Encouraging Professional Skepticism in the Industry Specialization Era

Abstract:     
This paper provides theory and experimental evidence that, under common audit conditions, industry specialization inhibits auditors’ professional skepticism. As auditors amass industry experience, they gain confidence and make more automatic judgments (i.e., analyzing audit evidence is cognitively faster, easier, and intuitive for industry specialists), inhibiting their inclination to be skeptical when there are no overt indicators of elevated misstatement risk. Encouragingly, I also predict and find that audit firms can enhance industry specialists’ professional skepticism by emphasizing the importance of expanding professional skepticism from the traditional focus on audit evidence to include auditors’ own judgment and decision making (i.e., be circumspect or self-critical). These results inform regulators as they consider proposed radical reforms (e.g., mandatory firm rotation) to address the extensive public criticism of the auditing profession for failing to exercise sufficient professional skepticism. Specifically, if regulators do not consider specialists’ tendency to make automatic judgments, such reforms may not succeed in enhancing professional skepticism.

Number of Pages in PDF File: 37

Keywords: professional skepticism, professional judgment, industry specialization, fraud, dual-processing, self-criticism

working papers series