Empowering Auditors: A Key to Protecting Investments

Reconsidering norms on audits could help enhance audit findings, according to a study by a team including Christine Sims Nielson, an assistant professor of accountancy at the University of Mississippi. Nielson worked on the project with Ashley Austin, of the University of Richmond, and Tina Carpenter and Margaret Christ, both of the University of Georgia.

The researchers found that when auditors feel more control over their schedules and the freedom to work independently, they are more likely to spot subtle indicators of fraud that might be overlooked if they only performed prespecified audit steps.

"Sometimes companies have bad actors, and they commit fraud," Nielson said. "It's really hard for auditors to find it since that company intends to get away with it.

"Investors depend on auditors to step in and give them assurance, make them feel more confident that managers really are reporting numbers that are OK to rely on and not just what helps managers get a bonus."

The work was published in the online edition of Accounting Horizons, journal of the American Accounting Association.

"Dr. Nielson and her co-authors have identified an important finding that has good potential to improve research and practice," said Mark Wilder, dean of the Patterson School of Accountancy. "Specifically, they learn that auditors who feel more 'empowered' perceive audit constraints as less restrictive which successfully improves their fraud pursuit during evidence evaluation."

The "Big Four" – Deloitte, KPMG, PricewaterhouseCoopers, and Ernst & Young – dominate the global auditing, accounting, and consulting industries.

However, the Public Company Accounting Oversight Board, the U.S. auditing regulator, observes some instances of concern. The board notes that while the Big Four and other firms have worked to improve training and audit tools, the board continues to see some auditors perform inadequate testing when possibilities exist that managers have committed fraud.

Nielson's research found that auditors who feel empowered to test more than what is initially specified in the audit steps are better at recognizing fraud risks. Often, those auditors suggest additional procedures and more effective methods for detecting fraud.

"Their work is sometimes laid out step one, step two, and step three," Nielson said. "When they see something that doesn't fit into that, stepwise, they don't feel like they have the autonomy or authority to do something different than the plan.

"That is when they miss an opportunity to pursue something that could indicate management misbehavior. They may miss protecting investors who depend on management's reporting to be reliable."

Giving auditors more power over how they do their work paves a path to improved audits, trickling down to benefit investors, who can make better informed investment decisions.

"When auditors feel empowered and they figure out when things are going wrong, an investor is more likely to get a reliable number," Nielson said.

"If the manager has misreported and the auditor does figure it out, then auditors require managers to make an adjustment to their numbers that they report. Those adjusted numbers should be reliable and help investors make the right decision for them on whether they want to invest or not."

The publication is aimed at helping auditors and investors, but Nielson believes company leaders can benefit too. Overall, having reliable and transparent reporting is the best move for a company's long-term success, even if it means not hitting short-term goals.

"When we have auditors making sure that companies' reporting is more reliable, investors trust the reporting more, and over a longer-term perspective," she said. "That's going to continue to pay dividends in that when investors trust companies more, they are willing to give companies more equity."

Top: Giving corporate auditors more control over their schedules and the freedom to work independently increases the chances that they will spot subtle indicators of fraud, research by an Ole Miss accounting professor finds. This approach could ultimately protect investors by helping them feel more confident in a firm's financial reporting. Illustration by Stefanie Goodwiller/University Marketing and Communications