The Effects of Accurate Fraud Risk Assessment on Audit Professionals’ Judgments of Auditor Performance in Cases of Undetected Fraud: Evidence of Shifting Standards

40 Pages Posted: 18 Dec 2020

See all articles by Kamber V. Hetrick

Kamber V. Hetrick

D'Amore-McKim School of Business - Accounting Group

Mark E. Peecher

University of Illinois at Urbana-Champaign; University of Illinois College of Law

Andrew Reffett

Miami University of Ohio

Aaron F. Zimbelman

University of South Carolina

Date Written: October 21, 2020

Abstract

We provide theory and experimental evidence that, in cases of undetected fraud, professional evaluators (i.e. experienced auditors) do not evaluate auditor performance any more favorably when the auditor more accurately assessed a heightened risk of fraud. This occurs despite professional evaluators indicating both that (1) more accurate fraud risk assessments are higher quality risk assessments, and (2) higher quality risk assessments improve auditor performance. These beliefs do not ultimately increase performance evaluations of auditors who more accurately assess fraud risks because professional evaluators, consistent with theory, react to accurately heightened risk assessments by non-normatively increasing their conceptualization of the standard of care auditors must meet to comply with audit standards. The tendency to hold auditors to higher (lower) standards when they more (less) accurately assess fraud risks yields a judgment pattern that is inconsistent with, and potentially undermines the paramount value accorded to accurate risk assessment by audit practitioners, standards, regulators, and academics.

Keywords: risk assessment, undetected fraud, auditor liability, auditor foresight, black sheep effect

JEL Classification: M42, M41

Suggested Citation

Hetrick, Kamber and Peecher, Mark E. and Reffett, Andrew and Zimbelman, Aaron F., The Effects of Accurate Fraud Risk Assessment on Audit Professionals’ Judgments of Auditor Performance in Cases of Undetected Fraud: Evidence of Shifting Standards (October 21, 2020). Northeastern U. D’Amore-McKim School of Business Research Paper No. 3716630, Available at SSRN: https://ssrn.com/abstract=3716630 or http://dx.doi.org/10.2139/ssrn.3716630

Kamber Hetrick

D'Amore-McKim School of Business - Accounting Group ( email )

360 Huntington Ave.
Boston, MA 02115
United States

Mark E. Peecher (Contact Author)

University of Illinois at Urbana-Champaign ( email )

Gies College of Business
1206 South Sixth Street
Champaign, IL 61820
United States
217-333-4542 (Phone)
217-244-0902 (Fax)

University of Illinois College of Law ( email )

504 E. Pennsylvania Avenue
Champaign, IL 61820
United States

Andrew Reffett

Miami University of Ohio ( email )

Oxford, OH 45056
United States

Aaron F. Zimbelman

University of South Carolina ( email )

Darla Moore School of Business
1014 Greene Street
Columbia, SC 29208
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
38
Abstract Views
216
PlumX Metrics