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    The Effect of the Strictness of Consultation Requirements on...
    research summary posted October 22, 2013 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 09.0 Auditor Judgment, 09.09 Impact of Consultation on Judgments 
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    Title:
    The Effect of the Strictness of Consultation Requirements on Fraud Consultation
    Practical Implications:

    In cases where fraud risks are high or time pressures are severe, auditors are more likely to consult a fraud specialist regarding the presence of fraud indicators when the requirement to do so is mandatory and the advice received is binding.  The authors indicate that a strict requirement is more likely to cause auditor compliance with the policy than a more lenient policy that merely suggests consultation and where the advice from the specialist is nonbinding.  Additionally, the auditors’ perceptions of fraud risks increased when a more strict consultation policy was in place which may indicate that the mere presence of a strict policy increases assessed fraud risks.

    For more information on this study, please contact Anna Gold.
     

    Citation:

    Gold, A., W.R. Knechel, and P. Wallage. 2011.The Effect of the Strictness of Consultation Requirements on Fraud Consultation. The Accounting Review 87 (3): 925-949.

    Keywords:
    auditing standards; consultation requirement; consultation propensity; deadline pressure; fraud; fraud risk.
    Purpose of the Study:

    This study addresses how auditors comply with a standard or policy given varying engagement and client characteristics and the strictness of the policy in question.  Specifically, the authors conduct two experiments to determine:

    • The propensity of an auditor to consult a fraud specialist when fraud risks exist and there is either a strict policy in place or a more lenient policy in place.
    • The propensity of an auditor to consult a fraud specialist when significant time pressures exist and there is either a strict policy in place or a more lenient policy in place. 

    Under the strict consultation condition, if fraud indicators are present the auditor is required to consult the fraud specialist and the advice received must be obeyed.  Under the lenient consultation condition, if fraud indicators are present it is merely suggested that the auditor consult a specialist and the advice received is nonbinding.

    The first experiment examines the strictness of the consultation policy where fraud indicators are manipulated to either be present or absent, thus creating a high fraud risk and low fraud risk condition.  The second experiment examines the strictness of the consultation policy where the audit completion deadline is either several days or many months away, thus creating a high time pressure and low time pressure condition.

    Design/Method/ Approach:

    163 Dutch audit partners and managers from 3 of the Big 4 accounting firms participated in the study.  Subjects were randomly assigned to the two experiments and to the conditions in the experiments.  80 auditors participated in experiment 1 and 83 auditors participated in experiment 2.  The auditors were provided with a hypothetical audit engagement scenario based on their inclusion in one of the treatment conditions described above and were asked to assume the role of audit partner.  After reviewing their case materials auditors indicated their propensity to seek consultation from a fraud specialist.  Data were collected in 2007.

    Findings:
    • The strictness of the consultation policy is positively associated with auditors’ propensity to seek consultation, but only in instances where fraud risks are high.  That is, when fraud risks exist, a strict, binding policy about consultation with a fraud specialist is more likely to result in an auditor consulting a specialist than if the consultation is merely suggested and the advice received is not binding.  The authors indicate that the managers used in this experiment may primarily be driving this finding, noting that the managers were more likely to seek consultation when fraud risks were high.
    • Deadline pressure is positively related to an auditor’s propensity to seek consultation when the consultation policy is strict but only moderately so.  That is, the auditor’s likelihood of consulting a fraud specialist under a strict consultation policy is only marginally greater when deadline pressure is strong as opposed to weak.
    • Auditors expressed an increased assessment of perceived fraud risk under the strict consultation policy compared to the more lenient policy.  This may indicate that the mere presence of a strict policy about consulting a fraud specialist causes auditors’ fraud risk assessments to go up.
       
    Category:
    Auditor Judgment, Risk & Risk Management - Including Fraud Risk, Standard Setting
    Sub-category:
    Fraud Risk Assessment, Impact of Consultation on Judgments