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    Fear and Risk in the Audit Process
    research summary posted November 24, 2014 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.05 Assessing Risk of Material Misstatement, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 11.0 Audit Quality and Quality Control, 11.03 Management/Staff Interaction 
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    Title:
    Fear and Risk in the Audit Process
    Practical Implications:

    Our analysis of fear helps better understand the relationship between comfort, confidence and fear in the audit process from the perspective of risk. On one hand, it suggests that confidence (self-confidence, confidence in work instrument and confidence in colleagues) without fear is a risky cocktail for auditors, who will not be sufficiently vigilant in carrying out their mission. On the other hand, it shows that fear without confidence is also a dangerous combination, which may induce auditors to maintain at a distance (and thus ignore) the inherent risks of their responsibilities. Ultimately, a sense of fear curbed by confidence and a sense of confidence tempered by fear is what enables public accountants to develop their ‘practical intelligence’, and thus to become comfortable without overlooking the risks of their job. Accordingly, the main implication which falls out of our study is the necessity for audit firms and audit regulators to create the conditions for the development among auditors of the right mix of fear and confidence.

    For more information on this study, please contact Henri Guénin-Paracini.

    Citation:

    Guénin-Paracini, H., Malsch B. and A. Paillé-Marché. 2014. Fear and risk in the audit process. Accounting, Organizations and Society 39 (4): 264-288

    Keywords:
    Auditors, audit process, fear, risk, practical intelligence, defensive strategies
    Purpose of the Study:

    While a number of studies have highlighted the role played by the feeling of comfort in audit work, comfort, in real audit settings, only arises at the very end of the audit task. The rest of the time, auditors seek to feel comfortable, but are inhabited primarily by fear. This became apparent to us in the course of an ethnographic study aimed at better understanding the work performed by auditors in the field. Of course, fear is not experienced by auditors all day long; it varies in intensity from individual to individual and depending on the circumstances; however, in general, public accountants have to deal with this emotion. If one considers that fear is the emotional experience of risk, this should hardly come as a surprise. In the post-Enron climate and after the enactment of the Sarbanes-Oxley Act, the risks associated with auditing have increased dramatically. Yet, associated with the perception of risk, the experience of fear and the role that fear plays in risk management processes have largely been overlooked in the literature. Our paper aims to ‘emotionalize’ and challenge the dominant cognitive orientation adopted by academics and regulators in their understanding of audit risks and auditors’ skepticism. It seeks better understand the role played by fear in audit practice, focusing specifically on the following questions: 1) What exactly is it that auditors worry about? 2) How do auditors manage fear in the field? 3) How does fear shape, and how is it shaped by, auditors’ work activity?

    Design/Method/ Approach:

    The research evidence was collected as part of a field study.

    • Seven audit teams including nine partners, five managers, 11 seniors and 19 assistants, were monitored in real time in June and July 2002 and between November 2003 and July 2004 (455 hours of observation).
    • Numerous documents were examined.
    • Interviews were conducted with four partners, three managers, eight seniors and 16 assistants.

    The psychodynamics of work theory of Dejours was used to interpret the data.

    Findings:
    • Confronted with technical knowledge and methodological standards’ limitations, auditors are nevertheless asked to certify the unknowable (i.e. to turn uncertainties into quasi certitudes), while being often reminded by the media that a failure on their part can have serious consequences. This ‘impossible mission’ creates fear within them. They are afraid of not detecting significant anomalies (a risk always present in auditing), and feel anxious about the judgments that they and others may pose over their possible mistakes.
    • Auditors manage their fear in two different ways. On one hand, they cultivate it through informal and formal techniques to stimulate vigilance, encourage self-surpassment, mitigate the ‘anesthetizing’ effect of habit, and maintain reputation. On the other hand, they strive to alleviate their fear before the end of each audit engagement, in order to convey their conclusions with a certain degree of comfort.
    • In the field, auditors finally become comfortable (i.e. quell their fear) either by mobilizing their ‘practical intelligence’ (which helps them handle that which, in their mission, cannot be obtained through the strict execution of standardized procedures) or by adopting defensive strategies (such as distancing themselves from work-related problems, mechanically applying audit methodologies, or relaxing their conception of a job well done). 

     

    Category:
    Audit Quality & Quality Control, Auditor Judgment, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Assessing Risk of Material Misstatement, Management/Staff Interaction, Prior Dispositions/Biases/Auditor state of mind