ABSTRACT

Corporate scandals have made stakeholders question the display of professional scepticism by auditors. This has prompted stakeholders to reassess the trust they place in the audit opinion. Research into professional scepticism has, therefore, caught the attention of practitioners and academia. There is a belief that: to win back the increasingly eroding trust of stakeholders, there is a need to understand the nature of the display of professional scepticism. The study, therefore, examines the relationship between personal characteristics and professional scepticism displayed by auditors. Also, the study examines the mediating role of professional scepticism between personal characteristics and fraud detection skills. To achieve this aim, the quantitative research approach is employed. A questionnaire was employed to gather data from 305 auditors while PLS-SEM was used for the analysis of data. The results revealed that there is a significant positive relationship between intrinsic motivation, and positive mood, as predictors, and professional scepticism. Also, the results show that persons that are less trusting are generally more sceptical. Furthermore, professional scepticism mediated the relationship between personal characteristics of auditors and their fraud detection skills. The results consequently recommend that practitioners should be aware of personal characteristics of auditors and should inform their hiring, training and appraisal practitioners. Government Audit Agencies should also find the recommendation relevant.

CHAPTER ONE

INTRODUCTION

            Background of the Study

Quality information is critical to the decisions made by market participants to either buy, hold or dispose of equity and debt instruments of entities. Major stakeholders require information to make decisions with regard to the provision of resources to the corporate entities (Zhai & Wang, 2016). The decisions of providers of resources are likely to be ineffective without relevant and faithfully represented financial information. Consequently, auditors have the objective to ensure financial information is true and fair (Kwok, 2017).

Auditors adhere to rigorous standards to arrive at the opinion that – financial information is true and fair. Audit standards pronounce that: auditors display professional scepticism in the conduct of an audit. Farag and Elias (2016) define Professional Scepticism (hereafter may be abbreviated as PS) as having a questioning mind and a critical assessment of evidence. The authors argue that professional scepticism is important to the quality information that providers of resources  employ for decision-making. Audit Standards amplify the call to display professional scepticism when there is an increased risk of fraud (DeZoort & Harrison, 2018). Studies on fraud in corporate entities highlight the lack of display of professional scepticism by auditors, to be complicit in the eventual collapse of such entities (Endrawes, 2010; Enofe, Ekpulu, & Ajala, 2015; Romney, Albrecht & Cherrington, 1980).

The occurrences of corporate collapses make the ability of auditors to detect fraud, questionable. This doubt is rife amongst stakeholders whose losses that accompany fraud-related collapses run into several billions of dollars and includes pension funds. The losses of pension funds extend  the issue of corporate fraud from a financial issue to a social one (Cadbury,2006) . The social responsibility of businesses and auditors, to uphold the interest of the public, is relevant thereof.

Auditors perceive that they are not responsible for fraud detection, but to examine whether  or not the financial statements show a true and fair view of the financial performance and position of the entity (Nolder & Kadous, 2018; Quadackers, Groot, & Wright, 2014; Toba, 2011). The legal substance of the argument cannot be denied, however, stakeholders with a financial interest may perceive a different view. Stakeholders find value in the ability of auditors to detect fraud which helps prevent losses. The possible avoidance of unfavourable consequences that can result from an inaccurate audit opinion, gives importance to auditors’ ability to detect fraud. It is based on this realisation that the users of financial information value fraud detection as a key skill of auditors.

Major stakeholders have criticised auditors in cases of corporate collapses, especially when the perpetrators of fraud are employees and managers (Bollen, Mertens, van Raak, Meuwissen, & Schelleman, 2005; Hassink, Bollen, Meuwissen, & de Vries, 2009). Studies (e.g Baron, Johnson, Searfoss, & Smith, 1977; Jizi, Nehme, & Elhout, 2016) question the extra value audit provides to investors and capital markets if it lacks the ability to detect fraud. Investors avoid making bad decisions based on the information on the financial statements provided by entities. Participants of capital markets find value in the fraud detection skills of the auditor

The recognition of this value inspires studies which examine the antecedents of the fraud detection skills of auditors. Studies indicate a positive relationship between professional scepticism and fraud detection skills in many contexts (Fullerton & Durtschi, 2005; Jizi et al., 2016; Lee, Welker, & Wang, 2013; Zimbelman, 1997). These studies profess that the level of fraud detection skills of an auditor is positively related to the level of professional scepticism. Therefore, researchers are keen to understand the level of professional scepticism that is exhibited by an auditor before and especially, during the conduct of the audit.

Sections of the Audit Standards (IFAC, 2007; ISA 240.23-25) make mention of the exercise of professional scepticism, especially in the conduct of audit where there are encounters with clues of fraud. Audit standards suggest that auditors presume doubt on the inexistence of fraud. Evidence is found in studies that reveal that; auditors are able to adopt a mental perspective of presumptive doubt in audit planning and evidence evaluation under conditions of fraud risk (Mock & Turner, 2005; Rose & Rose, 2003; and Zimbelman, 1997).

The understanding that professional scepticism is key to the ability to detect fraud, projects the importance of examining the antecedents of professional scepticism. Prior studies have examined some antecedents of professional scepticism. Some of these antecedents include the objectivity  of audit evidence (Robertson, 2010), the integrity of management (Earley & Gramling, 2010),  the riskiness of the client (Farmer & Rittenberg, 1987; Hackenbrack & Nelson, 1996) , the complexity of the client (Brewster, 2012; Tucker, Subramanyam, & Matsumura, 2003), and accountability to reviewers (Peecher, Schwartz, & Solomon, 2007).

These predictors of professional scepticism can be categorized into predictors that are related to evidence such as the objectivity of audit evidence ; those related to the client characteristics such as the integrity of management, the riskiness of the client, the complexity of the client ; and

predictors related to the relationship of client with external environment such as accountability to reviewers, accountability to regulators. (Brewster, 2012; Earley, Hoffman, Joe, Earley, & Joe, 2008; Peecher et al., 2007; Robertson, 2010; Tucker et al., 2003). The understanding of the influencers of professional scepticism has become important because of the consensus that the display of professional scepticism is low in so many an audit (Endrawes, 2010).

            Problem Statement

The collapse of seven universal banks has the attention of the Ghanaian public focused on corporate fraud. The overwhelming public pressure on regulatory authorities has seen regulatory authorities apply sanctions to managing directors, CEOs, Board Chairmen and Auditors (Joy Business, 2019b). The Disciplinary Committee of The Institute of Chartered Accountants Ghana (ICAG) – the regulatory body for Accountants and Auditors in Ghana- sanctioned 4 audit firms for various irregularities in their respective audits (Joy Business, 2019a). The irregularities stem from the discovery that the capital positions of these defunct banks were falsified purposely to continue holding banking licenses (Frimpong, 2019). Consequently, there is a sustained interest in the national discourse on how to restore trust in audited financial statements. One reason the trust of important stakeholders in audited financial statements may have declined is that: there may have been losses suffered by taking decisions on the basis of the financial statements.

The task of detecting fraud by external auditors is considered to be a complex one. According to Adnan and Kiswanto (2017), fraud detection requires comprehensive knowledge about the characteristics and the ways fraud is perpetrated. These characteristics and means are conceptualised, by Fullerton and Durtschi (2005), as red flags. Fullerton and Durtschi (2005) followed the conceptualization by ascertaining how internal auditors’ professional scepticism can influence fraud detection skills. The authors concluded that professional scepticism is positively

related to fraud detection skills amongst internal auditors. The authors also advised that a simple generalization of this finding to external auditors may be inappropriate. This is because the objectives, nature, extents and timing of similar procedures used by both internal and external auditors might differ. There is, therefore, an opportunity to understand how professional scepticism of external auditors influences fraud detection skills.

The professional scepticism displayed by auditors may be influenced by their individual characteristics. Aside from the situational characteristics of the audit context, individual characteristics can determine the level of scepticism displayed (Nolder & Kadous, 2018). These personal characteristics have received mention in prior literature (e.g Nelson, 2009; Hurtt et al, 2013) to influence professional scepticism. There lie possibilities to examine individual characteristics that influence professional scepticism. Accordingly, Nelson (2009) asserts that motivation influences professional scepticism although it may be complicated by the structure of the reward system. Extrinsic motivation, as noted by Bazerman and Tenbrusel (2011), is found to influence the sceptical actions of auditors. Consequently, in order to arrive at a positive outcome (e.g going concern of client assured, meeting the deadline, recognition) the auditors may pursue  or overlook doubt – a psychological phenomenon called motivated blindness. Peecher et al.(2010) also criticized regulatory bodies for overemphasizing on negative outcomes (fraud, collapse, etc.). This overemphasis reinforces auditors’ preference for positive outcomes to proper procedures.

Furthermore, Rosman (2011) studied the link between intrinsic (inherent) motivation and the influence it has on PS. The researcher discovered that inherently motivated persons display high levels of professional scepticism. However, lowly motivated persons displayed inconsistent levels of professional scepticism. Additionally, few studies have attempted to examine the influence of both forms of motivation on Professional Scepticism simultaneously, although it has

been found that both forms of motivations can co-exist (Kadous & Zhou ,2019). The current study attempt to fill this gap by examining both extrinsic and intrinsic motivation and their influence on professional scepticism. Moreso, the influence of PS on fraud detection combined with the lack of studies of the influence of motivation on fraud detection skills, provides an opportunity for further research. This study, therefore, attempts to examine the relationship between motivation and fraud detection skills.

Interestingly, there are few studies on the relationship between mood and professional scepticism. Hurtt et al.(2013) attribute that to the debate on the reliability of the measurement of mood. Prior research concurs on the unreliability of measurements of mood (Watson, 1985). This current study, however, utilizes the Positive and Negative Affect Schedule (PANAS) to measure the mood of auditors. Mood literature recommends that the PANAS is reliable and its results are generalizable. (Dalgleish & Power, 2015; Ryff & Keyes, 1995).

Also, Chung et al.(2009) revealed that the mood of accountants influenced inventory valuation judgement. Persons in a positive mood were unconservative (less cautious) with inventory valuation, however, persons in a negative mood were conservative with inventory valuation. The conservativeness was measured by how low the valuation of the inventory was determined, avoiding overestimation. The current study, on the basis of the possible influence of mood on judgements, explores the relationship between mood and professional scepticism. Furthermore, there is a dearth in studies on the influence of mood on fraud detection skills. This is curious as there is a possible relationship between mood and judgements (Chung et al.2009). The current study attempts to examine the influence of mood on fraud detection skills.

More so, there is extensive research on the relationship between trust and professional scepticism (Aschauer, Fink, Moro, van Bakel-Auer, & Warming-Rasmussen, 2017; Harding, Azim, Jidin, & Muir, 2016; Quadackers, Groot, & Wright, 2009; Quadackers et al., 2014; Toba, 2011). The common theme of prior research is that: trust has an inverse relationship with professional scepticism. For instance, Quadackers et al.(2009) used the inverse of the Rotters Interpersonal Trust Scale as the measure of professional scepticism. This is evidence that the relationship between trust and professional scepticism is well researched. However, the same cannot be said for the relationship between trust and fraud detection skills. A few studies have ventured in that research space. Hernandez & Groot (2006) discovered that trust negatively influences fraud risk assessments. The current study, therefore, extends this examination to ascertain the influence of trust on fraud detection skills of auditors.