Fraud Brainstorming Research Articles

Supervisor-subordinate communication in the audit environment: a review and synthesis of contextual factors affecting subordinate behavior

PurposeThis paper’s objective is to provide a systematic literature review of the contextual factors affecting downward communication from supervisors to subordinates in the audit environment. In addition, this review identifies emerging research themes and directions for future research.Design/methodology/approachI accomplish this review’s objectives by leveraging communication literature to establish a framework to identify and synthesize contextual factors affecting downward communication in the audit environment. The review identifies 50 published articles in the last 20 years from leading accounting and auditing journals.FindingsThis study consolidates research findings on downward communication under two primary contextual factors: (1) message and (2) channel. Findings indicate that empirical research examining communication in audit is fragmented and limited. Studies examining the message focus heavily on its content and treatment in the areas of feedback, nonverbal cues, and fraud brainstorming, and a handful of additional studies examine the effectiveness of the channel in these areas. Additional research is needed to understand a broader set of supervisor–subordinate communication practices, including those that are computer-mediated, and their effect on subordinate auditors’ judgments and behaviors in the contemporary audit environment.Originality/valueMuch of the audit literature examining communication to date is topic-versus construct-based, making it difficult to see how the research findings relate to one another. This review is the first to synthesize the literature to provide academics recommendations for a way forward, and inform practitioners of communication practices whereby supervisors can be trained to improve audit quality.

Factors influencing the effectiveness of credit card fraud prevention in Indonesian issuing banks

The increase in online credit card transactions in the digital era has caused an increase in credit card cyber incidents. This is happening globally, including in Indonesia. Thus, it will affect a bank’s reputation as well as its financial losses. Therefore, optimal fraud risk management is needed in a banking effort to prevent credit card fraud. In response, this article intended to study credit card fraud prevention by examining the relationship between digital security required for customer data security; fraud brainstorming to identify process weaknesses; and compliance management to manage regulatory compliance. The next step was to test whether the anti-fraud specialist is competent to moderate this relationship. This study used a quantitative approach. This study included 27 Indonesian card issuers. Primary sources were used to collect data for this study. The primary data were analyzed using a structural equation model (SEM). The results of the study show that digital security, fraud brainstorming, and compliance management were positively and significantly related to the prevention of credit card fraud, at a significance level of 5%, the t-statistic has a numerical value of 6.161, 5.079, and 5.98 each. Furthermore, testing the moderating effect obtained t-statistic values of 7.330, 4.161, and 7.694. Competency results obtained with positive and significant influence moderate the relationship between these factors and credit card fraud prevention. These findings have policy implications for banking and government objectives in fighting credit card fraud through implementing prevention strategies. AcknowledgmentsThis research was conducted as part of the process of study completion at the Padjadjaran University, Bandung, Indonesia. We would like to express our sincere gratitude to the respondents who participated in this research.

Research Forum on COVID-19: Implications for Audits and the Audit Profession

This Forum invites authors to submit articles that can directly inform our understanding of how the pandemic might affect audits and the profession. Instead of the common practice of presenting Forum papers in one issue of a journal, we have decided—in view of the timeliness of the topic—to publish accepted articles as they become available. Such articles will be identified as belonging to the body of research relating to this call.This issue contains the first article for this forum. Interestingly, this article highlights the implications of the pandemic for future auditing research. The pandemic has wrought significant changes in audit teamwork and group processes, many of which will persist post-pandemic. Bauer, Humphreys, and Trotman (2022) posit that these changes will create new research questions for audit research and new ways to address existing research questions. The authors provide an insightful discussion of the implications these changes have for group judgment and decision making in auditing (e.g., review process, fraud brainstorming, consultations, and interactions with client management and the audit committee).We hope to publish more papers inspired by this call in forthcoming issues of AJPT.

The Impact of a Structured Electronic Interacting Brainstorming Platform

SUMMARY With the advancements in technology and the recent trends in how audit teams communicate, audit firms increasingly develop and rely on computer-mediated communications and online platforms in the conduct of audits. We examine the effects of two different electronic interacting brainstorming platforms, structured (idea inputs organized into trees and shown by categories/topics) and non-structured (idea inputs in chronological sequence), on audit team brainstorming performance. While the psychology literature suggests potential benefits from the structured brainstorming platforms, we find that, in a fraud hypothesis generation task, a structured brainstorming platform does not improve audit team fraud brainstorming performance (either quantity or quality of fraud hypotheses generated). Further, we find that a structured brainstorming platform reduces the differences in brainstorming performance and mental simulations between managers and seniors. This is because a structured brainstorming platform reduces managers' performance, although it has no negative effects on seniors' performance. Data Availability: Contact the authors.

Group Judgment and Decision Making in Auditing: Research in the Time of COVID-19 and Beyond

SUMMARY The COVID-19 pandemic has fundamentally changed how auditors work and interact with team members and others in the financial reporting process. In particular, there has been a move away from face-to-face interactions to the use of virtual teams, with strong indications many of these changes will remain post-pandemic. We examine the impacts of the pandemic on group judgment and decision making (JDM) research in auditing by reviewing research on auditor interactions with respect to the review process (including coaching), fraud brainstorming, consultations within audit firms, and parties outside the audit firm such as client management and the audit committee. Through the pandemic lens and for each auditor interaction, we consider new research questions for audit JDM researchers to investigate and new ways of addressing existing research questions given these fundamental changes. We also identify potential impacts on research methods used to address these questions during the pandemic and beyond.

A Picture is Worth a Thousand Words: Using Interactive Data Visualization to Assess Fraud Risk

ABSTRACT Accounting firms are making significant investments in audit data analytics technologies to modernize their audit services and the audit profession is believed to be on the verge of a transformation (BDO 2016; Deloitte 2016; EY 2015; Forbes Insights 2015; PwC 2015). In particular, the firms are emphasizing newer technologies such as interactive data visualization (BDO 2016; Deloitte 2016; PwC 2016) and they are increasingly expecting students to have data analytics skills (Forbes Insights 2015; PwC 2015). In this case you take on the role of Bryan, an audit senior assigned to Acme Company, who has been tasked with using interactive data visualization to gain an understanding of Acme's sales and perform an initial evaluation of two fraud risks identified during a fraud brainstorming session. Bryan has been given a data file with over 250,000 financial transactions and five master tables that he needs to analyze using interactive data visualization.

Fraud Brainstorming Group Composition in Auditing: The Persuasive Power of a Skeptical Minority

ABSTRACT 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 develop more fraud ideas than control groups with no high trait skeptics. Mediation analyses indicate that minority high trait skeptic groups also assess higher fraud risk, in part because they consider more fraud ideas. Low trait skeptics who brainstorm in 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. Their individual, post-brainstorming fraud risk assessments remain high, indicating conversion to the minority (skeptical) viewpoint. Our study contributes to the brainstorming literature by highlighting the importance of group composition. It suggests that firms can promote skeptical team judgments by leveraging individuals' high trait skepticism in thoughtfully composed interacting groups.

Professional Skepticism Traits and Fraud Brainstorming Quality

Auditing standards emphasize that fraud detection is an important objective of an audit and require the exercise of professional skepticism (PS) and a discussion among the engagement team to prevent and detect fraud. The purpose of this study is to examine whether professional skepticism is a driver of fraud brainstorming quality. We investigate the relationship between fraud brainstorming quality, using the measure of Brazel et al. (2010), and auditor’s professional skepticism traits. Using proprietary data from Dutch audit firms on 125 engagements, we find that neutral trait skepticism and professional moral courage of the partner have a significant effect on fraud brainstorming quality. We observe a higher attendance rate and contribution of specialists, more extensive discussion, longer preparation, and longer sessions for engagements led by partners with high neutral trait skepticism and high moral courage. We find no significant results for partners with a high presumptive doubt trait. Additional cross-sectional analyses show that the effect of professional skepticism on FBQ depends on situational, organizational conditions.

Financial fraud detection and big data analytics – implications on auditors’ use of fraud brainstorming session

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.

Getting Comfortable on Audits: Understanding Firms’ Usage of Forensic Specialists

ABSTRACTIncreasing financial statement complexity along with an intense focus on audit quality has created challenges for today's auditors. As a result, audit firms are increasingly relying on various specialists to help them perform their audits. To better understand why and how audit firms are using forensic specialists on their audits, we conduct an exploratory survey of experienced audit and forensic professionals. Our results suggest auditors are largely relying on forensic specialists to provide them with additional comfort beyond that obtained from traditional audit procedures. Furthermore, our results demonstrate that the usage of forensic specialists occurs primarily on riskier engagements, such as those involving restatements, initial public offerings, and investigations by regulators or law enforcement agencies. Although their involvement varies, forensic specialists assist audit teams by providing both guidance and direct assistance across the audit in areas including fraud brainstorming, design of procedures to test for fraud, and review of results of fraud‐related testing. In addition, our findings indicate forensic specialist involvement may lead to greater comfort as evidenced by the perceived identification by forensic specialists of additional audit findings related to material misstatements, financial reporting fraud, misappropriation of assets, and internal control deficiencies. Our results also reveal the majority of auditor and forensic specialist participants believe the value of forensic involvement on audits outweighs the associated costs, even in the absence of such additional audit findings. We conclude our paper by offering a theoretical discussion of our findings based on the audit comfort framework and suggestions for future research. In summary, our findings suggest that the discomfort some auditors feel in the contemporary auditing environment is leading to changes in the rituals that underlie traditional audits such that they seek comfort afforded them through forensic specialist involvement.

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

Research shows that audit partner leadership is critical to achieving fraud brainstorming objectives. We examine how partner leadership and subordinate knowledge jointly influence brainstorming processes and outcomes. We conduct a natural field experiment that manipulates partner leadership during actual brainstorming sessions to leverage naturally-occurring differences in the knowledge levels of managers versus seniors. Our design allows us to examine how knowledge differences within the organization influence judgments on actual engagements, thereby facilitating uniquely realistic inferences about partner leadership in interactive brainstorming. We predict and find that quality-differentiated leadership improves the mental representations of fraud risk for seniors, but not managers. Consistent with theory around shared mental models, these changes are, in turn, associated with the engagement team's planned fraud risk responses. Further analyses reveal that our leadership prompts are relatively more novel for seniors than managers, supporting the notion that seniors have more room for improvement in their mental representations than managers.

Fraud Brainstorming Group Composition: The Persuasive Power of a Skeptical Minority

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.

Information Sharing during Auditors' Fraud Brainstorming: Effects of Psychological Safety and Auditor Knowledge

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.

Fraud Risk Brainstorming at Tesla Motors

ABSTRACTThis instructional case offers students the opportunity to explore the fraud risk assessment process and participate in a simulated fraud brainstorming session as required by AS 2401 (formerly SAS 99) for financial statement audits. Drawing on publicly available information about Tesla, Inc. (formerly Tesla Motors), the revolutionary company behind the popular Model S all-electric vehicle, the case materials guide students through multiple learning objectives. These objectives include learning how to: (1) recognize the factors that contribute to financial statement fraud risk; (2) identify and evaluate the likelihood and severity of fraud risks; (3) analyze the ways that fraud risks can lead to material misstatements in the financial statements; (4) understand the purpose of and how to conduct a fraud brainstorming session; and (5) develop audit procedures that respond to assessed fraud risks. In a post-case learning assessment, students reported significant improvement in their knowledge, comprehension, and application of these learning objectives. Students also indicated that they enjoyed learning about these concepts in the context of this popular company. This case has both an individual and a group component, and it is designed for use in an auditing or forensic accounting course at either the undergraduate or the graduate level.

The effect of brainstorming guidelines on individual auditors’ identification of potential frauds

Revised auditing standards and a focus by regulators on the detection of financial statement fraud have resulted in calls for research to examine alternative forms of fraud brainstorming. We examine the effect of using extended brainstorming guidelines, developed in the psychology literature as part of facilitator training, on auditors’ individual brainstorming performance prior to attending the team brainstorming meeting. We find that these additional brainstorming guidelines help auditors identify a greater quantity and quality of potential frauds. Our findings suggest an easy to implement approach to enhance auditors’ performance in fraud brainstorming.JEL Classification: C91; C92; M42

Information Technology in an Audit Context: Have the Big 4 Lost Their Advantage?

ABSTRACTAudit firms use information technology (IT) to improve audit quality, effectiveness, and efficiency. While audit IT has evolved over the past decade, limited guidance is available to assist practitioners in determining how IT can be used. Our research objectives are fourfold. First, we examine to what extent auditors use and assess the perceived importance of IT in their audits. Second, we look at different-sized firms to determine whether IT adoption and implementation decisions differ by firm size. Third, we investigate changes in auditors' use and perceived importance of IT over the past decade. Fourth, we examine whether IT has impacted the communication modes used by auditors when reviewing workpapers and fraud brainstorming. Overall, Big 4 auditors were not significantly more likely to use IT than non-Big 4 auditors, suggesting that the dominance of the Big 4 firms' use of IT has lessened. In fact, there are a few applications where non-Big 4 auditors appear to have taken the lead. In addition, our findings indicate that auditors have increased the use of all the IT applications we examined ten years ago. However, we find evidence that auditors may prefer to use even more IT in their audits than they are currently using.Data Availability: Data used in this study are available for download, see Appendix B.

The Effect of Partner Communications of Fraud Likelihood and Skeptical Orientation on Auditors' Professional Skepticism

SUMMARY We investigate the effect of partner communication on the level of professional skepticism in auditor judgments and actions within the context of the fraud brainstorming discussion meeting where the partner is of the view that there is a low likelihood of fraud. Across two studies, we examine the effect on professional skepticism of the partner's communication on the likelihood of fraud (making their own view known, making management's view known, or not making any view known) and the skeptical orientation being encouraged (outward orientation toward the veracity of management representations and/or inward toward the fallibility of the auditor's judgment processes). We find that auditors exhibit higher levels of professional skepticism when the partner expresses management's view, rather than their own view or no view, that there is a low likelihood of fraud. We also consider what causes these differences. Emphasizing an inward skeptical orientation was not found to be more effective in encouraging professional skepticism in audit judgments than emphasizing an outward skeptical orientation. Importantly, emphasizing both an inward and outward skeptical orientation was more effective in encouraging professional skepticism in audit actions than emphasizing only an outward orientation.

Information Sharing during Auditors' Fraud Brainstorming: Effects of Psychological Safety and Auditor Knowledge

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 Field Survey of Contemporary Brainstorming Practices

SYNOPSIS: 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 higher on these engagements. Collectively, our findings indicate risk-based resource allocations in brainstorming and diligent responses to regulatory concerns.

Contemporary Insights from a Fraud Brainstorming Field Survey

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.