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The Effect of Audit Standards on Fraud Consultation and Auditor Judgment

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  • Gold-Nöteberg, A.H.
  • Knechel, W.R.
  • Wallage, P.

Abstract

We investigate how the strictness of a requirement to consult on potential client fraud affects auditor assessments of fraud risk and the propensity to consult with firm experts. We test two specific forms of guidance about fraud consultations: (1) relatively strict (i.e., mandatory and binding) and (2) relatively lenient (i.e., advisory and non-binding). We predict that a strict consultation requirement will lead to greater propensity to consult and higher fraud risk assessments. We further investigate potentially amplifying effects of a client attribute (underlying fraud risk) and an engagement attribute (deadline pressure). Results from two experiments with 208 Dutch audit managers and partners demonstrate that fraud risk and the consultation propensity are both assessed higher under a strict consultation requirement. For near-partners and partners, this effect is compounded when a client exhibits significant red flags; for managers, it is compounded when deadline pressure is tight. This study demonstrates that the formulation of a standard, such as the consultation requirement, may create adverse incentives that bias risk assessment, which should be considered by regulators and audit firms when developing, formulating and implementing such procedures.

Suggested Citation

  • Gold-Nöteberg, A.H. & Knechel, W.R. & Wallage, P., 2008. "The Effect of Audit Standards on Fraud Consultation and Auditor Judgment," ERIM Report Series Research in Management 11687, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    • Handle: RePEc:ems:eureri:11687
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    References listed on IDEAS

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    More about this item

    Keywords

    audit standards; consultation propensity; consultation requirement; deadline pressure; fraud risk assessment; motivated reasoning; red flags;
    All these keywords.

    JEL classification:

    • M - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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