audit quality. The results of this study illustrate that the higher the audit risk, the audit quality will decrease. The auditor's professional skepticism as a moderating variable is not able to strengthen the effect of audit fees on audit quality. Furthermore, auditor professional skepticism as a moderating variable is also unable to strengthen the effect of audit risk on audit quality


Author(s):  
Hari Setiyawati ◽  
Diah Iskandar ◽  
Gustita Arnawati Putri

This study aims to determine the effect of auditor professional skepticism and audit experience on audit quality. This study was undertaken through a survey and was grounded based on existing theories which were then developed into a research model in which the model in this study was designed to examine the effect of auditor professional skepticism and the influence of audit experience on audit quality. This research was conducted at a Public Accounting Firm located in DKI Jakarta. The sampling method used was simple random sampling and 97 samples were obtained. Data were analyzed using Partial Least Square. The results of this study indicate that professional skepticism has a significant effect on audit quality, while auditor experience has no significant effect on audit quality. KEYWORDS: Audit Quality, Audit Professional Skepticism, Auditor Experience.


2021 ◽  
Vol 98 (3) ◽  
pp. 412-435
Author(s):  
Joseph E. Blado

Abstract Recently, social epistemologists have sought to establish what the governing epistemic relationship should be between novices and experts. In this article, the author argues for, and expands upon, Helen De Cruz’s expert-as-teacher model. For although this model is vulnerable to significant challenges, the author proposes that a specifically extended version can sufficiently overcome these challenges (call this the “extended-expert-as-teacher” model, or the “EEAT” model). First, the author shows the respective weaknesses of three influential models in the literature. Then, he argues the expert-as-teacher model can overcome its weaknesses by adding what he calls the “Authority Clause”, “Advisor Clause”, and “Ex Post Facto Clause” of the EEAT model. After developing a robust account of these clauses, the author entertains three major objections. First, he responds to the charge that the EEAT model is little better than the expert-as-authority model. Second, he responds to a double-counting objection. Lastly, he responds to a pragmatic objection from complexity.


2017 ◽  
Vol 93 (2) ◽  
pp. 97-115 ◽  
Author(s):  
Sudip Bhattacharjee ◽  
J. Owen Brown

ABSTRACT Concerns over “revolving door” practices of companies hiring directly from their external auditor led to a Sarbanes-Oxley Act provision mandating a one-year cooling-off period before such hires can occur. Yet little is known as to whether these alumni affiliations, still prevalent today, actually impair audit quality. Drawing on Social Identity Theory, we conduct an experiment to examine whether auditors experience heightened identification with an alumni-affiliated client manager and, if so, how this perceived relationship affects their professional skepticism in response to a management persuasion attempt. As predicted, absent the use of a management persuasion tactic, auditors identify more with an alumni-affiliated manager than a non-alumnus with equal professional experience, and this perceived social bond enhances the manager's influence. However, the use of a common persuasion tactic, while effective at influencing auditor judgment when used by an unaffiliated manager, “backfires” when used by an alumni-affiliated manager, leading to diminished persuasion and increased professional skepticism. Evidence suggests that auditors are better able to identify the inappropriateness of the persuasion attempt when the tactic is used by an alumni-affiliated manager.


2019 ◽  
Vol 21 (2) ◽  
pp. 507-525
Author(s):  
Namrata Sandhu

A number of researchers and professional fraud examiners have emphasized the need for early detection of frauds. Though there are many ways in which frauds can be detected, a particularly effective and inexpensive way is to identify fraudsters by scrutinizing personnel behaviour for peculiarities typical of fraudsters. Towards this end, the present study compiles a checklist of behavioural red flags of fraud based on data collected with the help of 41 semi-structured interviews. The interviewees constitute people who have personally investigated or closely observed a fraud in the last 3 years. A mixed methods triangulation approach is used to quantify the qualitative data collected from the interviews. Data analysis reveals 16 different behavioural red flags exhibited by fraudsters. An examination of frequencies indicates that strong ambition, extended working hours, social aloofness, dissatisfaction with current job and living standard disproportionate to current means are the most frequently displayed behavioural red flags of fraud. The study also shows that fraudsters exhibit three or four behavioural red flags in a majority of cases. Implications for anti-fraud practitioners are discussed.


2005 ◽  
Vol 74 (2) ◽  
pp. 231-260 ◽  
Author(s):  
Inger Österdahl

AbstractIn recent years the UN Security Council has entered the scene of action several times after a unilateral military intervention has already taken place. The Security Council has adopted comprehensive schemes for the reconstruction of the countries intervened in and has authorised both civil and military international presences. Kosovo, Afghanistan and Iraq are examples of such recent situations, and Liberia is an example from the early 1990s. This article makes the argument that, through its resolutions, the Security Council contributes to the legalisation ex post facto of the unilateral interventions, whether it wants to or not. The Security Council is caught in a trap set by those who undertake the intervention without prior Security Council authorisation.The only way the Security Council could escape the retroactive legalising effect of its resolutions would be by clearly stating in the resolution its intention not to authorise the preceding intervention. Even then, it may be that the Security Council could not escape the power of its own practice. A persistent practice of adopting reconstruction resolutions ex post facto would carry greater legal weight than the professed intention not to legalise the preceding unilateral intervention.Still, authorisation ex post facto may be better than no authorisation at all.


2018 ◽  
Vol 94 (2) ◽  
pp. 53-81 ◽  
Author(s):  
Lori Shefchik Bhaskar ◽  
Joseph H. Schroeder ◽  
Marcy L. Shepardson

ABSTRACT The quality of financial statement (FS) audits integrated with audits of internal controls over financial reporting (ICFR) depends upon the quality of ICFR information used in, and its integration into, FS audits. Recent research and PCAOB inspections find auditors underreport existing ICFR weaknesses and perform insufficient testing to address identified risks, suggesting integrated audits—in which substantial ICFR testing is required—may result in lower FS audit quality than FS-only audits. We compare a 2007–2013 sample of small U.S. public company firm-years receiving integrated audits (accelerated filers) to firm-years receiving FS-only audits (non-accelerated filers) and find integrated audits are associated with higher likelihood of material misstatements and discretionary accruals, consistent with lower FS audit quality. We also find evidence of (1) auditor judgment-based integration issues, and (2) low-quality ICFR audits harming FS audit quality. Overall, results suggest an important potential consequence of integrated audits is lower FS audit quality. Data Availability: Data are publicly available from the sources identified in the text.


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