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2019B02 – Engaging auditors’ innovation mindset to improve fraud detection with data analytics
Project Number – 2019B02

2019B02 – Engaging auditors’ innovation mindset to improve fraud detection with data analytics

What?

What?

In this study, we examine whether the use of an (inflexible) work program and encouraging auditors to identify value-added insights during the course of the audit impairs their judgments (i.e., fraud detection and identification of appropriate follow-up audit procedures), thereby inadvertently decreasing audit quality. Additionally, we draw from psychology theory on flexibility and investigate whether adding flexibility to the audit work programs that incorporate data analytics can improve auditors’ ability to manage their competing goals so that they can maintain appropriately levels of professional skepticism and conduct a high-quality audit.

Why?

Audit firms are increasingly employing data analytics during the audit, which allows them to more thoroughly examine large quantities of client data. They are investing significantly in developing audit programs that feature data analytics, particularly in the area of fraud detection. However, research suggests that the inflexibility of traditional audit work programs can inhibit auditors’ professional skepticism and development of effective procedures for detecting fraud. In addition to citing improved audit quality as a key benefit of data analytics, auditors also indicate that they use this powerful tool to provide value-added insights to the client throughout the course of the audit. This adds a new goal into auditors’ already crowded set of motivations and prior research suggests that the introduction of additional goals can decrease one’s performance on existing goals, andregulators are concerned about the impacts on auditor independence and professional skepticism.

FAR research team wins EARNet Best Paper Award!

During the Earnet Symposium, held in Thessaloniki, Sara Bibler, CPA, Tina Carpenter, Margaret Christ and Anna Gold won the Best Paper Award with their paper ‘Thinking Outside of the Box: Engaging Auditors’ Innovation Mindset to Improve Auditors’ Fraud Actions in a Data-Analytic Environment’. Congratulations on this gr…
Thinking Outside of the Box: Engaging Auditors’ Innovation Mindset to Improve Auditors’ Fraud Actions in a Data-Analytic Environment
KEY TAKE-AWAYS 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.  
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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.  
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Engaging auditors’ innovation mindset to mitigate goal conflict and improve audit effectiveness with data analytics – thinking outside of the box
The paper explores how engaging auditors’ innovation mindset can improve audit effectiveness when using data analytics, particularly in fraud detection. It addresses two key challenges:
  1. Goal conflict: auditors are increasingly expected to provide client insights alongside ensuring audit quality, which can reduce performance on primary audit tasks.
  2. Cognitive flexibility: essential for interpreting complex data analytics outputs and maintaining professional skepticism.
The authors propose that priming an innovation mindset enhances cognitive flexibility, enabling auditors to manage competing goals and improve judgment quality. They design an experimental study to test whether creativity prompts mitigate negative effects of goal conflict and lead to better fraud risk assessments and audit procedures. Key contributions:
  • Highlights risks of conflicting goals in audits using data analytics.
  • Suggests creativity interventions to strengthen auditors’ professional skepticism.
  • Provides insights for regulators and firms on fostering innovation to improve audit quality.
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Project info

Project Lead

Prof. Dr. Anna Gold
Prof. dr. Anna Gold

Research team

Dr. Margaret Christ
Dr. Tina Carpenter
Dr. Sara Bibler
Prof. Dr. Anna Gold
Prof. dr. Anna Gold

Involved University

University of Georgia | Vrije Universiteit Amsterdam

Theme(s)

Professional Skepticism and Fraud Detection
Project Number – 2019B02

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