Solving the Puzzle: Can Increasing Auditors’ Involvement in Audit Firm Communication Improve their Fraud-related Judgments when Alumni Affiliations are Present?

• In Event: Misstatement Risk and Value Creation

Abstract

Regulators and the fraud literature note auditors’ difficulty responding to fraud risks. Audit firms currently use emails to remind auditors about fraud, but busy auditors may not devote sufficient attention to these messages. Building on psychology theory, we develop a novel modification designed to increase auditor involvement in audit firm communication, causing auditors to pay more attention to the message and return to their work more alert to fraud. Auditors who are sufficiently alert to fraud should recognize that alumni affiliations (i.e., management that used to work at the auditor’s firm) increase fraud risk because management has greater opportunity to conceal fraud. We predict and find that increasing auditor involvement in audit firm communication about fraud makes auditors more likely to recognize and respond to the fraud risk implications of alumni affiliations, thus improving their responses to fraud risks. Our results are important to researchers, regulators, and practitioners interested in improving auditors’ fraud judgments and the effects of alumni affiliations on audit quality.

Authors

• Ashley Austin, University of Georgia

• Tina Carpenter, University of Georgia