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  • Jennifer M Mueller-Phillips
    A Field Survey of Contemporary Brainstorming Practices
    research summary posted February 20, 2017 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.02 Changes in Audit Standards, 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 06.07 SAS No. 99 Brainstorming – process, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 10.0 Engagement Management, 10.03 Interaction among Team Members in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    A Field Survey of Contemporary Brainstorming Practices
    Practical Implications:

    Understanding that auditors allocate greater resources to fraud brainstorming when engagement risk is significant fosters brainstorming of a superior caliber corresponds to stronger regulatory compliance.  Auditors report that engagement teams are holding fraud brainstorming sessions earlier in the audit, document more detailed risk assessments, plan more specific procedures, and retain more documentation.  These characteristics contribute to adequately addressing increased PCAOB regulatory scrutiny.  Additionally, brainstorming sessions are highly regarded when they occur in a face-to-face fashion and are attended by multiple levels of firm personnel—whether that is “core” or “non-core” professionals.  Fraud brainstorming sessions are executed less mechanically (as determined by PCAOB inspectors) by using fewer checklists and increase the amount of time auditors prepare for brainstorming sessions.  

    Citation:

    Dennis, S. A., and K. M. Johnstone. 2016. A Field Survey of Contemporary Brainstorming Practices. Accounting Horizons 30 (4): 449–472. 

    Keywords:
    audit planning; engagement risk; field survey; fraud brainstorming; professional skepticism
    Purpose of the Study:

    The purpose of this study is to further understand current fraud brainstorming practices minding regulatory climate and its impression of brainstorming practices.  The authors seek to understand the auditing profession’s existing framework to effectively brainstorm by evaluating audit team characteristics; attendance and communication; structure, timing, effort; and brainstorming quality.  Fraud brainstorming environment is considered with respect to client characteristics; particularly, inherent, fraud, and engagement risks, and if the client is publicly traded or privately held.  The authors refer to the characteristics as “partitions”.  The partitions allow the study to better examine how each characteristic effects the deployment of resources in response to risk levels and trading status. 

                The study poses further exploration into the implementation of Statement of Auditing Standards No. 99 and its effect on fraud brainstorming practices.  Particularly addressing the Public Company Accounting Oversight Board’s report suggesting auditing professionals were “mechanically” addressing fraud-related auditing standards.  SAS 99 sought to blend experienced audit professionals—those with greater client experience—with less-seasoned auditors to brainstorm how a fraud could occur specific to the client.  As part of the brainstorming framework, the study seeks to understand if senior-level auditors (partners and managers) and seniors and staff members, along with “non-core” professionals, cultivate meaningful brainstorming sessions. 

    Design/Method/ Approach:

    The authors collected field data from audits conducted between March 2013 and January 2014, per a survey of 77 audit engagements.  Information pertaining to the client, audit team, and brainstorming sessions were called upon in the survey.  The majority (93 percent) of observations were obtained by two Big 4 firms—7 percent from one non-Big 4 global firm.  Each engagement’s partner received instructions for the distribution of the survey to lead managers and lead seniors on the respective engagement while the partner withheld that the survey was for research purposes.  A total of 75 managers and 73 seniors participated.  

    Findings:
    • Surveyed auditors rarely interacted with engagements where fraud in financial reporting was identified.
    • When fraud risk and inherent risk are both elevated for a particular engagement, perceived professional skepticism is also elevated.
    • Risk-based resource deployment is consistent when considering high- versus low-risk clients—particularly, when inherent risk is elevated, audit team size is also greater.
    • Public clients cultivate larger audit teams where managers and seniors have more client experience.
    • With respect to contributions made at brainstorming sessions, the audit partner and manager make the greatest contributions along with forensic specialists and audit seniors.  Interestingly, when fraud brainstorming is more important with respect to the engagement, seniors make lower relative contributions. 
    • Media richness theory is robustly at work with respect to attendance patterns at brainstorming sessions.  Specifically, when engagement risk is elevated, staff and seniors are more likely to attend face-to-face. 
    • Fraud brainstorming sessions are most commonly open-discussion (86 percent) where the session is held during the planning stage of the engagement (87 percent).
    • Results propose that audit partners are open-minded to suggestions made during fraud brainstorming.
    • Fraud risk assessments appear to be independent from brainstorming tactics; however, when inherent risk is elevated and if the client is public versus private, audit teams exert more effort.  
    Category:
    Auditing Procedures - Nature - Timing and Extent, Engagement Management, Risk & Risk Management - Including Fraud Risk, Standard Setting
    Sub-category:
    Auditors’ Professional Skepticism, Changes in Audit Standards, Fraud Risk Assessment, Interaction among Team Members, SAS No. 99 Brainstorming – process
  • The Auditing Section
    Impact of the Type of Audit Team Discussions on Auditors’ G...
    research summary posted May 7, 2012 by The Auditing Section, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 06.07 SAS No. 99 Brainstorming – process, 06.08 SAS No. 99 Brainstorming – effectiveness in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Impact of the Type of Audit Team Discussions on Auditors’ Generation of Material Frauds
    Practical Implications:

    The results of this study are important for audit firms to consider when designing their group discussions, required by US and International auditing standards, regarding the susceptibility of their clients’ financial statements to fraud and ways these potential frauds could be enacted.  The study’s findings suggest that interacting groups with brainstorming guidelines and pre-mortem groups (i.e., where participants engage in a backward-thinking process, in which they envision the event of an undiscovered fraud emerging after the financial statement audit period) generate the highest quantity and quality of fraud ideas.  The study’s results are important for audit firms to consider, since the quantity and quality of ideas generated in the fraud group discussions are key characteristics of the output of such discussions.  Specifically, the quantity of ideas is important because the “mere mention” of ideas during the meeting is likely to elevate auditors’ overall skepticism and alert them to a variety of potential frauds they could encounter. The quality of ideas is an inherently important output of the discussion, and the rarity/uniqueness of ideas (a dimension of quality in the study) is important because audit team members are likely to already be aware of obvious potential frauds, and so the group discussion could be best used to construct more “out of the box” frauds that are less likely to be known.

    Citation:

    Trotman, K.T., Simnett, R., and A. Khalifa. 2009. Impact of the Type of Audit Team Discussions on Auditors’ Generation of Material Frauds. Contemporary Accounting Research. 26(4): 1115 – 1142.

    Keywords:
    Risk, Risk Management, Fraud Risk
    Purpose of the Study:

    The PCAOB has emphasized the importance of detecting fraud as an objective of the financial statement audit and has prompted auditors to ensure that they fulfill the requirements of SAS No. 99, which instructs auditors to engage in a fraud brainstorming session for each audit engagement. The goal of the brainstorming session is to share ideas among members of the audit team about ways in which management could intentionally misstate the financial statements, conceal intentional misstatements, and engage in asset misappropriation.  In a similar fashion, ISA 315 and ISA 240 require the audit team to engage in a group discussion about the vulnerability of a client’s financial statements to intentional or unintentional misstatements, but these international standards do not specifically refer to the term “brainstorming”. 

    The authors observe that there are a variety of group discussion formats that could satisfy the requirements of these standards. This motivates the authors’ investigation regarding which types of discussions are optimal, in the sense of generating fraud ideas (quantity and quality), estimating the likelihood of the frauds occurring, and engaging in mental simulations of potential fraudulent misstatements (including envisioning how the fraud may be enacted).  The authors examine the output of the following types of group discussions: 

    • An interacting group with brainstorming guidelines (i.e., the group is told that “criticism is ruled out; the more creative the idea, the better; combination and improvement are sought; and most important: quantity is wanted)
    • An interacting group without the brainstorming guidelines stated above.
    •  An interacting group with pre-mortem instructions (i.e., auditors are told to envision a scenario where it is months after an audit is completed and no material fraud was uncovered, but the media has now revealed that there was a material financial reporting fraud for the audit client).
    Design/Method/ Approach:

    The research evidence is collected prior to 2007 at a senior associate auditing training in Sydney and Melbourne for a Big 4 audit firm.  Prior to the experimental session, the senior audit associate participants read an introduction to the experiment case (e.g., company background, industry information, financial performance, instances of unethical behavior) and participate in a discussion of the audit strategy and engagement scope.  During the experimental session, the participants are placed into groups of three, given all of the case materials about the audit client that they read prior to the experimental session, and are instructed to discuss and record a list of potential misstatements due to fraud.  They are also asked to record the significant account/disclosures impacted, significance of the fraud, and likelihood of occurrence. The participants were then asked to assess the likelihood that a material misstatement due to fraud occurred at the client, select and describe one such potential misstatement, how the fraud could have been perpetrated, and how the perpetrator could have covered up the fraud.  

    Findings:
    • Both interacting groups with brainstorming guidelines and pre-mortem groups generate a higher quantity of fraud ideas and higher quality fraud ideas than interacting groups without brainstorming guidelines.
    • Though not statistically significant, the authors do find that the pre-mortem groups and interacting groups with brainstorming guidelines derive more rare/unique fraud ideas than interacting groups without brainstorming guidelines.
    • There were no significant differences among group types with respect to participants’ assessments of the likelihood of fraud occurring.
    • The authors found a significant positive relationship between the completeness of participants’ mental simulations and their fraud likelihood assessments for the interacting groups with brainstorming guidelines and pre-mortem groups, but not for interacting groups without brainstorming guidelines.  
    Category:
    Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Fraud Risk Assessment, SAS No. 99 Brainstorming – process, SAS No. 99 Brainstorming – effectiveness
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  • Jennifer M Mueller-Phillips
    Nominal versus Interacting Electronic Fraud Brainstorming in...
    research summary posted July 27, 2015 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.07 SAS No. 99 Brainstorming – process, 06.08 SAS No. 99 Brainstorming – effectiveness in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Nominal versus Interacting Electronic Fraud Brainstorming in Hierarchical Audit Teams.
    Practical Implications:

    The adoption of these electronic brainstorming alternatives by audit firms would be consistent with the increase in the use of technology within audit firms. As firms move to electronic brainstorming, there are potential benefits of using a nominal form over an interacting form. Firms should at least be aware of some potential negative effects of interacting electronic brainstorming, such as social loafing, and consider the benefits of building mechanisms to overcome such negative effects. The authors find that because less experienced auditors make less effort in interacting brainstorming sessions, they develop less complete, coherent, and applicable mental simulations than those in nominal teams.

    Citation:

    Chen, Clara X., Trotman, K. T., & Zhou, F. 2015. Nominal versus Interacting Electronic Fraud Brainstorming in Hierarchical Audit Teams. Accounting Review 90 (1): 175-198.

    Keywords:
    fraud brainstorming, mental simulation, nominal versus interacting teams, social loafing
    Purpose of the Study:

    Detecting financial statement fraud is of high priority to the audit profession. Both U.S. (SAS 99/AU 316) and International (ISA 240) Auditing Standards require a discussion or “brainstorming session” among audit team members including how and when an entity’s financial statements can be susceptible to material misstatement due to fraud. While auditing standards do not specify how brainstorming sessions should be conducted, the most commonly used method in practice is open brainstorming, where individuals brainstorm in a face-to-face interacting team. However, the evidence from social psychology research shows that this form of brainstorming is unlikely to be the optimal method and suggests that there are potential benefits to audit practice of considering other alternatives.

    One potential alternative to face-to-face brainstorming is electronic brainstorming. In electronic brainstorming, computer software allows individual group members to separately input ideas without interruption. In this study, the authors examine whether interacting hierarchical teams outperform nominal hierarchical teams in electronic brainstorming. The authors also investigate the underlying mechanisms of the relative effectiveness of nominal versus interacting teams for these two tasks of varying complexity. Specifically, they examine two process variables: social loafing and mental simulations.

    In the nominal brainstorming condition, participants individually complete the two audit tasks on the computer, and team members’ unique ideas are then combined to form the team-level performance. In the interacting brainstorming condition, team members communicate via computer anonymously and are able to observe via computer screen the other two team members’ ideas during the two audit tasks.

    Design/Method/ Approach:

    Participants are 111 managers and senior auditors from two Big 4 accounting firms in Australia. The managers had an average audit experience of 84 months and the seniors had an average audit experience of 44 months. All participants received a $70 gift voucher for participating in the experiment. The experiment took place in a conference room of the participating according firm prior to April 2013.

    Findings:
    • Nominal teams generate a significantly larger number of relevant fraud risk factors and fraud hypotheses than interacting teams. In addition, compared to interacting teams, nominal teams also generate fraud hypotheses of higher quality, as measured by the number of expert-identified fraud hypotheses.
    • Social loafing of seniors drives the differences between nominal and interacting teams in the fraud hypothesis generation task. On average, there is a significantly greater difference in the generation of fraud hypotheses between managers and seniors in interacting teams than in nominal teams.
    • Mental simulations of seniors in interacting brainstorming teams are significantly less well developed than those of seniors in nominal brainstorming teams. These results are consistent with greater social loafing by seniors in fraud hypothesis generation in the interacting teams.
    • Interacting fraud brainstorming sessions may lead to less developed mental simulations for these auditors, which may negatively impact their subsequent performance in fraud-planning tasks.
       
    Category:
    Risk & Risk Management - Including Fraud Risk
    Sub-category:
    SAS No. 99 Brainstorming – effectiveness, SAS No. 99 Brainstorming – process