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  • Jennifer M Mueller-Phillips
    Auditor Perceptions of Client Narcissism as a Fraud Attitude...
    research summary posted June 7, 2014 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 06.04 Management Integrity, 10.0 Engagement Management, 10.04 Interactions with Client Management in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Auditor Perceptions of Client Narcissism as a Fraud Attitude Risk Factor
    Practical Implications:

    The results of this study offer initial evidence that manager narcissism is an observable measure of elevated fraud risk. These findings have clear implications for audit practice. The results suggest that auditors are aware of the link between client narcissism and increased fraud attitude risk. Public accounting firms should emphasize the linkage between specific client manager personality traits and the increased likelihood of fraud-related behaviors in fraud risk assessment training. This study may also be useful to standard setters and auditing firms as a means to improve professional guidance regarding how to assess fraud attitude and the resulting effect on auditors’ fraud risk assessments.  

    Citation:

    Johnson, E. N., J. R. Kuhn, B. A. Apostolou, and J. M. Hassell. 2013. Auditor Perceptions of Client Narcissism as a Fraud Attitude Risk Factor. Auditing 32 (1).

    Keywords:
    attitude/rationalization; fraudulent financial reporting; narcissism; risk assessment
    Purpose of the Study:

    Despite increased emphasis on fraud detection in the auditing standards since the passage of the Sarbanes-Oxley Act of 2002, fraudulent financial reporting continues to be a serious concern. Auditing standards state that the auditor should consider client management’s attitude toward fraud when making fraud risk assessments. Very little guidance, however, is provided in the auditing standards or existing fraud literature on observable indicators of fraud attitude. This study tests whether observable indicators of narcissism, a personality trait linked to unethical and fraudulent behavior, is viewed by auditors as an indicator of increased fraud attitude risk. 

    Design/Method/ Approach:

    The authors developed an audit judgment case scenario that included specific indications of client fraud attitude and fraud motivation. Narcissism and motivation were each manipulated at two levels (high or low) in a 2 X 2 design. Participants selected were 101 practicing auditors from several U.S. offices of a large international public accounting firm. The data was collected in an experimental setting, where the participants were randomly assigned to one of four possible experimental conditions and individually completed the experimental materials. Responses were gathered through a combination of: (1) “live” administration at firm training events attended by the researchers; and (2) mail responses, where the managing partners of four firm offices agreed to distribute questionnaires and coordinate their completion and return. The overall goal was an initial experiment of client narcissism as a fraud risk factor in an audit context. 

    Findings:
    • Results indicate a narcissism effect, with significantly higher assessments of fraud risk when a client manager was described as exhibiting narcissistic characteristics. 
    • Auditors assessed fraud risk as significantly higher in the presence of motivations for the client manager to commit fraud.
    • Narcissism did not interact with fraud motivation in influencing auditor fraud risk judgments; high levels of either fraud attitude risk or fraud motivation risk were sufficient to increase auditors’ fraud risk assessments.
    Category:
    Engagement Management, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Fraud Risk Assessment, Interactions with Client Management, Management Integrity
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  • Jennifer M Mueller-Phillips
    Prior Exposure to Interviewee’s Truth-Telling &...
    research summary posted October 22, 2013 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 06.04 Management Integrity, 11.0 Audit Quality and Quality Control, 11.03 Management/Staff Interaction in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Prior Exposure to Interviewee’s Truth-Telling (Baselining) and Deception-Detection Accuracy in Interviews
    Practical Implications:

    Although baselining appears to affect behaviors an interviewer perceives as deceptive, this study does not find evidence that baselining improves the accuracy of deception detection.  However, baselining does appear to increase the accuracy of identifying truthful interviewees.  The authors suggest that training interviewers in deception detection might improve the accuracy of their detection rates.  They note that very few participants in their study had had training in detecting deception and that future research may prove useful in this area.

    For more information on this study, please contact Chih-Chen Lee.
     

    Citation:

    Lee, C-C. and R. Welker. 2011 Prior Exposure to Interviewee’s Truth-Telling (Baselining) and Deception-Detection Accuracy in Interviews. Behavioral Research in Accounting 23 (2): 131-146.

    Keywords:
    Deception detection; baselining; audit interviews.
    Purpose of the Study:

    This study examines if the effect of baselining (acquiring knowledge of an interviewee’s truth-telling behavior prior to attempting to detect deception) increases the ability of an interviewer to accurately assess deception during an interview.  Specifically, the authors examine:

    • Whether interviewers identify different indications of deceptive behavior for familiar interviewees than for unfamiliar interviewees; and
    • If deception detection is more accurate in an interview with a familiar (baselined) interviewee than an unfamiliar (non-baselined) interviewee.
       
    Design/Method/ Approach:

    208 students in junior level accounting courses were randomly paired into dyads consisting of an interviewer and interviewee.  The dyads were then divided into three treatment groups.  In one group, the interviewer baselined the interviewee engaging the interviewee in multiple truthful dialogues prior to a focal interview with the same interviewee where the interviewee may have either been honest or dishonest (interview of same person).  In the second group, the interviewer observed the truth telling behavior of one interviewee before the focal interview with a different interviewee (interview of different person).  In the third group no prior interview took place before the focal interview (No prior interview).  The interviewer’s task in all groups was to determine which interviewee statements in the focal interview were truthful and, which were deceptive.  The data were collected prior to 2011.

    Findings:
    • Interviewers who were familiar with the interviewee (baselined “interview of same person” group) perceived more behaviors as indicative of deception than did interviewers in either the “interview of different person” group or “no prior interview” group (9.8 behaviors indicative of deception compared to 8.0 behaviors indicative of deception, on average).
    • Interviewers of familiar interviewees identified behaviors such as providing irrelevant information, negative comments, and scratching as being more suspicious than did interviewers in either of the other groups.  Additionally, interviewers of familiar interviewees found the act of smiling to be a less suspicious behavior than did interviewers in the other two groups.  This indicates that familiarity with an interviewee affects which behaviors an interviewer identifies as suspicious.
    • No statistical difference was found in deception detection accuracy between the three groups indicating that familiarity (baselining) did not improve the accuracy of deception detection.
    • However, the interviewer’s accuracy of assessing an interviewee’s truthfulness was much higher when the interviewer was familiar with the interviewee.
       
    Category:
    Audit Quality & Quality Control, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Fraud Risk Models, Management Integrity, Management/Staff Interaction
  • The Auditing Section
    The Impact of Management Integrity on Audit Planning and...
    research summary posted April 13, 2012 by The Auditing Section, tagged 02.02 Client Risk Assessment, 02.03 Management Integrity Assessments, 06.04 Management Integrity, 14.01 Earnings Management in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Impact of Management Integrity on Audit Planning and Evidence
    Practical Implications:

    The results of this study are important because, while severe cases of low integrity may be weeded out during client acceptance, auditor firms tend to retain clients with a wide spectrum of integrity levels that must be managed throughout the audit process. Thus evidence regarding how the integrity of management influences auditors (1) assessment of risk, (2) planning of audit procedures, and (3) identification of misstatements may be useful for developing training materials or best practices for approaching audits on the lower end of the integrity spectrum.

    Citation:

    Kizirian, T.G., B.W. Mayhew, and L.D. Sneathen, Jr. 2005. The impact of management integrity on audit planning and evidence. Auditing: A Journal of Practice & Theory 24 (2): 49-67.

    Keywords:
    Audit risk model, management integrity, evidence
    Purpose of the Study:

    Management integrity (i.e., “tone at the top”) is a key determinant of the client’s risk structure and provides the foundation of internal control. As a result, it is important that auditors incorporate this risk component into their audit judgments. Furthermore, auditors rely on management to provide a great deal of audit evidence. Thus, auditors must carefully evaluate management integrity to assess the credibility of management-supplied evidence. To determine the extent to which auditor judgments are influenced by perceptions of management’s integrity, this study examines the effect of auditor-assessed management integrity on three aspects of the audit: (1) auditors’ assessments of risk of material misstatement (RMM), (2) audit planning, and (3) audit outcomes (i.e., identification of misstatements).

    Design/Method/ Approach:

     The authors collected their data from working papers of 60 clients of a U.S. Big 4 auditing firm. The working papers used were from engagements performed between 1996 and 1999. In all of the selected engagements, the auditors had documented an explicit assessment of management integrity as either “strong,” “moderate,” or “weak.”

    Findings:
    • Auditor-assessed management integrity is negatively related to the auditor’s assessment of RMM (i.e., high integrity is related to low risk assessments). However, the primary driver of auditors’ risk assessments appears to be whether or not the auditors identified a misstatement during the prior year audit (i.e., identification of a prior year error leads to higher assessments of RMM). In the case of a prior year misstatement, management integrity has no additional impact on assessments of RMM.
    • The auditor responds to low management integrity by requiring more persuasive evidence to support audit assertions. Additionally, management integrity was not related to the timing or extent of audit procedures. This suggests that when management integrity is low, the auditor goes outside the client for independent data verification rather than simply increasing the analysis of the client’s information.
    • When the auditor assesses that management is of low integrity, they are more likely to discover misstatements. Furthermore, the authors find that this is not just because the auditor tends to be more diligent in their testing when management is of low integrity. This suggests that management integrity is a good indicator of the likelihood that the financials are misstated.  
    Category:
    Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Client Risk Assessment, Management Integrity, Assessing Risk of Material Misstatement, Earnings Management, Earnings Management
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  • The Auditing Section
    CFO Intentions of Fraudulent Financial Reporting
    research summary posted April 13, 2012 by The Auditing Section, tagged 02.02 Client Risk Assessment, 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 06.04 Management Integrity in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    CFO Intentions of Fraudulent Financial Reporting
    Practical Implications:

    The results of this study call into question the legitimacy of compensation structure as a red flag for fraud risk and introduce company size as a new (and easily assessed) indicator of financial statement fraud. CFO attitude emerged as the most influential factor in the formation of intentions to misreport. This indicates that it is important that auditors attempt to assess client management’s attitude toward fraudulent financial reporting. Although directly assessing management’s attitude may not be possible, auditors can subjectively assess management attitude based on ongoing personal interactions with the client. More formal audit decision aids to assess management attitudes toward fraudulent financial reporting might also be valuable for successfully detecting fraud.

    Citation:

    Gillett, P.R. and N. Uddin. 2005. CFO Intentions of Fraudulent Financial Reporting. Auditing: A Journal of Practice and Theory 24 (1): 55-75.

    Keywords:
    Financial statement fraud, reasoned action model, company size, compensation
    Purpose of the Study:

    Many studies have examined whether the fraud risk factors or “red flags” listed in Statement on Auditing Standards (SAS) No. 99 are effective for predicting fraud. However, one limitation of this prior work is that it examines whether red flags were present after a fraud has already occurred. To address this limitation, this study identifies factors which influence the intentions of CFOs to report fraudulently and examines the predictive value of those factors. Thus, a CFO who expresses an intention to misreport will be more likely to actually do so. The following four factors are investigated to determine their respective influence on CFO intentions to fraudulently misreport: 

    •  Attitude: This refers to the CFO’s attitude toward fraudulent financial reporting. An attitude toward a behavior is formed based on the expected positive and negative consequences of the action. For example, if fraudulently overstating revenue will result in a management bonus, then the CFO’s attitude toward overstating revenue might be more positive.
    •  Subjective Norms: This refers to the CFO’s perception of the expectations of specific referents (e.g., coworkers, family, and friends) and the motivation to comply with those expectations. For example, a CFO who perceives that his/her coworkers, family and friends approve of fraudulent financial reporting will be more likely to misreport, especially if the CFO tends to comply with others’ expectations.
    •  Compensation Structure: When the compensation structure is highly contingent upon company performance, it is expected that managers are more likely to participate in fraudulent financial reporting. SAS No. 99 considers earnings-based compensation to be an incentive for fraud.
    •  Company Size: There is mixed evidence about the effect of company size on unethical or illegal activity. Therefore, the authors investigate whether company size influences CFO intentions of fraudulent financial reporting.
    Design/Method/ Approach:

    The authors collected their evidence by mailing surveys to the CFOs of domestic firms selected from the Compact Disclosure database as of July 1998. CFOs were provided with a fraud scenario, followed by questions measuring their intention to fraudulently misreport. The CFOs also answered questions measuring their attitude toward misreporting, subjective norms, their personal compensation structure, and the size of the firm for which they currently work. Once this data was collected, the authors used structural equation modeling (SEM) to determine the factors that influence CFO intentions of fraudulent financial reporting.

    Findings:
    • The authors find that a CFO’s attitude toward fraudulent financial reporting has the strongest influence on their intention to misreport. CFO attitudes toward fraudulent financial reporting appear to be driven primarily by the negative consequences expected if they misreport.
    • The authors find that larger firms are more likely to participate in fraudulent financial reporting.
    • Compensation structure and subjective norms did not influence CFO intentions to misreport in the manner expected by the authors. The finding that CFOs’ compensation structure does not influence intentions to misreport runs counter to SAS No. 99, which contends that earnings-based management compensation is a fraud red flag.
    Category:
    Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Fraud Risk Assessment, Management Integrity
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