The Effect of the Strictness of Consultation Requirements on Fraud Consultation

Posted: 6 Mar 2011 Last revised: 22 Aug 2014

See all articles by Anna Gold

Anna Gold

Vrije Universiteit Amsterdam; Norwegian School of Economics (NHH)

W. Robert Knechel

University of Florida - Fisher School of Accounting

Philip Wallage

VU University Amsterdam; University of Amsterdam - Business School

Date Written: November 24, 2011

Abstract

We investigate how the strictness of a requirement to consult on potential client fraud affects auditors' propensity to consult with firm experts. We consider two specific forms of guidance about fraud consultations: (1) strict, i.e., mandatory and binding; and (2) lenient, i.e., advisory and non-binding. We predict that a strict consultation requirement will lead to greater propensity to consult, particularly under certain client- and engagement-related conditions. Results from two experiments with 163 Dutch audit managers and partners demonstrate that consultation propensity is higher under a strict consultation requirement, but only when underlying fraud risk is high. The strictness effect is also greater under tight versus relaxed time pressure. Further, a strict standard increases auditors' perceived probability that a fraud indicator exists. Overall, we demonstrate that the formulation of a standard can have the desired effect on the judgments of auditors while also creating unexpected incentives that may influence auditor judgments.

Keywords: audit standards, consultation requirement, consultation propensity, deadline pressure, fraud, fraud risk

JEL Classification: C91, G38, M42

Suggested Citation

Gold, Anna and Knechel, W. Robert and Wallage, Philip, The Effect of the Strictness of Consultation Requirements on Fraud Consultation (November 24, 2011). Accounting Review, Vol. 87, No. 3, May 2012, Available at SSRN: https://ssrn.com/abstract=1777041 or http://dx.doi.org/10.2139/ssrn.1777041

Anna Gold (Contact Author)

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31 20 598 25 92 (Phone)

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway

W. Robert Knechel

University of Florida - Fisher School of Accounting ( email )

Warrington College of Business
PO Box 117166
Gainesville, FL 32611-7166
United States

Philip Wallage

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
31 6 5120 6178 (Phone)

University of Amsterdam - Business School ( email )

Faculty of Economics and Econometrics
Roetersstraat 11
1018 WB Amsterdam
Netherlands
31 6 5120 6178 (Phone)

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