Thinking Outside of the Box: Engaging Auditors’ Innovation Mindset to Improve Auditors’ Fraud Procedures

Abstract

Auditors have historically struggled with identifying fraud and continue to do so today. Audit firms try to tackle these challenges by updating their audit approaches and incorporating data analytics, which can help reveal unusual patterns in data that could point to misstatements including fraudulent activity. However, harnessing this potential may require auditors to adopt an innovation mindset as urged by firms and regulators. Innovation is creativity in action. Therefore, building on the creativity literature, we develop an innovation mindset prime designed to improve auditors’ ability to generate effective fraud procedures. Further, with the advent of data analytics, auditors are increasingly asked to provide value-added client insights, in addition to their primary goal of achieving high-quality audits. While regulators express concern about conflicting goals, theory suggests that combining a client insights goal with an innovation mindset can mitigate potential goal conflict and even further strengthen the innovation mindset effect. We experimentally demonstrate that an innovation mindset significantly improves auditors’ development of effective fraud procedures. Further, our pattern of results suggests that an innovation mindset is particularly important when auditors are also asked to provide client insights as our results suggest that an innovation mindset can mitigate adverse effects of the client insights goal and the innovation mindset effect is strongest when the client insights goal is present. Overall, our findings support standard setters’ claim that auditors have room for improvement when it comes to fraud procedures, by showing that an innovation mindset significantly boosts creativity, enhancing auditors’ decision-making quality. Accordingly, we provide support for regulator and practitioner claims that innovation could be an important factor for audit quality for today’s auditors.

Keywords: innovation mindset; fraud detection; auditor judgment; goals; creativity; cognitive flexibility

JEL Classification: M42