No one wants to be the squeaky wheel, but new accounting research finds that auditors who feel empowered ask more questions and are more likely to detect fraud — even when the clock is ticking.
“We found that auditors who reported feeling more empowered were far better at detecting fraud,” said Tina Carpenter, a University of Georgia Josiah Meigs Teaching Professor and Dan Smith Professor in the J.M. Tull School of Accounting. Meanwhile, “those who reported not feeling empowered were relatively less likely to find the fraud. So that’s a danger.”
“The Association of Certified Fraud Examiners (ACFE) estimates the cost of fraud annually is $5 trillion,” Carpenter added. “When it happens, we would like an auditor to find it before it turns into a disaster. So, this is a powerful finding.”
Carpenter and Tull School Director Margaret Christ launched their study with a research grant from the ACFE’s Research Institute (ARI). Their paper, “Empowering Auditors to Pursue Fraud during Evidence Evaluation,” appeared this summer in Accounting Horizons.
Christ and Carpenter worked with co-authors and former UGA doctoral students Ashley Austin, now an associate professor at the University of Richmond, and Christy Nielson, an assistant professor at the University of Mississippi.
During a typical audit, early-career auditors are tasked with doing the first review of the books and financial statements. If they see something suspicious, they flag it and send it to a manager to investigate.
“Previous experimental research documented that managers will penalize their staff if they feel they are wasting time by flagging something as suspicious that did not turn out to be fraud. Which is not the way it’s supposed to be,” Carpenter said. “You’re supposed to do the best job you can.”
Christ and Carpenter’s study focused on how to help early-career auditors overcome this fear of “wasting time” and be as thorough as they need to be to catch mistakes or malfeasance.
“Fraud is really rare, and it can be really hard to find when it is there,” Carpenter said. “You must find an anomaly in the data, and, of course, the fraudsters are trying to cover up those anomalies. … Getting auditors to really scrutinize the data down to the level that they need to is tough. That’s why this empowerment finding is so important.”
Carpenter and Christ’s team recruited 144 practicing, early-career auditors with an average of three years of work experience. They were given the task of reviewing a real company’s financial information that was identified by the Securities and Exchange Commission (SEC) as committing fraud. However, like in the real world, the fraud is very difficult to detect, and the auditors had to search for more evidence to detect it.
During the task, the auditors were surveyed about how empowered they felt using a standardized empowerment scale. The results revealed that those auditors who reported stronger feelings of empowerment were more skeptical and focused when reviewing evidence and subsequently appropriately flagged more anomalies. These auditors were also more willing to use more effective auditing tools to dig deeper and go beyond the standard checklist of auditing procedures.
There seems to be a fear amongst managers that early-career auditors given a green light will simply burn work hours poring over the same documents until they find “something,” whether it’s relevant or not.
But Carpenter and Christ found the opposite. The auditors who reported feeling the most empowered were more likely to discover fraud but didn’t spend more time reviewing the evidence.
“Managers are worried that if they empower their people, they’re just going to go work a ton of hours in search of errors or anomalies,” Carpenter said. “That’s not true. They work smarter and find the fraud in an efficient way. They didn’t spend any more time on the audit than those who didn’t find the fraud, which was really a cool finding and so important.”
While there’s no one-size-fits-all way to make auditors feel empowered, the team found managers need to proactively tell their employees they have their support to do a thorough job.
Extra resources are good too, but credible, articulated support is most important, Carpenter and Christ said.
“Our study doesn’t prescribe a simple fix for helping auditors feel empowered,’” Christ concluded. “But the overall takeaway is that if you can find credible ways to help your employees feel like they have some autonomy and that it’s safe for them to make their own decisions, then they’ll make good choices and improve the quality of the audits.”