FAR Practice Note: Thinking Outside the Box: Engaging Auditors’ Innovation Mindset to Improve Auditors’ Fraud Judgments and Actions in a Data-Analytic Environment
Data analytics has become a prominent tool for audit firms, which exalt its capabilities to promote audit quality. However, whether auditors have the appropriate mindset to fully leverage the capabilities of data analytics is yet unclear. Further, as data analytics becomes more prevalent in audit engagements, auditors are encouraged to also use this technology to provide client insights. This use has sparked concern from regulators that this additional goal could negatively impact audit quality by shifting an auditors’ focus and/or impacting independence. This could happen as these goals may compete for the same cognitive resources and auditors face time constraints. In addition, the focus on providing insights could be viewed as an auditor operating in more of an advisory (non-audit) role. In this study, we seek to understand whether encouraging auditors to be creative by employing an innovation mindset and instructing them to identify clients’ insights, when using data analytics, has a meaningful positive? impact on audit quality. We examine this using an experiment in which audit quality means the ability to address seeded fraud in a hypothetical engagement. Our results indicate that encouraging auditors to be creative increases their cognitive flexibility, which results in better identification of effective audit procedures (i.e., procedures targeting fraud). In addition, when a creative prompt is paired with a new goal to provide client insights, auditor judgments improve even more. Finally, encouraging auditor creativity also appears to improve their identification of value-added client insights. We recommend that firms look at creativity as a tool to improve auditor judgments. We point out for those concerned about adding a goal to provide client insights that this goal may not have a negative impact and in some instances may even improve audit quality.
Authors
Sara Bibler is a PhD candidate at the department of Accounting of the Vrije Universiteit Amsterdam.
Anna Gold is Professor of Auditing at Vrije Universiteit Amsterdam and Adjunct Professor at Norwegian School of Economics (NHH). She earned her PhD at the University of Amsterdam. Her research interests are in the judgment and decision-making area, primarily applied to the field of auditing. Her research has focused on the impact of regulatory changes (e.g., fraud consultation, audit firm rotation, and auditor reporting standard changes) on judgments and decisions of auditors, preparers, and financial statement users. She has also examined how auditors and audit firms manage errors and whether varying the error management climate affects auditors’ error reporting willingness and learning. Her current work focuses on how auditors use specialist advice, the communication between auditors and audit committees, and auditors’ use of audit technology.
She has published her research in outlets such as The Accounting Review, Contemporary Accounting Research, Auditing: A Journal of Practice & Theory, Accounting Horizons, Journal of Business Ethics, and International Journal of Auditing. Professor Gold currently serves as editor at The Accounting Review (2020-2023) and Maandblad voor Accountancy en Bedrijfseconomie (since 2018). She is a member of the editorial board of Auditing: A Journal of Practice and Theory.