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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.

The following is Part III of a three-part series. Please see Part I and Part II.

Competence (Fraud Detection)

Given the importance of exercising professional skepticism to detect fraud, recent studies have been conducted to examine auditors’ competence in this area. Carpenter and Reimers (2013) consider the importance of tone at the top and find that the level of the audit partner's emphasis on skepticism (high vs. low) causes audit managers to more effectively and efficiently identify fraud risk factors and choose relevant audit testing procedures. Brazel et al. (2014) demonstrate that auditors are, in general, not sensitive to the presence of a fraud red flag. A prompt that assisted the auditors in identifying the red flag was only effective when the initial fraud risk assessment for the engagement was high (versus low or medium). Cohen et al. (2015) examine corporate fraud cases and note the difficulty auditors have in assessing subjective components of fraudulent behavior. They suggest that the ability to detect personality-driven fraudulent tendencies is a ‘‘soft skill’’ that is part of appropriately applying professional skepticism.

Key Observations:

  • The focus of most competency-related studies is on the extent auditors can detect and respond to fraud red flags/risks.
  • Auditors do not generally respond appropriately to personality-driven fraud tendencies in management.
  • Tone at the top matters, suggesting the importance of firm culture on professional skepticism.

Traits (Integrity, Fortitude, and Experience)

Many studies are beginning to examine auditor characteristics and study professional skepticism as a trait. Hurtt et al. (2015) explore whether viewing professional skepticism as a trait rather than strictly as a response to audit circumstances provides a clearer link between professional skepticism and auditors' behaviors. The study finds that auditors that rate higher on trait professional skepticism (e.g., a questioning mind) exhibit higher professional skepticism behavior (detect inconsistencies when reviewing audit documentation related to the audits of debt and inventory). Robinson et al. (2015) examine both the state and trait components of professional skepticism and find that as state professional skepticism increases (via inherent risk increases), auditors with low trait professional skepticism exhibit a greater increase in skeptical behavior than auditors with high trait professional skepticism. Brown-Liburd et al. (2013) conduct an experiment involving a simulated negotiation between the auditor and client. A composite professional skepticism measure (based on the actions of the participant in the negotiation, such as mentioning insufficient evidence and considering fraud/management incentives) was used to classify participants into high/low professional skepticism groups. The authors find that when auditors exhibit heightened professional skepticism, they are more conservative and stand more resolute during negotiations over the financial statements with management.

Quadackers et al. (2014) conduct an experiment to evaluate two dimensions of professional skepticism—presumptive doubt and neutrality. They find that where auditors fall on a scale measuring presumptive doubt is more predictive of their skeptical judgments (e.g., assessment of management's explanation, perceived likelihood of fraud, explanations for an error) than what level of neutrality auditors’ exhibit. Cohen et al. (2015) surveyed audit professionals with varying levels of experience and find that neutral professional skepticism is positively associated with both perception of job fit and professional identification, which, in turn, lead to lower turnover intentions. In contrast, presumptive doubt professional skepticism is negatively associated with job fit and organizational trust, which, in turn, leads to higher turnover intentions.

Sargent (2015) examines the impact of trait professional skepticism and experience and finds that more experience generally leads to more professional skepticism (measured by reactions to client explanations). However, skeptical traits interact with experience across career spans, leading to swings in skeptical responses. Participants with lower to average skeptical traits initially exhibit high skepticism, but this dips during the intermediate years and then rises back to the same high levels exhibited as a novice by the time they become experienced managers. For those with higher skeptical traits, the career skepticism trajectory takes a different shape, starting lower and then continually increasing with experience.

Key Observations:

  • Auditor characteristics (such as the auditor’s tendency to have a questioning mind or have presumptive doubt) predict auditors’ professional skepticism judgments.
  • Auditors with greater integrity/fortitude stand more resolute when disagreeing with management.
  • Experience generally leads to greater professional skepticism.

Conclusion and Future Research

Overall, our review of the auditor professional skepticism literature from 2013–2015 yielded many current studies tackling this crucial issue. The professional skepticism literature has grown extensively since Nelson (2009) and will continue to grow as new researchers with recent practice experience enter academia. As such, as part of our project we also attempted to identify questions for future research. Below we offer some additional questions for future research (for a more extensive list, see our full executive summary):

  • The application of professional skepticism in the “real world” often occurs in an unobservable black box. If feasible, researchers should study actual professional skepticism failures and successes to determine if a common set of features (e.g., levels of budget pressure or auditor competence) determine the difference. Even if research access is permitted only for professional skepticism successes, identifying the common environmental factors that foster appropriate professional skepticism would be useful.
  • We found few studies considering the important role training can play in the development of professional skepticism. Given the wealth of literature that identifies the impediments and potential solutions related to professional skepticism, more research needs to be performed to determine how these findings can be put into action with respect to more effective training.
  • Lastly, while professional skepticism is a global issue, the vast majority of studies we reviewed were performed via experiments and surveys of US auditors or examinations of US public company data. It is not known whether the professional skepticism issues identified in US studies are relevant to non-US auditors. Outside of the US, qualitative methods of research are used more extensively. Performing in-depth qualitative studies (e.g., unstructured interviews of auditors in the field) would surely enhance our understanding of professional skepticism. In addition, considering recent skepticism research from other fields (e.g., political science, marketing, etc.) may provide insights into the current professional skepticism issues facing the audit profession.
Tammie Schaefer

Assistant Professor of Accounting at the University of Missouri, Kansas City

Tammie Schaefer is an Assistant Professor of Accounting at the University of Missouri – Kansas City where she teaches undergraduate and graduate courses in auditing and tax. Her research focuses on fraud detection, professional skepticism, nonfinancial measures, consultations, and judgment and decision-making in auditing and tax. Her research in these areas has led to publications in The Accounting Review and Contemporary Accounting Research. The Institute for Fraud Prevention, the Center for Audit Quality, KMPG, the International Association for Accounting Education and Research, the University of South Carolina, and the University of Missouri – Kansas City have all supplied her with grants to support her research. In 2013 Tammie received the American Accounting Association Auditing Section’s Best Ph.D. Student Paper Award for her dissertation. She is a member of the AICPA’s Accounting Doctoral Scholars (ADS) Program, and prior to obtaining her Ph.D., Tammie was an audit senior with PwC.

Joseph F. Brazel

Professor of Accounting and University Faculty Scholar, North Carolina State University

Joseph F. Brazel is the Jenkins Distinguished Professor of Accounting and a University Faculty Scholar at North Carolina State University where he teaches undergraduate and graduate courses in auditing. His research focuses on fraud detection, professional skepticism, data and analytics, nonfinancial measures, investor and CFO responses to fraud red flags, fraud brainstorming, and judgment and decision-making in auditing. He has been published in The Accounting Review, Journal of Accounting Research, Contemporary Accounting Research, Accounting Organizations and Society, and Review of Accounting Studies. The Institute for Fraud Prevention, the FINRA Investor Education Foundation, the Institute of Management Accountants, the Institute of Internal Auditors, Ernst and Young, KMPG, the International Association for Accounting Education and Research, and North Carolina State University have all supplied him with grants to support his research. In 2014 Joe received the AAA/Deloitte Wildman Medal Award, presented annually to the publication judged to have made the most significant contribution to the advancement of the practice of accounting. While presenting his research to many academic audiences, Joe has also presented his research to the PCAOB, IAASB, SEC, FINRA, as well as many practitioner audiences. He has served on the American Accounting Association’s Notable Contributions to the Accounting Literature Award Selection Committee, Competitive Manuscript Award Committee, COSO Task Force, as well as AICPA’s Assurance Research Advisory Group. Prior to obtaining his Ph.D., Joe was an audit manager with Deloitte.

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