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

43 Pages Posted: 8 Mar 2020 Last revised: 20 May 2020

See all articles by Dereck Barr-Pulliam

Dereck Barr-Pulliam

University of Louisville - Department of Accountancy

Joseph F. Brazel

North Carolina State University - Poole College of Management - Department of Accounting

Jennifer McCallen

University of Georgia - J.M. Tull School of Accounting

Kimberly Walker

UW-Madison

Date Written: May 19, 2020

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. 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 and additional investigation is less likely to identify a misstatement. Our findings highlight the importance of calibrating analytic tools 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

Suggested Citation

Barr-Pulliam, Dereck D. and Brazel, Joseph F. and McCallen, Jennifer and Walker, Kimberly, Data Analytics and Skeptical Actions: The Countervailing Effects of False Positives and Consistent Rewards for Skepticism (May 19, 2020). Available at SSRN: https://ssrn.com/abstract=3537180 or http://dx.doi.org/10.2139/ssrn.3537180

Dereck D. Barr-Pulliam

University of Louisville - Department of Accountancy ( email )

United States

Joseph F. Brazel (Contact Author)

North Carolina State University - Poole College of Management - Department of Accounting ( email )

Campus Box 8113
Nelson Hall
Raleigh, NC 27695
United States
919-513-1772 (Phone)

Jennifer McCallen

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States

Kimberly Walker

UW-Madison ( email )

Madison
Madison, WI 53705

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