Auditor Mindsets in Fraud-Detection Planning
40 Pages Posted: 29 Mar 2021
Date Written: March 26, 2021
The PCAOB maintains that auditors planning fraud detection tend to choose procedures that readily demonstrate audit work rather than those more effective at detecting fraud. One possible reason for this disparity between auditors’ obligation and their performance may be the way they conceive the fraud-detection planning task. Currently, auditors view the task as selecting procedures aware that their choices will subsequently be reviewed, which leads them to call to mind “implementation intentions” from previous fraud-detection planning. We consider an alternative view of the task where subordinate auditors work under agreements that offer potential compensation for forming effective fraud-detection plans, leading them to construe the task as an unresolved problem. This alternative representation of the task can lead auditors to adopt a deliberative mindset where they engage in an open-minded examination of evidence and set engagement-specific detection goals. In an experiment, auditors were assigned to complete a fraud-detection planning task under performance-contingent agreements, the typical review process, or complete anonymity. We find that auditors operating under performance-contingent agreements reported that the task required deeper thought about fraud risks and development of an overall strategy. Under performance-contingent agreements, auditors spent more time planning, were more likely to correctly identify the probable source of fraud and selected programs that were more effective. Auditors focused on accountability described the task as providing the reviewer with detailed explanations and demonstrating that a lot of steps were taken. They budgeted significantly more hours to less effective procedures and fewer hours to effective, new procedures.
Keywords: deliberative mindset, implemental mindset, fraud detection, performance-contingent agreements
JEL Classification: M42, M49
Suggested Citation: Suggested Citation