Do Auditors Make Better Fraud Planning Decisions When Advising Colleagues versus Deciding for Themselves?

• In Event: Auditor Interactions

Abstract

Prior research finds auditors often fail to revise their audit plans to effectively address assessed fraud risks and conjectures this is because they lack the ability to identify effective changes. In contrast, we hypothesize that even when auditors can identify effective changes they are less likely to do so when deciding for themselves versus advising colleagues because the decider (advisor) role triggers a more pragmatic (idealistic) mental perspective. In our experiment, audit seniors are randomly assigned a role (decider or advisor) and identify what changes, if any, to make to a same-as-last-year (SALY) audit plan to address a seeded fraud risk. We find that auditors identify changes that are more consistent with fraud experts’ recommendations when advising versus deciding. Our experiment also manipulates whether or not auditors receive a prompt to consider allocating resources to a lower risk area. We find that advisors are less apt than deciders to follow the prompt, alleviating concerns that advisors simply deviate from the status quo – rather than target higher risk areas – because they have no “skin in the game.” Overall, our findings highlight one benefit to audit firms of encouraging the provision of informal advice: auditors recommend better decisions when advising colleagues than they reach when deciding for themselves.

Authors

• Tim David Bauer, University of Illinois-Urbana-Champaign

• Sean M. Hillison, University of Illinois at Urbana-Champaign

• Mark Peecher, University of Illinois-Urbana-Champaign

• Bradley M Pomeroy, University of Waterloo