The Effect of the Strictness of Consultation Requirements on Fraud Consultation

A.H. Gold, W.R. Knechel, P. 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
JournalThe Accounting Review
Volume87
Issue number3
DOIs
Publication statusPublished - 2012

Fingerprint

Fraud
Propensity
Auditors
Experiment
Incentives
Time pressure
Fraud risk
Auditor judgment
Audit
Guidance
Managers

Cite this

@article{58b6f03b5d334bc2a238e2f3c9056a7e,
title = "The Effect of the Strictness of Consultation Requirements on Fraud Consultation",
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.",
author = "A.H. Gold and W.R. Knechel and P. Wallage",
year = "2012",
doi = "10.2308/accr-10213",
language = "English",
volume = "87",
pages = "925--949",
journal = "The Accounting Review",
issn = "0001-4826",
publisher = "American Accounting Association",
number = "3",

}

The Effect of the Strictness of Consultation Requirements on Fraud Consultation. / Gold, A.H.; Knechel, W.R.; Wallage, P.

In: The Accounting Review, Vol. 87, No. 3, 2012, p. 925-949.

Research output: Contribution to JournalArticleAcademicpeer-review

TY - JOUR

T1 - The Effect of the Strictness of Consultation Requirements on Fraud Consultation

AU - Gold, A.H.

AU - Knechel, W.R.

AU - Wallage, P.

PY - 2012

Y1 - 2012

N2 - 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.

AB - 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.

U2 - 10.2308/accr-10213

DO - 10.2308/accr-10213

M3 - Article

VL - 87

SP - 925

EP - 949

JO - The Accounting Review

JF - The Accounting Review

SN - 0001-4826

IS - 3

ER -