Academic journal article Contemporary Management Research

The Role of "Tone at the Top" and Knowledge of Fraud on Auditors' Professional Skeptical Behavior

Academic journal article Contemporary Management Research

The Role of "Tone at the Top" and Knowledge of Fraud on Auditors' Professional Skeptical Behavior

Article excerpt

ABSTRACT

Auditors need to be professionally skeptical when they are conducting an audit. Skeptical behavior is especially needed when there are indications of fraud in the audited entity. Without skepticism, fraud is likely to be overlooked, because fraud is usually concealed by the perpetrators. This experimental study aimed to investigate the influence of skeptical attitude, tone at the top, and knowledge of fraud on auditors' professional skeptical behavior. The study participants were junior auditors, senior auditors, and auditor supervisors. The analysis led to three key findings in this study. First, skeptical attitude, tone at the top, and the auditor's knowledge of fraud influenced the skeptical behavior of professional auditors. Second, a high tone at the top of the partner's style played an important role in maintaining and improving auditors' professional skeptical behavior, particularly for auditors who had a weak skeptical attitude. This result supported the theory of the attitudes-behavior relationship described by Fazio (1990) in the MODE model. Third, auditors' knowledge about fraud improved their professional skeptical behavior. However, knowledge of fraud did not influence auditors' professional behavior if those auditors had weak skeptical attitudes and were supervised by a supervisor with a low tone at the top style.

Keywords: Tone at The Top, The MODE Model, Professional Skepticism, Knowledge of Fraud

INTRODUCTION

Auditors need to adopt skeptical behavior when conducting an audit procedure. They should not be easily satisfied with audit evidence or base their examination solely on trust that management and related parties are honest and operate with absolute integrity (IFAC, 2007, ISA 240.23-25). Skeptical behavior is especially needed when there are indications of fraud in the audited entity. Without behavioral skepticism, fraud is often difficult to detect because fraud is usually concealed by the perpetrators (Knapp & Knapp, 2001).

The importance of auditors' professional skeptical behavior in detecting fraud is highlighted in the Statement on Auditing Standards (SAS) No. 99, which provides guidance for auditors on how to maintain professional skepticism during the audit engagement (AICPA, 2002). However, in fact, auditors do not always use professional skepticism during the audit engagement. Research by Beasley, Carcello, and Hermanson (2001)-based on the SEC's Accounting and Auditing Releases (AAERs) over an 11-year period (January 1987 to December 1997)-indicates that one of the causes of auditors' failures in detecting fraud is the low level of their professional skepticism.

The Association of Certified Fraud Examiners explained that "tone at the top" refers to the ethical atmosphere or organizational culture created by the head of the organization in the workplace, which ultimately affects subordinates' task performance. Lately, public attention has focused on the role of tone at the top in the occurrence of fraud in a certified public accountant firm. An example of the role of tone at the top is the fraudulent behavior of David Duncan, the chief partner of Arthur Andersen, one of the world's big four accounting firms. Duncan ordered his staff to destroy hundreds of audit working papers and e-mails related to Enron, his client. The destruction of these documents by Duncan confirmed, for the public and Congress, that Andersen knew of Enron's bad business practices, but Duncan did not want to disclose this in the audit report as he feared losing Enron as a client.

Contrary examples show that the tone at the top can also play a positive role by creating an ethical behavior in an organization (AICPA, 2002). Carpenter and Reimers (2007, 2009 a, 2009 b) reported that auditors who work under high "tone at the top" environment behaved more skeptically by recognizing a higher risk of fraud than auditors who work under low tone style superiors. Thus partners in charge of supervising an audit engagement need to emphasize the importance of maintaining a professional skeptical attitude to their staff generally, and to auditors in particular. …

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