Research Insights—Auditor Professional Skepticism Part I: Incentives and Time
In September 2015, the International Auditing and Assurance Standards Board (IAASB) and this research team agreed to conduct a project that involved summarizing academic research in the area of auditor professional skepticism from 2013 to 2015. The work was intended as an update of the auditor professional skepticism literature since the syntheses performed by Nelson (2009) and Hurtt et al. (2013).
The research forms part of the IAASB project on how to more effectively respond to issues related to professional skepticism. Three specific deliverables formed the academic research: a summary listing relevant research related to professional skepticism, a presentation of significant observations to the IAASB at its December 2015 meeting, and an executive summary of the project. The full summary and related documents can be found on the IAASB’s December 2015 Meeting Page.
Given the substantial role that incentives play in influencing behavior, two recent studies have investigated the link between auditor evaluations and professional skepticism. Brazel et al. (2015) illustrate that superiors on the audit team evaluate their staff based on the outcome of their skeptical behavior. If the skeptical auditor finds a misstatement, the auditor is rewarded. If there is a reasonable explanation for an evidence inconsistency and no misstatement is identified, the skeptical auditor is penalized (evaluated significantly lower). The paper finds this "outcome effect" to be present even under conditions where the skeptical auditor keeps the superior "in the loop" during the course of exercising professional skepticism, and even when evaluators give their approval to engage in the skeptical behavior.
Via a survey of auditors, Westermann et al. (2015) attempt to identify the sources of pressure that increase or decrease auditor professional skepticism in practice. The study finds that sources that hold auditors accountable for quality (PCAOB inspections and work paper reviews) increase professional skepticism and sources that promote defensibility or profitability (time budget pressure and excessive documentation) reduce professional skepticism. In short, the study's results indicate that the effect of accountability on professional skepticism depends on the source of pressure.
- The evaluation of professional skepticism may depend more on the outcome than the process. This insight into the evaluation of professional skepticism should inform inspections of firms’ evaluation systems/quality controls.
- The accountability or pressures associated with a potential inspection can enhance auditor professional skepticism, unless excessive documentation to appease inspectors becomes the auditor’s overriding concern.
Given that the appropriate application of professional skepticism is a cognitively demanding and time-consuming process, two current studies examine how the auditor’s workload can affect their application of professional skepticism. Brazel et al. (2015) find that time pressure and workload impact professional skepticism. Their study reports that if the US Security and Exchange Commission’s 10-K filing accelerations in the 2000s required an acceleration of the audit report date, earnings quality suffered. Audit partners, who experienced the 10-K accelerations, reported in a survey that more time pressure, induced by the need to meet shorter 10-K filing deadlines, may have limited the extent to which auditors on their engagements exercised professional skepticism. Auditors responding to a survey in Persellin et al. (2015) indicate that their workload (in hours) often exceeds the point at which they believe audit quality starts to suffer (due mainly to deadlines and staffing shortages), with 40% indicating that their judgment begins to be impaired (including reduced professional skepticism).
- Substantial time pressure, particularly at year-end, can impair professional skepticism.
- If a future reporting acceleration or other regulation curtails the time available for year-end audits, professional skepticism may become impaired and audit quality could suffer.
- Solutions to year-end time pressure appear to be moving testing at final to interim, rescheduling other work, and working more hours.