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.
