Fairness, Accountability, and the Determination of Audit Failure Due to a Lack of Professional Skepticism

• In Event: Accounting Errors and Auditor Litigation

Abstract

A lack of precision in defining the concept of professional skepticism (Nelson, 2009) has understandably contributed to some confusion between practitioners and regulators regarding what constitutes skeptical behavior. To address this issue, this study considers a regulator’s perspective by examining how the Securities and Exchange Commission (SEC) defines professional skepticism. When a public company is accused of fraudulent financial reporting, the SEC may determine that the audit performed on the fraudulent financial statements was deficient. Prior research has suggested that in such cases, insufficient skepticism is often a leading cause of alleged audit failure (Beasley, Carcello and Hermanson, 2001). Within a fairness theory framework (Folger and Cropanzano, 2001), this study examines auditing enforcement actions, filed against auditors by the SEC between 1999 and 2009, and identifies certain factors that are associated with a citation for a lack of professional skepticism. Overall, results suggest that regulators approach the issue by determining whether auditors should have been more skeptical. Factors found to affect this determination include whether the auditor was perceived as having been aware of an elevated risk of fraud or whether the client was accused of having provided the auditor with false or misleading information during the course of their investigation.

Author

• Erin Burrell Nickell, University of Denver