The effect of the strictness of consultation requirements on Fraud Consultation

A. Gold, W.R. Knechel, Ph. Wallage

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

We investigate how the strictness of a requirement to consult on potential client fraud affects auditors' propensity to consult with firm experts. We consider two specific forms of guidance about fraud consultations: (1) strict, i.e., mandatory and binding; and (2) lenient, i.e., advisory and non-binding. We predict that a strict consultation requirement will lead to greater propensity to consult, particularly under certain client- and engagement-related conditions. Results from two experiments with 163 Dutch audit managers and partners demonstrate that consultation propensity is higher under a strict consultation requirement, but only when underlying fraud risk is high. The strictness effect is also greater under tight versus relaxed time pressure. Further, a strict standard increases auditors' perceived probability that a fraud indicator exists. Overall, we demonstrate that the formulation of a standard can have the desired effect on the judgments of auditors while also creating unexpected incentives that may influence auditor judgments.

Original languageEnglish
Pages (from-to)925-949
Number of pages25
JournalAccounting Review
Volume87
Issue number3
DOIs
Publication statusPublished - May 2012

Keywords

  • auditing standards
  • consultation requirement
  • consultation propensity
  • deadline pressure
  • fraud
  • fraud risk
  • AUDITOR BEHAVIOR
  • DECISION-MAKING
  • TIME PRESSURE
  • ACCOUNTABILITY
  • RISK
  • PERFORMANCE
  • JUSTIFICATION
  • INFORMATION
  • JUDGMENTS
  • FRAMEWORK

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