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215

BEHAVIORAL RESEARCH IN ACCOUNTING


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).
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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.
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