In a matter of weeks, artificial intelligence took over the world in a way unseen before. With the launch of ChatGPT by OpenAI in November 2022,
In this article Inez Verwey1 talks about the differences between public auditors and forensic accountants in their ability to identify fraud risks and to plan effective procedures to mitigate fraud risks. According to her, especially in fraud detection an out of the box mentality is crucial as successful fraudsters are ‘top of the bill” in being creative thinking.
The ‘Thinking-out-of-the-box’ ability?
Fraud and public auditors; not really a happy marriage. And that is an understatement.
Improving the fraud detection ability of public auditors is a hot topic for regulators in the auditing field. But most of the research on this topic is only focused on the implementation of assumed aids to improve fraud detection without knowing why public auditors have so many difficulties in fraud detection. To be able to implement effective aids it is necessary to address this issue.
Regulators (PCAOB, ISA, NV COS, SAS) are more and more interested in a more forensic view during the audit. The expectation that a more forensic view will be effective is based on several assumptions. The first assumption is that forensic accountants are more able to detect fraud during an audit engagement. The second assumption is that a so-called forensic view exists. Regulators tend to describe a forensic view as being skeptical and ethical. Also having a lot of fraud experience and fraud training is considered as being of great importance. These assumptions are quite obvious, but have not been subject of academic research yet.
My background as public auditor and forensic accountant made me curious: Is it that simple? I started PhD-research on the subject.
In my dissertation I describe a study between forensic accountants and public auditors. The aim of this research is to compare the abilities of public auditors and forensic accountants to identify and assess fraud risks and to plan effective audit procedures to mitigate those risks (hereafter this will be referred to as “fraud detection” for brevity). To address this issue I designed an experiment. In a between-subjects experiment 48 Dutch forensic accountants and 131 Dutch public auditors were asked to identify fraud risks, assess the fraud risk and plan audit procedures to detect the identified risks. The case used in this study is based on a SEC enforcement fraud action and adopted from Asare & Wright (2004). In this experiment I manipulated the time budget pressure for planning audit procedures. Public auditors are prone to time budget pressure during an audit engagement. I combined the scores of the participants on bot fraud detection tasks with data about the level of ethics, the level of professional skepticism, and the amount of fraud experience and training of the participants. I collected these data with a post-experimental questionnaire.
The data-analyses showed that forensic accountants are better able to identify fraud risks as well to plan effective audit procedures to mitigate these fraud risks. Under time budget pressure public auditors planned even less effective audit procures. Forensic accountants proved not to be sensible for time budget pressure.
Another interesting finding is that although forensic accountants tend to be more skeptical, more ethical and have more fraud experience and received more fraud training than public auditors these higher scores do not explain the differences in both detection tasks between both groups of participants. The relationships between the different research variables differ between both groups. Furthermore, for public auditors fraud experience is negatively related to the ability to plan audit procedures. This finding can be explained by the relatively low amount of fraud case experience by public auditors. As fraud cases are rare during the career of public auditors, a single fraud experience may lead to the situation that the auditor unjustly thinks he recognizes the same fraud case. The auditor then projects his specific experience on a new situation and focuses on procedures to detect this fraud as used in the earlier experience. So the risk of misrecognition of fraud risks may lead to a loss of audit quality instead of improvement. Another interesting finding is that for both groups of participants there is no relation between the ability to identify fraud risks and the ability to plan effective audit plan procedures.
So what can be concluded from this study?
First of all, forensic accountants indeed can ad value during an audit engagement. Is this a surprise? Not really, but finally it has been proved now. But unfortunately, the assumption that this expertise is a result of a higher score on the levels of professional skepticism, ethics, fraud experience and fraud training than public auditors is not right. So we have to concentrate on other factors to improve the fraud detection abilities of public auditors.
And the big question is: what are those factors that make forensic accountants successful in fraud detection???
The unexpected findings that fraud experience has a negative influence on the fraud detection ability of public auditors as well as the missing relation between the tasks of identifying fraud risks and planning audit procedures may give us a clue. And personally, I think that the direction of interesting future research on this topic can be described as:
“The Thinking out of the box – ability”
I don’t think this is an existing word yet, but let me explain what I mean with this description.
The negative relation between fraud experience and the ability to plan effective audit procedures is an example of a cognitive bias. Cognitive biases are tendencies to think in certain ways that can lead to systematic deviations from a standard of rationality or good judgment, and are often studied in psychology and behavorial economics. In this case, a single fraud experience may lead to the situation that the auditor unjustly thinks he recognizes the same fraud case. The absence of a relation between the ability to identify fraud risks and the ability to plan effective audit plan procedures is also an example of a cognitive bias: thinking in separate tasks instead of overlooking the whole audit engagement. Probably strengthened by internal procedures within an audit firm to document every single task during an audit engagement.
A big problem of public auditors is that they are prone to many rules, procedures, regulations, checklists etc. My hypothesis is that these rules, procedures and regulations make the public auditor framed and prone to cognitive biases. And of course, everybody is framed: we see ‘reality’ through ‘colored’ glasses. These glasses are colored by experience, education, and nurture, even by nature….. And the more procedures, rules, checklists have to used, the ‘narrower’ a person’s view will be, resulting in persons who are less able to think out of the box. And especially in fraud detection this thing out of the box mentality is crucial, as successful fraudsters are ‘top of the bill” in creative thinking……
 Dr. Inez Verwey RA is Associate Professor at Nyenrode Business Universiteit Nyenrode at the Center for Auditing & Assurance.
 Verwey, I.G.F. (2014). Differences between public auditors and forensic accountants in their ability to identify fraud risks and plan effective procedures to mitigate fraud risks: The relationship between individual traits and fraud experience and training on fraud risk identification and planning audit procedures. Dissertation, Nyenrode Business Universiteit.(Breukelen, The Netherlands).