Professional Skepticism: The Effects of a Partner’s Influence and the Presence of Fraud on Auditors’ Fraud Judgments and Actions

Abstract

The Public Company Accounting Oversight Board (PCAOB), in its recent auditor inspections, cited a lack of professional skepticism and selection of appropriate audit procedures as serious problems for auditors and has suggested that the tone set by audit partners is critical for auditors’ fraud investigations. Nelson (2009) presented a model of professional skepticism in auditing. This study investigates selected components of Nelson’s model: the effects of the partner’s emphasis on professional skepticism and the presence of fraud on auditors’ identification of fraud risk factors, auditors’ fraud risk assessments, and their selection of audit procedures. Thus, we extend Nelson’s professional skepticism model by providing an initial test of predictions of the links established in his model and suggesting additional interactive links based on our results. Consistent with predictions of the model, results from our experiment suggest that auditors’ fraud risk assessments are (1) higher when fraud is present than when it is not and (2) higher with a partner who emphasizes an attitude of professional skepticism than with a partner who places less emphasis on professional skepticism. Interestingly, we find that auditors’ choice of appropriate fraud audit procedures is responsive to their fraud risk assessments when fraud is present, but only with a partner who emphasizes professional skepticism. This pattern of results is also observed in auditors’ identification of fraud risk factors. These results should be informative to both standard setters and academic researchers because they highlight the costs and benefits of audit partners’ tone at the top on auditors’ evaluation of fraud.