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Auditors hired to detect fraud should have a healthy dose of professional skepticism, the freedom of candid discussions on an engagement team, and proper exposure to high-quality audit practices, according to research contributed by Auburn University Professor Greg Jenkins.
Jenkins co-authored the findings of a national five-member academic team reported in the Journal of Accountancy, one of the profession’s most respected publications.
Greg Jenkins, the Ingwersen Professor of Accounting at Auburn's Harbert College of
Jenkins is the Ingwersen Professor of Accounting at Auburn’s Harbert College of Business and began his professional career after having earned his PhD at Virginia Tech and earlier degrees from Appalachian State University. His current research examines various aspects of auditor independence, auditors’ use of specialists, and accountants’ adherence to professional codes of conduct. He also serves on the AICPA's Auditing Standards Board.
He joined Harbert’s School of Accountancy in the summer of 2018.
“I was lured to Auburn because of the faculty’s great reputation and a balanced focus on teaching, scholarship, and engagement with the business community,” Jenkins said.
Why it matters
“Auditors are required to maintain their professional skepticism throughout an audit,” Jenkins said. “Professional skepticism calls on auditors to remain alert during their work for information that suggests the financial statements may contain misstatements and to recognize that things – such as a client’s explanations for a transaction – may not be as they appear.
“Our article highlights some of the key lessons and insights from contemporary fraud-related research that auditors can implement on their engagements to enhance their consideration of fraud.”
“Fraudulent financial reporting is a fundamental and longstanding concern of audit professionals who work to protect the interest of client stakeholders, including investors and creditors,” Stanley said. “As accounting academics, one of our primary goals is to produce research that not only advances the academy but also shapes practice.”
He credited Jenkins for the quality representation his work reflects on Auburn.
“As a member of the Auditing Standards Board, and through its projects such as this, Jenkins is able to share his expertise... while at the same time gain a very unique perspective that informs his own research and teaching,” Stanley said.
“This type of engagement is great for the School of Accountancy and Harbert College of Business as we work to prepare our students to become tomorrow’s accounting leaders and generate research that drives business thought and practice,” he said. “It truly exemplifies our mission.”
Under the title “Auditing best practices: What academic fraud research reveals,” the team reported its findings and recommendations after the Auditing Standards Board tasked it with synthesizing contemporary fraud research.
“Professional skepticism” is among the first topics for which the team provides recommendations:
Reward staff for practicing skepticism
“Audit seniors and managers should reward appropriate skepticism (e.g., investigation of an evidence inconsistency) with positive feedback even when skepticism does not lead to the discovery of a misstatement. That is, avoid penalizing staff (e.g., through a poor performance review) who respond skeptically to evidence inconsistencies when no misstatement is identified,” the Journal article reports.
Have leaders set the right tone
“Engagement partners should demonstrate their own professional skepticism to other team members by, for example, sharing their own past fraud experiences. This encourages preparation for fraud brainstorming meetings and deeper discussions during those meetings. When engagement partners demonstrate their professional skepticism, brainstorming sessions are longer, have better attendance, and include more extensive discussions.”
Build teams whose members have different levels of skepticism
“Even a small number of more skeptical auditors can encourage deeper and more thoughtful fraud-related discussions by others on the audit team who may be less skeptical.”
The research showed several other key areas for potential focus, including a call for more discussion among the engagement team. Recommendations include steps to promote more effective brainstorming, creating a supportive environment so auditors are comfortable sharing their ideas, and starting with unstructured sharing of ideas.
Another suggestion for fraud hunters is to conduct interviews in the afternoon. “Client personnel are more likely to report fraudulent activities when auditors remind them of applicable whistleblower protections and during late-in-the-day interviews, when interviewees are tired and prone to ‘letting their guard down.’”
The research also warns auditors to be aware of relationships between audit committee members and client management because close relationships may hinder the effectiveness of the audit committee’s oversight.
The team consisted of, in addition to Jenkins, four other accounting professors:
Jenkins shared encouragement for current and prospective students considering a degree from Harbert.
“Harbert’s School of Accountancy has an exceptionally talented group of faculty members who are dedicated to student learning,” he said. “Our faculty includes leading textbook authors; researchers focused on many of the challenges facing the profession, including research on effective teaching techniques and strategies; and individuals who are committed to the accounting profession.
“Students who complete their accounting degree at Auburn are very prepared to enter the profession and to have a successful and rewarding career.”
The report published in the Journal of Accountancy can be found at: https://www.journalofaccountancy.com/news/2023/jan/auditing-best-practices-what-academic-fraud-research-reveals.html