Volume 19, 2007 pp. 215229 Attention to Evidence of Aggressive Financial Reporting and Intentional Misstatement Judgments: Effects of Experience and Trust Jacob M. Rose Southern Illinois University Carbondale ABSTRACT: This study extends prior research by examining the effects of dispositional trust, induced skepticism, and fraud-specic audit experience on attention to aggres- sive nancial reporting practices and judgments of potential misstatement. In an ex- perimental analysis using 125 practicing auditors, this study nds that auditors who are less trusting of others attend more to evidence of aggressive reporting than do more trusting auditors, and higher levels of induced skepticism increase attention to aggressive reporting. Further, auditors who pay more attention to evidence of aggres- sive reporting are more likely to believe that intentional misstatement occurred. General audit experience was not a predictor of auditors attention to aggressive reporting or auditors judgments about intentional misstatements. Auditors with more fraud-specic experience, however, were more likely than auditors with less fraud-specic experience to believe that intentional misstatement had occurred when evidence of aggressive reporting exists. Keywords: aggressive reporting; experience; fraud; skepticism; trust. INTRODUCTION T he responsibility of auditors to detect and prevent fraud has received substantial attention in recent years. In response to policy makers and practitioners concerns that auditors often fail to detect fraud, the Auditing Standards Board (ASB) released Statement on Auditing Standards (SAS) No. 82 in 1997 (AICPA 1997). More recently, the ASB replaced SAS No. 82 with SAS No. 99, which requires more auditor attention to fraud and fraud risk during the audit process than any prior standard (AICPA 2003). SAS No. 99 was introduced to increase investor condence in capital markets by promoting more effective detection of fraud (AICPA 2002). While auditors face increasing pressures to detect fraud, they have little experience with fraudulent reporting and face many barriers in detecting nancial statement fraud (Zimbelman 1997; Knapp and Knapp 2001). Only a sparse collection of accounting research has directly examined auditors ability to detect potentially fraudulent reporting or auditors judgments concerning misstatements (Zimbelman 1997; Phillips 1999; Knapp and Knapp 2001). In addition, prior research has not evaluated auditor traits and experiences associated The author thanks participants of workshops at Lincoln University, University of Melbourne, University of MissouriKansas City, and Southern Illinois University for their suggestions. In addition, the author gives special thanks to Vicky Arnold, Steve Kaplan, Anna Rose, and two anonymous reviewers for their valuable insight and input. 216 Rose Behavioral Research in Accounting, 2007 with increased attention to aggressive or potentially fraudulent nancial reporting. Under- standing auditor traits and experiences that lead to increased attention to indicators of fraudulent reporting is essential to improving fraud detection and prevention. Firms may be able to promote attention to and detection of aggressive and potentially fraudulent re- porting by making audit personnel assignments that take advantage of individual auditors traits and experiences. This paper employs an experiment involving 125 practicing auditors to investigate the effects of induced skepticism, auditors dispositional trust, and fraud-specic audit experi- ence on auditor attention to aggressive reporting, and the effects of attention on judgments of misstatement. Results from the experiment indicate that increased skepticism results in increased attention to aggressive reporting. Next, results indicate that less trusting auditors attend more to evidence of aggressive reporting than do more trusting auditors. Increased attention to evidence of aggressive reporting leads to beliefs that aggressive reporting is the result of intentional misstatements by management. Auditors who have low levels of trust pay substantial attention to audit evidence that may indicate nancial statement fraud. This research nds that dispositional trust can explain more of the variance in attention and judgment than context-induced skepticism. Finally, auditors with more fraud-specic ex- perience are more likely to believe that intentional misstatement has occurred than are auditors with less fraud-specic experience. The remainder of the paper describes the relevant literature and hypotheses, followed by a description of the methods and results. The nal section includes conclusions and potential extensions. HYPOTHESIS DEVELOPMENT Attention to Audit Evidence Trust and Professional Skepticism One of the primary purposes of SAS No. 82 was to develop the concept of professional skepticism (AICPA 1997; Knapp and Knapp 2001). Professional skepticism is dened in SAS No. 82 as an attitude that includes a questioning mind and a critical assessment of audit evidence. The major premise behind promoting professional skepticism is that skep- tical auditors will perform better audits and detect more fraud (AICPA 1997; Knapp and Knapp 2001; Rose and Rose 2003). At the beginning of 2003, the ASB released SAS No. 99, Consideration of Fraud in a Financial Statement Audit. This new statement supersedes SAS No. 82 and greatly increases the auditors responsibility to maintain professional skep- ticism and detect fraud. The psychology literature suggests that skepticism inuences the evaluation of evi- dence. Schul et al. (1996) demonstrated that individuals who are skeptical about evidence or its source will more critically evaluate the messages content than will individuals who are less skeptical. Following Kruglanskis (1989) Lay Epistemic Theory, Schul et al. (1996) suggest that more critical evaluation of a message prevents anchoring on a potentially invalid piece of information. Hilton et al. (1993) nds similar results in a related study. When evaluating a target persons motive for engaging in an activity, evaluators who were more skeptical of the targets motive analyzed the targets behavior from multiple perspec- tives, and attempted to determine if behaviors were consistent with many alternative mo- tives. In both studies, skepticism created by the context, the evidence, or the source of evidence resulted in evaluation strategies that relied on generating multiple explanations for messages and target behavior. Attention to Evidence of Aggressive Financial Reporting 217 Behavioral Research in Accounting, 2007 Prior accounting research has treated professional skepticism as a situational variable that can be manipulated through warnings of potential fraud or aggressive reporting prac- tices. Peecher (1996) induced skepticism with statements suggesting that prior audits had been performed without adequate skepticism and found that the auditors with induced skepticism relied less on explanations provided by clients. Phillips (1999) directly tested the effects of induced skepticism on attention to audit evidence. Results from his study indicate that auditors who are made skeptical of nancial disclosures during analytical review pay more attention to evidence of aggressive reporting. In order to conrm the ndings from prior accounting research, this study posits that induced skepticism (hereafter referred to as skepticism) will increase auditors attention to evidence of aggressive reporting. H1: Higher levels of contextually induced skepticism among auditors will result in more attention to evidence of aggressive reporting than will lower levels of induced skepticism among auditors. The current study also considers an auditors dispositional trust in addition to skepti- cism. Dispositional trust (hereafter referred to as trust) is a personality trait that an auditor brings to all situations. Personality traits affect most behavior in our personal and professional lives (Goffman 1959), and trust inuences behavior across decision contexts (Wrightsman 1974; Rotter 1980). The existing accounting studies have not examined how trust can affect attention to indicators of potential fraud or aggressive accounting. Numerous studies in the psychology literature and a few accounting studies nd that individual differences exist in levels of trust (e.g., see Wrightsman 1974; Harnett and Cummings 1980; Rempel et al. 1985; Wrightsman 1991; Sorrentino et al. 1995; Shaub 1996). Individuals with high levels of trust consistently trust others across situations, con- texts, and individuals (Deutsch 1973; Wrightsman 1974; Harnett and Cummings 1980; Wrightsman 1991). Those who trust across all situations are assumed to either believe that people are typically trustworthy or that they will personally benet by trusting others (Deutsch 1973; Harnett and Cummings 1980; Wrightsman 1991). Shaub (1996) suggests that trust is a key component of professional skepticism because auditors who have less trust of their clients have more questioning minds. The psychology literature demonstrates that less trusting individuals evaluate people and evidence more critically (Schul 1993; Schul et al. 1996), and a recent accounting study found that less trusting auditors evaluate audit evidence more critically (Rose and Rose 2003). Less trusting auditors who analyze client-produced nancial statements and other - nancial evidence evaluate the evidence more critically than more trusting auditors (Rose and Rose 2003). Auditors generate more explanations for the results of analytical proce- dures when they are concerned about the integrity of the evidence (Rose and Rose 2003). Prior accounting research has also shown that auditors who are made aware of high-risk accounts pay more attention to aggressive accounting in these accounts during workpaper review (Phillips 1999). In other words, when skepticism is induced by the situational con- text, auditors increase attention to higher-risk accounts. This research proposes that auditors with lower levels of trust will also pay more attention to aggressive reporting (but not more attention to nonaggressive reporting) than more trusting auditors across all levels of skepticism. 218 Rose Behavioral Research in Accounting, 2007 H2: Less trusting auditors will pay more attention to evidence of aggressive re- porting than will more trusting auditors. Experience and Fraud-Specic Experience Knapp and Knapp (2001) nd that audit managers are more effective in assessing the risk of fraud using analytical procedures than are audit seniors. Phillips (1999), on the other hand, nds that audit managers do not pay any more attention to evidence of aggressive reporting than audit seniors, and more-experienced auditors are not any more likely to believe that fraud has occurred when evidence of aggressive reporting exists. The mixed evidence likely stems from the nature of knowledge differences between more and less- experienced auditors. Prior research has demonstrated that more-experienced auditors have more audit knowl- edge and more meaningful organizations of knowledge than less-experienced auditors have (e.g., see Libby and Frederick 1990; Frederick 1991; Tubbs 1992; Christ 1993). Further, the general concept that more-experienced professionals acquire more knowledge than less- experienced professionals has strong face validity and has been validated in psychology research (e.g., see Chi et al. 1982). Therefore, the question arises: why would more- experienced auditors with more audit knowledge not consistently be found to be better detectors of aggressive reporting than less-experienced auditors? The mixed results likely stem from the fact that experienced auditors have many more exposures to nonfraudulent reporting than fraudulent reporting (Loebbecke et al. 1989; Solomon et al. 1999). As a result, experienced auditors without sufcient exposure to fraud will tend to focus on non- fraudulent explanations for errors (Zimbelman 1997). The lack of exposure to fraudulent reporting causes auditors to have little well-developed knowledge of fraud and indicators of fraud or aggressive reporting (Zimbelman 1997). Similarly, Kaplan et al. (1992) nd that more-experienced auditors (determined by level within the rm) believe that nonerror causes of ratio uctuations are more plausible than error causes, because their experience provides them with examples of ratio uctuations caused by the environment. Based on these prior studies of auditor knowledge differences, this paper proposes that general audit experience is an insufcient proxy for fraud knowledge or ability to detect potentially fraudulent reporting. Auditors with more general audit experience may not have better-developed schema for fraud than auditors with less experience. Fraud-specic ex- perience, however, should result in the development of knowledge structures that are useful for the detection of potentially fraudulent and aggressive reporting practices. That is, au- ditors who have been directly involved with the detection of nancial statement fraud will have more knowledge that is useful for the detection of potentially fraudulent reporting in future engagements, and will increase their attention to aggressive reporting. H3: Fraud-specic experience is positively associated with auditors attention to evidence of aggressive reporting. Auditor Judgment Variation in attention to aggressive reporting is one expected effect of differences in inherent trust, induced skepticism, and fraud-specic experience. Trust, skepticism, and experience can also inuence the judgments of auditors indirectly through their effects on attention. As more attention is directed to evidence of aggressive reporting, auditors will believe that intentional misstatement is more likely. Increased attention to evidence of ag- gressive reporting will increase judgments of the likelihood of intentional misstatement for two reasons. First, attention is a strong indication of the weight placed on evidence in Attention to Evidence of Aggressive Financial Reporting 219 Behavioral Research in Accounting, 2007 FIGURE 1 Proposed ModelEffects of TRUST and EXPERIENCE on ATTENTION and JUDGMENT Client-Related SKEPTICISM H1 (+) ATTENTION to Evidence of Aggressive Reporting H4 (+) H2 () JUDGMENT of Intentional Misstatement H3 (+) FRAUD EXPERIENCE TRUST H1: Higher levels of skepticism result in more attention to evidence of aggressive reporting than will lower levels of skepticism. H2: Less trusting auditors will pay more attention to evidence of aggressive reporting than will more trusting auditors. H3: Auditors with more fraud-specic experience will pay more attention to aggressive reporting than will auditors with less fraud-specic experience. H4: Auditors who pay more attention to evidence of aggressive reporting will be more likely to believe that intentional misstatement has occurred than auditors who pay less attention to evidence of aggressive reporting. Dotted lines represent potential direct effects of the independent variables on the judgment of misstatement. judgment processes. Increased attention to specic evidence indicates increased weight placed on that evidence (Fiske 1980; Wedell and Senter 1997). Therefore, more attention to evidence of aggressive reporting is expected to increase the weight placed on evidence of aggressive reporting in judgments about potential misstatement. Second, an increase in the amount of aggressive evidence items stored in memory is expected to increase estimates of intentional misstatement. Consequently, auditors who attend more to evidence of aggressive reporting will esti- mate higher likelihoods of intentional misstatement than auditors who attend less to evi- dence of aggressive reporting. H4: Auditors attention to evidence of aggressive reporting will be positively associated with their assessments of the likelihood of intentional misstatement. In sum, this research proposes that skepticism, trust, and an auditors prior fraud ex- perience will affect attention to evidence of aggressive nancial reporting, and attention to this evidence will inuence judgments about the likelihood of intentional misstatements. The expected relationships are depicted in the theoretical model in Figure 1. Note that, as shown in Figure 1, it is also possible for skepticism, trust, and fraud experience to inuence judgment directly. While no hypotheses are developed for the possibility of direct effects, this research will explore the potential for direct paths. RESEARCH METHOD Participants A total of 135 practicing auditors participated in the experiment. Of these participants, ten failed to complete all of the experimental materials. As a result, the nal sample size 220 Rose Behavioral Research in Accounting, 2007 was 125 participants. 1 Participants completed the experiment during an intensive CPE train- ing session for regional ofces of the Big 4 accounting rms and two national accounting rms. The participants had an average of 3.6 years of experience. In order to motivate performance, successful completion of all portions of the experiment was made a re- quirement for receiving credit for a four-hour CPE session. Participants were given 45 minutes to complete the experimental materials. Task and Procedures Participants were randomly assigned to one of two treatment conditions. The two treat- ments were derived from Phillips (1999). In the rst treatment group, participants received a statement that increases in the sales account were materially higher than expected. The second treatment received a statement with no indication of abnormality in the sales ac- count. The treatments are designed to create two categories of client-related skepticism: high and low. In Phillips (1999), auditors assigned to the high level of skepticism paid more attention to aggressive and potentially fraudulent reporting (measured with recall of aggressive evi- dence). By manipulating skepticism at two levels, it is possible to determine whether an individuals level of trust has the same effects on attention to evidence of aggressive re- porting under conditions of high and low skepticism. The introductory experimental materials provided background information and ex- plained to participants that they were performing workpaper reviews for a hypothetical audit client. The background information described the client as a manufacturer and seller of electric, gas, and water meters. Participants were told that the primary purpose of the review was to identify contentious accounting matters. Participants then proceeded to review the same 45 pieces of audit evidence used in Phillips (1999), which were divided into 14 nancial statement categories and contained 12 pieces of evidence indicative of aggressive nancial reporting. Of these 12 evidence items, ve related to sales and seven related to nonsales nancial items. 2 After reviewing the evidence, participants completed a short distracter task and then completed a surprise free recall task. The written free recall task measured attention to evidence of aggressive reporting. Using free recall to measure attention is consistent with prior research of attention in the accounting literature (e.g., see Tan 1995; Libby and Trotman 1993; Phillips 1999). An audit expert who was unaware of the treatment conditions analyzed the free recall task. The expert coder classied each piece of evidence recalled as belonging or not belonging to the original set of 45 pieces of audit evidence. For each piece of evidence accurately recalled, the coder classied the recalled evidence as consistent or not consistent with the 12 pieces of evidence indicative of aggressive reporting and as sales-account related (ve pieces) or not sales-account related (seven pieces). The author also coded the instruments, and there was 96 percent agreement between the coders. The measure of ATTENTION used in the analyses is the percentage of the 12 aggressive evi- dence items recalled. After the recall task, participants responded to a question designed to measure their overall JUDGMENTs of the likelihood of intentional nancial statement misstatement. 1 The nal sample included six auditors with a Certied Fraud Examiner license and three participants who indicated a specialization in fraud. The results do not change if these nine participants are excluded from the analyses. The percentage recall of aggressive evidence items is higher for fraud specialists (mean 0.61) than nonfraud specialists (mean 0.46). 2 Administration of the experiment involved two evidence orders. No differences in results were found across the two evidence orders, and all results collapse the evidence orders. Attention to Evidence of Aggressive Financial Reporting 221 Behavioral Research in Accounting, 2007 JUDGMENT was measured after recall because attention to evidence is an antecedent to JUDGMENTs based upon that evidence. Requiring subjects to recall the audit evidence before making a JUDGMENT prevented JUDGMENT from interfering with the measure- ment of ATTENTION. Measuring ATTENTION before JUDGMENT does introduce a design limitation, however. While the measure of auditor ATTENTION is not inuenced by JUDG- MENT, it is possible that the ATTENTION measure can affect subsequent auditor JUDG- MENTs and the judgment of intentional misstatement measure. The judgment of misstate- ment scale is presented below: What is the likelihood that the clients nancial statements were intentionally misstated? 0 50 100
Extremely Extremely Low Likelihood High Likelihood Next, participants lled out a demographics questionnaire. The demographics question- naire included measures of general audit experience (years and months of experience) and fraud-specic experience (i.e., the number of audit engagements where material fraud was discovered). Finally, participants completed a previously validated questionnaire designed to measure their level of trust (Wrightsman 1974; Wrightsman 1991). The Wrightsman scale consists of 14 statements concerning honesty and trust, and participants indicate their agreement with each statement on a six-point scale. Numerous psychology studies and prior accounting studies that examine auditors trust of their clients have used the Wrightsman scale to measure trust (e.g., see Rose and Rose 2003; Shaub 1996). The trust score is the sum of the 14 questions, where the trusting end of the scale for each question is scored as 3 and the nontrusting end is scored as 3 (Wrightsman 1991). The score can range from 42 to 42, where lower scores represent lower levels of trust. RESULTS Manipulation Checks Immediately after the judgment task, participants rated the risk in the sales account on a scale of 1 to 100 (very low risk to very high risk) to verify the effectiveness of the manipulation of client-related skepticism. Participants in the high client-related skepticism treatment rated the risk at 67.8, while participants in the low client-related skepticism treatment rated the risk at 41.4 (difference 26.4, signicant at p .001). The classi- cations of individual audit evidence items as being aggressive or not aggressive were val- idated in Phillips (1999), and did not require further manipulation checks. Descriptive Statistics and Correlations Table 1 presents descriptive statistics and Table 2 presents a correlation analysis of the variables of interest: ATTENTION to evidence of aggressive reporting, JUDGMENT of the likelihood of material misstatement, TRUST, client-related SKEPTICISM, FRAUD EXPE- RIENCE, and also general AUDIT EXPERIENCE. As expected from prior research of au- ditors experience with fraud (e.g., Loebbecke et al.1989; Zimbelman 1997; Solomon et al. 1999), the auditor participants had little prior exposure to fraud during audit engagements (mean 0.67 fraud exposures). Participants recalled, on average, 44 percent of the 12 222 Rose Behavioral Research in Accounting, 2007 TABLE 1 Descriptive Statistics Minimum Maximum Mean Std. Deviation AUDIT EXPERIENCE 8 120 43.22 19.45 FRAUD EXPERIENCE 0 15 0.67 1.76 TRUST 16 24 7.24 6.73 ATTENTION 0.11 0.82 0.44 0.17 JUDGMENT 0.00 78.00 26.60 17.40 Variable Denitions: AUDIT EXPERIENCE the number of months of professional audit experience; FRAUD EXPERIENCE the number of audit engagements where material fraud was discovered and the auditor was involved with the audit team; TRUST the dispositional trust score from the Wrightsman trust scale; ATTENTION (to evidence of aggressive reporting) the percentage recall of the 12 pieces of evidence indicative of aggressive reporting; and JUDGMENT participants assessments of the likelihood that nancial data was intentionally misstated on a 0100 scale. evidence items indicative of aggressive reporting. 3 In general, the auditors believed that intentional misstatement was less likely than unintentional misstatement (mean 26.6). The average level of trust (mean 7.24) is on the marginally trusting side of the Wrightsman scale. This nding is similar to those from prior audit research (Rose and Rose 2003). The auditor participants were slightly more trusting than randomly sampled college students from around the country (mean 1.40) (Wrightsman 1991). Reliability testing of the scale found a test-retest reliability rate of 0.74 (Wrightsman 1991). Analysis of the scales reliability in this study produces a Cronbachs alpha of 0.816. As shown in Table 2, TRUST, client-related SKEPTICISM, and FRAUD EXPERIENCE are all signicantly correlated with both ATTENTION to aggressive evidence and JUDG- MENT of the likelihood of intentional misstatement. General AUDIT EXPERIENCE, how- ever, is not correlated with ATTENTION, JUDGMENT, or FRAUD EXPERIENCE. Finally, there is no statistically signicant correlation between general AUDIT EXPERIENCE and TRUST (r .015, p .871) or FRAUD EXPERIENCE and TRUST (r .115, p .204). This is consistent with the ndings from the psychology literature, which nd that TRUST is a relatively stable personality trait (Wrightsman 1974; Rotter 1980). 3 Multiple measures of attention were collected. The measure used in all analyses was the percentage recall of the 12 evidence items indicative of aggressive reporting. I also measured the percentage recall of the ve sales- related evidence items indicative of aggressive reporting. Use of this alternative measure in the path analyses produces the same pattern of results. The only meaningful difference between this measure and the percentage of all aggressive evidence is that participants recall a higher percentage of the sales-related aggressive evidence (mean 0.61) relative to all aggressive evidence (mean 0.44). This may result from requirements in SAS No. 99 to pay close attention to revenue recognition. In addition to the recall of aggressive evidence, I measured the recall of evidence not indicative of aggressive reporting. The recall rates for nonaggressive evidence do not differ signicantly across auditors with higher and lower levels of trust. That is, TRUST affects ATTENTION to aggressive evidence, but there is no correlation between TRUST and ATTENTION to nonaggressive evidence (p 0.5). Similarly, there is no signicant correlation between SKEPTICISM and recall of nonaggressive evidence (p 0.4). A t t e n t i o n t o E v i d e n c e o f A g g r e s s i v e F i n a n c i a l R e p o r t i n g 2 2 3 B e h a v i o r a l R e s e a r c h i n A c c o u n t i n g , 2 0 0 7 TABLE 2 Correlation Analysis SKEPTICISM AUDIT EXPERIENCE FRAUD EXPERIENCE TRUST ATTENTION JUDGMENT SKEPTICISM Pearson Correlation 1 0.035 0.118 0.195 0.326 0.272 Sig. 0.710 0.204 0.331 0.000 0.002 AUDIT EXPERIENCE Pearson Correlation 1 0.149 0.015 0.016 0.104 Sig. 0.108 0.871 0.861 0.264 FRAUD EXPERIENCE Pearson Correlation 1 0.115 0.207 0.251 Sig. 0.204 0.022 0.005 TRUST Pearson Correlation 1 0.393 0.315 Sig. 0.000 0.000 ATTENTION Pearson Correlation 1 0.310 Sig. 0.000 JUDGMENT Pearson Correlation 1 Sig. Variable Denitions: SKEPTICISM (Client-related) an experimental manipulation. The treatment creates two categories of induced skepticism, high and low; AUDIT EXPERIENCE the number of months of professional audit experience; FRAUD EXPERIENCE represents the number of audit engagements where material fraud was discovered and the auditor was involved with the audit team; TRUST the dispositional trust score of each auditor subject from the Wrightsman trust scale; ATTENTION (to evidence of aggressive reporting) the percentage recall of the 12 pieces of evidence indicative of aggressive reporting; and JUDGMENT participants assessments of the likelihood that nancial data was intentionally misstated. 224 Rose Behavioral Research in Accounting, 2007 FIGURE 2 Path Analysis ATTENTION to Evidence of Aggressive Reporting 0.245* 3.722** Client-Related SKEPTICISM 0.078 0.329** TRUST 0.970 JUDGMENT of Intentional Misstatement 0.140 0.138* FRAUD EXPERIENCE *, ** p < .01; p < .001, respectively Variable Denitions: Client-Related SKEPTICISM an experimental manipulation. The treatment creates two categories of skepticism, high and low; TRUST the dispositional trust score of each auditor subject from the Wrightsman trust scale; FRAUD EXPERIENCE the number of audit engagements where material fraud was discovered and the auditor was involved with the audit team; ATTENTION to aggressive reporting the percentage recall of the 12 pieces of evidence indicative of aggressive reporting; and JUDGMENT of intentional misstatement participants assessments of the likelihood that nancial data was intentionally misstated. Attention Hypothesis testing is performed with a causal model and path analysis (see Figure 2). The intermediary variable is ATTENTION to aggressive evidence items (measured as the percentage of aggressive items recalled), and the dependent variable is JUDGMENT of intentional misstatement. The independent variables are TRUST (the score from the Wrightsman scale), client-related SKEPTICISM, and FRAUD EXPERIENCE (the number of engagements where material fraud was discovered). The paths in the model include the standardized betas and statistical signicance. Hypothesis 1 proposes that increased skepticism will lead to increased attention to aggressive reporting. The test of this hypothesis is intended to conrm prior ndings by Phillips (1999). As expected, inducing SKEPTICISM by warning participants of a risk in the sales account increased ATTENTION to evidence of aggressive reporting (b .245, p .01). The second hypothesis involves auditors TRUST of others and its effects on atten- tion to evidence of aggressive reporting. Path analysis reveals that less trusting auditors pay Attention to Evidence of Aggressive Financial Reporting 225 Behavioral Research in Accounting, 2007 more attention to evidence of aggressive reporting than do more trusting auditors (b .329, p .001). The second hypothesis is supported. 4 Hypothesis 3 posits that auditors with more FRAUD EXPERIENCE will pay more attention to evidence of aggressive nancial reporting. The correlation analysis in Table 2 suggests that auditors with more FRAUD EXPERIENCE are more attentive to aggressive reporting. Path analysis, however, reveals that there is no statistically signicant effect of FRAUD EXPERIENCE on ATTENTION (b 0.140, p 0.1) when the path between attention and judgment is controlled. FRAUD EXPERIENCE appears to act directly on JUDGMENT (b 0.138, p 0.01), rather than indirectly through ATTENTION. Judgment The fourth hypothesis proposes that auditors who pay more attention to evidence of aggressive reporting will be more likely to believe that intentional misstatement has oc- curred than auditors who pay less attention to evidence of aggressive reporting. The hy- pothesis is supported by the statistically signicant path between ATTENTION and JUDG- MENT (b 3.722, p .001). The path coefcient indicates that for a one standard deviation increase in aggressive items recalled, there is a corresponding 3.7 standard deviation in- crease in the JUDGMENT of intentional misstatement. The result is both statistically sig- nicant and meaningful in terms of the magnitude of the effect of ATTENTION on subse- quent JUDGMENT. In addition to the path analysis presented in Figure 2, I performed mediation analysis and veried that ATTENTION mediates the relationship between TRUST and JUDGMENT. 5 I also analyzed the explanatory power of TRUST relative to the manipulation of client- related SKEPTICISM and FRAUD EXPERIENCE. Researchers have argued that fraud de- tection will be improved by increasing auditors awareness through contextually induced skepticism (Phillips 1999) and by involving more-experienced auditors in fraud detection (Knapp and Knapp 2001). To formally analyze explanatory power, I develop an ANCOVA model with recall of evidence of aggressive reporting as the dependent variable (ATTEN- TION). The independent variables in the model are TRUST, client-related SKEPTICISM, AUDIT EXPERIENCE, and FRAUD EXPERIENCE. General AUDIT EXPERIENCE is also included in the model as a control variable to verify that general AUDIT EXPERIENCE explains less of the variation in attention than FRAUD EXPERIENCE. Table 3 presents the results from this model. Similar to the path model, TRUST and client-related SKEPTICISM are statistically signicant. The key result from this analysis is the nding that TRUST 4 In addition to analyzing the effects of induced SKEPTICISM on ATTENTION to all aggressive evidence and the ve pieces of aggressive sales evidence, I also analyzed the effects of SKEPTICISM on ATTENTION to the nonsales aggressive evidence. Phillips (1999) found that skepticism can spread forward from cued high-risk categories to noncued low-risk categories. In this experiment, I nd that SKEPTICISM increases attention to both cued high-risk categories (i.e., sales) and noncued categories, and I do not nd evidence for a spreading forward effect. That is, the auditor participants increased ATTENTION to aggressive evidence in sales and nonsales nancial categories when they were cued that the sales category was high risk, and the order of presentation of nancial statement categories did not alter recall of nonaggressive evidence. 5 Following Baron and Kenny (1986), I test for four mediation conditions with a series of three path models. ATTENTION qualies as a mediator of the relationship between inherent TRUST and JUDGMENT if: (1) vari- ations in inherent TRUST signicantly account for variations in ATTENTION (p 0.001); (2) variations in inherent TRUST signicantly account for variations in JUDGMENT (p 0.001); (3) variations in ATTENTION signicantly account for variations in JUDGMENT (p 0.001); and (4) the signicance of the relationship between TRUST and JUDGMENT is diminished or eliminated when the relationships between inherent TRUST and ATTENTION and between ATTENTION and JUDGMENT are controlled (signicance is reduced from p 0.001 to p 0.274). All four conditions are met, and ATTENTION mediates the relationship between TRUST and JUDGMENT of intentional misstatement. Similar analyses verify that ATTENTION also mediates the relationship between SKEPTICISM and JUDGMENT. 226 Rose Behavioral Research in Accounting, 2007 TABLE 3 ANCOVA ModelAttention to Aggressive Evidence Source Type III SS df Mean Square F Sig. Eta Squared Corrected Model 0.938 6 0.156 6.501 0.000 0.260 Intercept 3.567 1 3.567 148.352 0.000 0.572 SKEPTICISM 0.176 1 0.176 7.335 0.008 0.062 AUDIT EXPERIENCE 0.004 1 0.004 0.179 0.673 0.002 FRAUD EXPERIENCE 0.058 1 0.058 2.393 0.125 0.021 TRUST 0.354 1 0.354 14.737 0.000 0.117 SKEPTICISM TRUST 0.018 1 0.018 0.750 0.388 0.007 SKEPTICISM TRUST 0.000 1 0.000 0.000 0.997 0.000 R 2 .260 Variable Denitions: SKEPTICISM (Client-related) an experimental manipulation. The treatment creates two categories of induced skepticism, high and low; AUDIT EXPERIENCE the number of months of professional audit experience; FRAUD EXPERIENCE represents the number of audit engagements where material fraud was discovered and the auditor was involved with the audit team; TRUST the dispositional trust score of each auditor subject from the Wrightsman trust scale; ATTENTION (to evidence of aggressive reporting) the percentage recall of the 12 pieces of evidence indicative of aggressive reporting; and JUDGMENT participants assessments of the likelihood that nancial data was intentionally misstated. explains more of the variance in attention (eta-squared .117) than client-related SKEP- TICISM (eta-squared .062) or FRAUD EXPERIENCE (eta-squared .021). This result must be considered within the context of the study. It does appear, however, that TRUST is an important predictor of auditor ATTENTION to aggressive nancial reporting. 6 CONCLUSIONS The audit profession is placing increased emphasis on the ability of auditors to prevent and detect fraud and closely monitor aggressive reporting practices. The current study investigates auditor characteristics that can inuence attention to evidence of aggressive reporting, and the effects of attention on auditor judgments. Based on an experiment with 125 practicing auditor participants, this study nds that auditors trust of others systemat- ically inuences their attention to audit evidence. Specically, relative to more trusting auditors, less trusting auditors pay more attention to evidence of aggressive reporting. One result of increased attention to evidence of aggressive reporting is an increase in the belief that intentional misstatement has occurred. While prior research does not nd that general audit experience reliably predicts atten- tion to evidence of aggressive reporting or fraud detection ability, this research demonstrates that prior experience with fraud during the audit (fraud-specic experience) is positively related to judgments of intentional misstatement. Prior fraud experience may allow auditors to develop fraud-based explanations for aggressive reporting and develop knowledge struc- tures that include potential indicators of fraud. 6 Similar analyses of explanatory power with JUDGMENTs of misstatement as the dependent variable nd pre- cisely the same pattern of results. Attention to Evidence of Aggressive Financial Reporting 227 Behavioral Research in Accounting, 2007 The results of this study must be considered in light of its limitations. Trust is a personality trait, and there is a potential for correlated omitted variables to inuence the results. For example, less trusting auditors may have other personality traits, such as lower tolerance for risk, that inuence their attention and judgment. Next, the attention measure was collected prior to the judgment measure. The attention measure could inuence sub- sequent auditor judgments. In addition, this study predicted that fraud experience would inuence judgment indirectly through attention. Path analysis reveals, however, that fraud experience inuences judgment directly. There are at least three possible explanations for this nding: (1) auditors who have experienced fraud in the past are simply more likely to believe that intentional misstatement has occurred, due to their higher base rates of fraud exposure; (2) auditors who possess more fraud-based explanations for evidence of aggres- sive reporting are more likely to rely on these explanations during the judgment process than auditors who have fewer fraud-based explanations in memory; and (3) auditors may not activate their knowledge of fraud-based explanations for evidence until they make a fraud-related judgment. This study was not designed to differentiate between potential ex- planations of the direct effect of fraud experience on judgment, and future research will be necessary to understand why fraud-specic experience alters judgment but not attention to evidence. In addition to expanding our knowledge of the effects of auditor traits on the audit process, the ndings for trust and fraud experience have some potential implications for practice. Audit rms may benet from audit team structures that include members with varying levels of trust and varying levels of prior fraud experience. Audit teams without less trusting auditors may pay too little attention to aggressive reporting and fail to detect aggressive reporting and/ or evidence indicative of fraud, while audit teams without mem- bers with prior fraud experience may lack the knowledge structures necessary to develop fraud-based explanations for evidence. On the other hand, teams consisting entirely of less trusting auditors may focus too heavily on aggressive evidence. Additional research will be necessary to investigate optimal combinations of prior experience and individual trust for improving fraud detection and promoting professional skepticism in audit teams, while maintaining audit efciency. Understanding the role of trust in auditing and fraud detection appears to hold substantial promise for improving practice. REFERENCES American Institute of Certied Public Accountants (AICPA). 1997. Consideration of Fraud in a Financial Statement Audit. Statement on Auditing Standards No. 82. New York, NY: AICPA. . 2002. New fraud audit standard will help auditors uncover fraud; Cornerstone of compre- hensive anti-fraud program. The CPA Letter (November). . 2003. Consideration of Fraud in a Financial Statement Audit. Statement on Auditing Stan- dards No. 99. New York, NY: AICPA. Baron, R., and D. Kenny. 1986. The moderator-mediator variable distinction in social psychological research: Conceptual, strategic, and statistical considerations. Journal of Personality and Social Psychology 51: 11731182. Chi, M., R. Glaser, and E. Rees. 1982. Expertise in problem solving. In Advances in the Psychology of Human Intelligence, edited by R. Sternberg. Hillsdale, NJ: Erlbaum. Christ, M. 1993. Evidence on the nature of audit planning problem representations: An examination of auditor fee recalls. The Accounting Review (April): 304322. Deutsch, M. 1973. The Resolution of Conict: Constructive and Destructive Processes. New Haven, CN: Yale University Press. 228 Rose Behavioral Research in Accounting, 2007 Fiske, S. 1980. Attention and weight in person perception: The impact of negative and extreme information. Journal of Personality and Social Psychology 38: 889906. Frederick, D. M. 1991. Auditors representation and retrieval of internal control knowledge. The Accounting Review 66 (2): 240258. Goffman, E. 1959. The Presentation of Self in Everyday Life. Garden City, NY: Doubleday. Harnett, L., and L. Cummings. 1980. Bargaining Behavior: An International Study. Houston, TX: Dame Publications. Hilton, J., S. Fein, and D. Miller. 1993. Suspicion and dispositional inference. Personality and Social Psychology Bulletin 19: 501512. Kaplan, S., C. Moeckel, and J. Williams. 1992. Auditors hypothesis plausibility assessments in an analytical review setting. Auditing: A Journal of Practice & Theory 11: 5065. Knapp, C., and M. Knapp. 2001. The effects of experience and explicit fraud risk assessment in detecting fraud with analytical procedures. Accounting, Organizations and Society 26(1): 25 37. Kruglanski, A. 1989. Lay Epistemics and Human Knowledge. New York, NY: Plenum Press. Libby, R, and D. Frederick. 1990. Experience and the ability to explain audit ndings. Journal of Accounting Research (Autumn): 348367. , and K. Trotman. 1993. The review process as a control for differential recall evidence in auditor judgments. Accounting, Organizations and Society 18: 559574. Loebbecke, J., M. Eining, and J. Willingham. 1989. Auditors experience with material irregularities: Frequency, nature, and detectability. Auditing: A Journal of Practice & Theory (Fall): 128. Peecher, M. 1996. The inuence of auditors justication of processes on their decisions: A cognitive model and experimental evidence. Journal of Accounting Research 34: 125140. Phillips, F. 1999. Auditor attention to and judgments of aggressive nancial reporting. Journal of Accounting Research 37: 167189. Rempel, J., J. Holmes, and M. Zanna. 1985. Trust in close relationships. Journal of Personality and Social Psychology 49: 95112. Rose, A., and J. Rose. 2003. The effects of fraud risk assessments and a risk analysis decision aid on auditors evaluation of evidence and judgment. Accounting Forum 27 (3): 312338. Rotter, J. 1980. Interpersonal trust, trustworthiness, and gullibility. American Psychologist 35: 17. Schul, Y. 1993. When warning succeeds: The effect of warning on success of ignoring invalid infor- mation. Journal of Experimental Social Psychology 29: 4262. , E. Burnstein, and A. Bardi. 1996. Dealing with deceptions that are difcult to detect: En- coding and judgment as a function of preparing to receive invalid information. Journal of Experimental Social Psychology 32: 228253. Shaub, M. 1996. Trust and suspicion: The effects of situational and dispositional factors on auditors trust of clients. Behavioral Research in Accounting 8: 154174. Solomon, I., M. Shields, and O. Whittington. 1999. What do industry-specialist auditors know? Jour- nal of Accounting Research 37: 191208. Sorrentino R., J. Holmes, S. Hanna, and A. Sharp. 1995. Uncertainty orientation and trust in close relationships: Individual differences in cognitive styles. Journal of Personality and Social Psy- chology 68: 314327. Tan, H. 1995. Effects of expectations, prior involvement, and review awareness on memory for audit evidence and judgment. Journal of Accounting Research 33: 113135. Tubbs, R. 1992. The effect of experience on the auditors organization and amount of knowledge. The Accounting Review (October): 783801. Wedell, D., and S. Senter. 1997. Looking and weighting in judgment and choice. Organizational Behavior and Human Decision Processes 70: 4164. Wrightsman, L. S. 1974. Assumptions about Human Nature: A Social-Psychological Approach. Mon- terey, CA: Brooks/ Cole Publishing Company. Attention to Evidence of Aggressive Financial Reporting 229 Behavioral Research in Accounting, 2007 . 1991. Interpersonal trust and attitudes toward human nature. In Measures of personality and social psychological attitudes: Vol. 1: Measures of Social Psychological Attitudes, edited by J. P. Robinson, P. R. Shaver, and L. S. Wrightsman, 373412. San Diego, CA: Academic Press. Zimbelman, M. 1997. The effects of SAS No. 82 on auditors attention to fraud risk factors and audit planning decisions. Journal of Accounting Research 35: 7594.
PENGARUH BEBAN KERJA, PENGALAMAN AUDIT DAN TIPE KEPRIBADIAN TERHADAP SKEPTISME PROFESIONAL DAN KEMAMPUAN AUDITOR DALAM MENDETEKSI KECURANGAN (Studi Empiris pada KAP di Kota Medan Padang dan Pekanbaru).pdf
Dawson, Peg - Guare, Colin - Guare, Richard - Smart But Scattered Teens - The Executive Skills Program For Helping Teens Reach Their Potential-Guilford Press (2013)
The Whole-Brain Child by Daniel J. Siegel, M.D., and Tina Payne Bryson, PhD. - Book Summary: 12 Revolutionary Strategies to Nurture Your Child’s Developing Mind