Under the Influence? Management Charisma and the Relative Skepticism of Audit Committee Member Judgments in the Presence of Fraud

• In Event: The Influence of Managers and Other Auditors in Audit-Related Decisions

Abstract

We experimentally examine the interactive influence of management charisma and need for cognition (NFC) on audit committee (AC) members’ professional skepticism in the presence of financial reporting fraud. While society seems to value charismatic leaders (e.g., Steve Jobs at Apple or Marc Benioff at Salesforce), these individuals are also at the root of many high-profile frauds in which members of corporate governance failed to heed cues suggesting critical red flags (e.g., Elizabeth Holmes at Theranos or Andy Fastow at Enron). Charisma is typically a heuristic signal of competence and trustworthiness that reduces decision makers’ evaluative uncertainty, so we expect that management charisma will cause AC members to be less skeptical. In contrast, we find that in our context – which contains fraud risk cues – CFO charisma causes AC members to be more skeptical. We also expect that management charisma interacts with AC members’ NFC. NFC is characterized by spontaneous engagement in deep thinking and the ability to resist the temptation to inappropriately engage in heuristic decision making. Therefore, we expect and find that AC members who possess higher NFC behave skeptically regardless of the CFO’s charisma. In contrast, lower NFC AC members lack skepticism when management charisma is low but behave skeptically when management charisma is high – this implies that lower NFC AC members interpret CFO charisma as a signal of risk rather than as a signal of competence and trustworthiness.

Authors

• Julia Ariel-Rohr, University of Wisconsin-Madison

• Emily Elaine Griffith, University of Wisconsin-Madison

• Karla M. Zehms, University of Wisconsin-Madison