Internal Auditors' Fraud Judgments: The Benefits of Brainstorming in Groups

Abstract

SUMMARYRecent fraud scandals have encouraged actions by standard-setters to improve both corporate governance among firms and auditors' fraud investigations. Internal auditors are now viewed as playing an important role in reducing fraudulent financial reporting. Although brainstorming is not required by internal auditors, researchers and leaders in the profession suggest that it may be helpful to internal auditors in assessing and identifying risks. In this study, we investigate whether the group interaction associated with brainstorming is necessary to reap the benefits of brainstorming for internal auditors' fraud judgments. Guided by psychology theory on cognitive load, we also examine whether this group interaction can reduce a response mode bias that auditors have exhibited when assessing risk. Consistent with prior research on external auditors, we find that internal auditors who brainstorm in groups identify fewer fraud risks (i.e., quantity) than nominal groups of individual auditors who brainstorm alone, but brainstorming groups identify more quality fraud risks than nominal groups. Further, we find that auditors who assess risk qualitatively generally provide higher fraud risk assessments than those auditors who assess risk quantitatively. However, after group brainstorming this bias is reduced.Data Availability: Contact the authors.