Data Analytics and Skeptical Actions: The Countervailing Effects of False Positives and Consistent Rewards for Skepticism

Abstract

We investigate if varying rates of false positives impact auditor skepticism toward red flags identified by data analytic tools. We also examine the extent to which consistent rewards for skepticism can improve the application of skepticism on audits employing data analytics. Using an experiment with practicing auditors we observe that, when false positive rates are higher, skepticism levels are low. Importantly, both our lower and higher false positive conditions reflect well calibrated analytic tests. We also find that consistent rewards for skepticism significantly improve the skepticism of our auditors. However, the positive effect of rewards is limited, in that we do not see improvements in skepticism when the false positive rate is higher. Our findings highlight the importance of improving the calibration of analytic tests to reduce false positives and the need for a culture change where appropriate skepticism is consistently rewarded in order for audit firms to effectively use analytic tools to enhance audit quality.

Keywords: audit, data analytics, false positives, professional skepticism, rewards

JEL Classification: M40, M41, M42