Do Professional Evaluators Give Auditors Credit for Accurate Fraud Risk Assessment?

• In Event: Responses to Audit Outcomes and Disclosures

Abstract

Despite widespread agreement on the foundational importance of accurate risk assessment, prior research suggests that lay evaluators (e.g., jurors) do not reward auditors for accurately assessing the risk of fraud. However, prior research lacks theory and evidence about how another highly relevant group of evaluators—audit professionals—reward auditors for accurately assessing fraud risk. This paper develops hypotheses and reports experimental evidence about how auditor professionals respond to more accurate fraud risk assessments in cases of undetected fraud. As we hypothesize, more accurate assessment of fraud risk increases professional evaluators’ perceived audit quality, and higher perceptions of audit quality increase professional evaluators’ overall assessments of compliance with audit standards. Nevertheless, we observe no discernible effect of accurate risk assessment on professional evaluators’ compliance assessments. These ostensibly conflicting findings are due to an effective “shifting of the goalpost,” where professional evaluators hold more accurate auditors to a higher standard than less accurate auditors. This judgment pattern is inconsistent with, and potentially undermines, the paramount value practitioners, regulators, and academics all consistently accord to accurate risk assessment.

Authors

• Kamber Vittori Hetrick, Northeastern University

• Mark Peecher, University of Illinois-Urbana-Champaign

• Andrew Buthod Reffett, Miami University

• Aaron F Zimbelman, University of South Carolina