Using Self-Justification to Improve Novice Auditors’ Performance in Brainstorming Meetings

ABSTRACT: This study experimentally investigates the effectiveness of computer-mediated brainstorming in the context of the SAS No. 99 mandated fraud brainstorming requirement. Results indicate that brainstorming effectiveness is significantly higher for teams brainstorming electronically relative to teams using traditional face-to-face brainstorming. There is no significant difference in brainstorming effectiveness between electronic interactive brainstorming and electronic nominal brainstorming. Brainstorming effectiveness is significantly higher for teams receiving content facilitation relative to teams not receiving content facilitation. The post-brainstorming fraud risk assessments are significantly higher than the pre-brainstorming assessments in all treatment conditions, indicating that the SAS No. 99 mandated brainstorming session has the intended effect. This research informs audit practice by demonstrating that computer-mediated fraud brainstorming can be more effective than face-to-face brainstorming and also by establishing the effectiveness of content facilitation for improving the quality of the fraud risk factors generated by auditors.

SUMMARYOutsourcing and offshoring have become common practice among audit firms and have introduced dynamic changes to the experiences of novice auditors. Tasks once performed by novice auditors are now performed by firm members outside the core audit team, which in turn frees up novice auditors to perform different types of tasks. We utilize a 2 × 2 mixed design to manipulate the task type and the order in which tasks are performed to answer questions about knowledge acquisition among novice auditors. We examine accuracy on a confirmations task and sequential learning experienced by novice auditors. Our results show that the type of experience is important to novice auditors' performance as is the order in which these experiences occur. Based on our findings, we provide recommendations for improving novice auditors training and on the job experience in the changing environment of audits.

SUMMARY Conducting a fraud brainstorming session during planning assists with risk-based tailoring of the audit. An effective session should include a team environment in which all members are willing to share information to appropriately calibrate the collective assessment of fraud risk. We report the results of a study (Gissel and Johnstone 2017) in which we manipulate partner leadership in terms of engendering a safe (unsafe) psychological environment whereby subordinates are (are not) encouraged to speak up about fraud-relevant information. Participants are audit staff and seniors, and through the experimental case (based on the Krispy Kreme Doughnut Corporation fraud) they come to realize that they alone possess fraud-relevant information critical to the team's calibration of fraud risk. These auditors participate in a simulated brainstorming session containing the partner leadership manipulation and indicate changes in their willingness to share the fraud-relevant information with the team. We find that less-knowledgeable auditors become more willing to share their privately known, fraud-relevant information when the partner engenders a safe psychological environment as compared to an unsafe environment. In contrast, more-knowledgeable auditors are impervious to the relative psychological safety engendered by the partner; these individuals are equally willing to speak up regardless of the partner's leadership behavior. Data Availability: Contact the authors.

Audit standards require auditors to conduct brainstorming sessions on every audit so they can discuss the potential for fraud and how to respond to the risk of fraud. The Public Company Accounting Oversight Board (PCAOB) has raised concerns about the effectiveness of auditors’ responses to fraud risks and has noted variations in the quality of brainstorming sessions. We develop a measure of brainstorming quality to examine whether and how it affects the relationships among fraud risk factors, fraud risk assessments, and auditors’ responses to fraud risks. We test our measure using data from a field survey of auditors’ actual brainstorming sessions and fraud-related judgments for 179 audit engagements. We find considerable variation in the perceived quality of brainstorming sessions conducted in practice. We find some evidence that the quality of brainstorming sessions moderates the relations between fraud risk factors and fraud risk assessments. We also find that brainstorming quality positively moderates the relations between fraud risk assessments and the nature, staffing, timing, and extent of fraud-related audit procedures. Our results suggest that the benefits of brainstorming do not apply uniformly, because low quality sessions likely incur the costs of such interactions without the attendant benefits. By documenting best practices from high quality brainstorming sessions, our evidence can inform auditors in practice on how to improve their fraud decision-making processes.

Why computer-mediated communication improves the effectiveness of fraud brainstorming

In a field experiment, we leverage differences in audit subordinates’ job-relevant knowledge about clients, fraud brainstorming objectives, and “normal” audit partner leadership to explore whether and how knowledge moderates the effect of a partner-led intervention on brainstorming processes and outcomes. Our research design allows us to examine how differences in subordinate knowledge (between seniors and managers) influence auditors’ judgment processes on actual audit engagements, thereby facilitating uniquely realistic inferences about the conditions under which prompt-based interventions influence brainstorming. We develop and test a theoretical model that articulates an indirect effect of quality-differentiated partner leadership on brainstorming outcomes through changes in subordinates’ mental representations of fraud risk, conditional on subordinate knowledge. We manipulate partner leadership in brainstorming sessions for actual audit engagements and induce quality-differentiated leadership in our treatment group. We measure changes in mental representations using retrospective recalls of targeted professional skepticism, the number of new fraud risks identified, and changes in fraud risk assessments as a result of brainstorming. We predict and find an effect of quality-differentiated partner leadership on changes in the mental representations of seniors, but not managers. We also predict and find an indirect effect on fraud risk response outcomes (i.e., planned procedures) through changes in mental representations of seniors, but not managers. Both effects are stronger for seniors than managers. Our findings suggest knowledge differences as an explanatory factor that can guide the interpretation of, and potentially reconcile, prior mixed findings regarding incremental benefits of interventions in teams that are already brainstorming interactively.

SAS No. 99 requires brainstorming sessions on each audit to help auditors detect fraud. This study investigates audit team brainstorming sessions and the resulting fraud judgments. The psychology literature provides mixed results on the benefits of brainstorming. Results from my experiment suggest that while the overall number of ideas is reduced, brainstorming audit teams generate more quality fraud ideas than individual auditors generate before the brainstorming session. Further, audit teams generate new quality fraud ideas during the brainstorming session. Results also suggest that audit teams' fraud risk assessments after the brainstorming session are significantly higher than those assessments given by individual auditors on the team prior to the brainstorming session, especially when fraud is present. These results should be informative to standard setters as they suggest that brainstorming audit teams' generation of new quality fraud ideas and their improved fraud risk assessments will likely enhance their ability to identify fraud.

ABSTRACT: Audit standards require auditors to conduct fraud brainstorming sessions on every audit. The Public Company Accounting Oversight Board has raised concerns about auditors’ fraud judgments and the quality of their brainstorming sessions. We develop a measure of brainstorming quality to examine how it affects auditors’ fraud decision-making processes. We test our measure using field survey data of auditors’ actual brainstorming sessions for 179 audit engagements. Respondents report considerable variation in the quality of brainstorming in practice. We find some evidence that high-quality brainstorming improves the relations between fraud risk factors and fraud risk assessments. We also determine that brainstorming quality positively moderates the relations between fraud risk assessments and fraud-related testing. Our results suggest that the benefits of brainstorming do not apply uniformly, because low-quality sessions likely incur the costs of such interactions without receiving the attendant benefits. By documenting best practices from high-quality brainstorming sessions, our findings can inform auditors on how to improve their consideration of fraud.

We experimentally examine the effects of trait professional skepticism on fraud brainstorming performance. We find that groups with a minority, but not a majority, of high trait skeptics assess fraud risk higher than control groups with no high trait skeptics. These effects persist to group members’ individual, post-brainstorming fraud risk assessments, indicating conversion to the minority (skeptical) viewpoint. Mediation analyses indicate that groups with a minority of high trait skeptics assess higher fraud risk in part because they consider more fraud ideas. Groups with a minority of high trait skeptics tend to view the minority high trait skeptic as the best member of the group because of that member’s unique insights. Our study contributes to the brainstorming literature by demonstrating that the mix of trait professional skeptics in the group impacts brainstorming outcomes. It casts doubt on prevailing wisdom that superior audit outcomes require a majority of high trait skeptics.

This study investigates the efficacy of using a technology based on an elaboration of the traditional fraud risk model to assess the risk of fraud and subsequently plan the audit. The fraud risk model used is based on Srivastava, Mock, and Turner (2007, 2009) and explicitly assesses the presence of fraud triangle factors and the need for forensic tests to aid in the assessment of fraud detection risk and audit planning. Previous studies that examine fraud risk decomposition simply advise subjects to assess fraud risks separately without an analytical model. We examine the effectiveness of the approach using an experiment involving 76 experienced auditors where specific fraud risks are present or absent. As expected, the results indicate that the model significantly enhances auditors' sensitivity to differences in the level of fraud risks. That is, the auditors using the fraud risk model appropriately assessed low fraud risk as low and high fraud risk as high, whereas the auditors using the traditional Audit Risk Model approach assessed fraud risk at essentially the same level under either risk condition. The experiment also investigates effects on audit program planning decisions. Contrary to expectations but consistent with prior research, the risk decomposition technology tested did not result in auditors providing more effective fraud detection procedures. In all, the results suggest that although the tested risk decomposition technology can enhance risk assessments and recognition of the need for additional forensic tests, auditors continue to have difficulties in responding to fraud risks, perhaps because they lack the requisite fraud experience and training. Data Availability: Copies of the instruments are available from the first author.

PurposeThis paper aims to discuss the application of Big Data analytics to the brainstorming session in the current auditing standards.Design/methodology/approachThe authors review the literature related to fraud, brainstorming sessions and Big Data, and propose a model that auditors can follow during the brainstorming sessions by applying Big Data analytics at different steps.FindingsThe existing audit practice aimed at identifying the fraud risk factors needs enhancement, due to the inefficient use of unstructured data. The brainstorming session provides a useful setting for such concern as it draws on collective wisdom and encourages idea generation. The integration of Big Data analytics into brainstorming can broaden the information size, strengthen the results from analytical procedures and facilitate auditors’ communication. In the model proposed, an audit team can use Big Data tools at every step of the brainstorming process, including initial data collection, data integration, fraud indicator identification, group meetings, conclusions and documentation.Originality/valueThe proposed model can both address the current issues contained in brainstorming (e.g. low-quality discussions and production blocking) and improve the overall effectiveness of fraud detection.

SUMMARY We investigate the effects of psychological safety and auditor knowledge on subordinates' willingness to share privately known, fraud-relevant information during brainstorming. We test a model illustrating how partner leadership affects subordinates' perceptions of psychological safety (P-S), which then affect brainstorming differentially depending on the level of subordinates' task knowledge. Participants watch a video of a simulated brainstorming session in which we manipulate P-S by altering how the partner communicates. In the more (less) P-S condition, the partner engenders a supportive (non-supportive), non-threatening (threatening) group dynamic and a style that encourages (discourages) idea sharing. We predict and find that less-knowledgeable auditors increase their willingness to share privately known, fraud-relevant information in a more P-S setting than in a less P-S setting; there is no effect of differential levels of P-S on more-knowledgeable auditors' changes in willingness to share such information. This implies the criticality of encouraging team dynamics that engender P-S for less-knowledgeable subordinates. Data Availability: Contact the authors.

A natural field experiment examining the joint role of audit partner leadership and subordinates’ knowledge in fraud brainstorming

This paper describes fraud risk factors identified by practicing auditors relative to their own clients, and the relationship of those factors to fraud risk assessments and audit planning decisions. When the U.S. Auditing Standards Board (ASB) developed SAS No. 82, a major concern was whether and how to incorporate specific fraud risk factors into the standard. This issue remains important, as the ASB and the International Auditing and Assurance Standards Board (IAASB) continue to examine auditor's responsibilities for fraud detection. This paper contributes to the literature by providing evidence on the prevalence of certain types of fraud risk factors in audit practice and their impact on audit planning. To address these issues, we asked practicing Big 5 auditors to identify specific fraud risk factors of an actual client, assess the client's level of fraud risk, and plan audit tests to address fraud. We find that a high proportion of clients exhibit one or more fraud risk factors, most frequently related to industry/competitive position, management integrity, internal control system quality, financial condition, and pressure to meet financial targets. While fraud risk factors are often documented, fraud risk assessments are not well related to the number of those factors, overall or by individual type. All types of fraud risk factors are statistically associated with some form of audit testing response, but the nature of the audit test planned varies by risk factor type. Results of the study also show that the effect of fraud risk assessments on audit test planning varies according to the nature of the audit test planned.

The purpose of this study is to guide practice and future research by examining contemporary fraud brainstorming practices. Using field data collected from audits conducted during 2013-2014, we investigate team characteristics, attendance and communication, brainstorming structure, timing, and effort, and brainstorming quality. Results show that although some practices are similar to those reported in earlier field studies, there are interesting differences (e.g., decreased use of checklists, shorter sessions, and risk-based deployment of resources in brainstorming). These differences suggest brainstorming has evolved throughout the intervening period during which new audit standards became effective and the PCAOB criticized auditors’ performance in fraud risk identification and risk response generation. We also examine differences in audit team characteristics and brainstorming practices across risk and trading- status partitions. Results reveal auditors deploy more resources to brainstorming when engagement risk is heightened (i.e., publicly traded clients with high fraud and/or high inherent risk); correspondingly, brainstorming quality is assessed as higher on these engagements. Collectively, our findings indicate risk-based resource allocations in brainstorming and diligent responses to regulatory concerns.