Thinking Outside of the Box: Engaging Auditors’ Innovation Mindset to Improve Auditors’ Fraud Actions in a Data-Analytic Environment

Data analytics can help auditors effectively respond to the risk of material misstatement due to fraud. However, harnessing this potential may require auditors to adopt an innovation mindset as urged by firms and regulators. Innovation is defined as creativity in action.

Building on the creativity literature, we develop an innovation mindset designed to improve auditors’ ability to generate effective fraud audit procedures when interpreting data analytic output. Further, with the advent of data analytics, auditors are asked to provide value-added, client insights, in addition to their primary goal of obtaining high audit quality.

We predict that incorporating this secondary goal may strengthen the innovation mindset effect by enhancing auditors’ cognitive flexibility. We experimentally demonstrate that the innovation mindset significantly improves  auditors’ development of effective fraud procedures. Moreover, this effect is amplified when auditors generate client insights, as this intervening goal boosts creativity and cognitive flexibility, further enhancing auditors’ decision-making quality.