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Auditing: A Journal of Practice & Theory American Accounting AssociationVol. 32, Supplement 1 DOI: 10.2308/ajpt-503612013pp. 4597

Research on Auditor Professional Skepticism:Literature Synthesis and Opportunities for

Future Research

R. Kathy Hurtt, Helen Brown-Liburd,

Christine E. Earley, and Ganesh Krishnamoorthy

SUMMARY: Both researchers (e.g., Nelson 2009) and regulators (e.g., the PCAOB)have emphasized the importance of exercising the appropriate level of professional

skepticism when conducting an audit. However, professional skepticism remains a hard

concept to define and measure. In addition, it is often difficult to determine if a lack of

skepticism is the primary cause of audit deficiencies and if so, what factors led to the lack

of skepticism. The purpose of this paper is threefold: (1) extend the work of Nelson

(2009) by synthesizing research related to auditors professional skepticism to identify

antecedents to both skeptical judgment and skeptical action, (2) identify areas where

research is lacking on a particular dimension and suggest avenues for future research,

and (3) discuss the implications of research findings for regulators and auditing

professionals. We adopt two foundational aspects of the framework introduced in the

seminal paper by Nelson (2009), which proposes that lack of skepticism can either bethe result of a failure in problem recognition (lack of skeptical judgment) or a failure to act

on a problem recognized (lack of skeptical action). We organize research studies into

four categories of antecedents: studies relating to auditor characteristics, evidence

characteristics, client characteristics, and environmental characteristics. We find that

R. Kathy Hurtt is an Associate Professor at Baylor University; Helen Brown-Liburd is an Assistant Professor

at Rutgers, The State University of New Jersey, Newark; Christine E. Earley is a Professor at Providence

College; and Ganesh Krishnamoorthy is a Professor at Northeastern University.

The authors appreciate the research assistance of Olivia Ayuso and Emily Fuller, and the helpful comments of JeffCohen, Charles Davis, Christine Nolder, and two anonymous reviewers.

To facilitate the development of auditing and other professional standards and to inform regulators of insights from theacademic auditing literature, the Auditing Section of the American Accounting Association (AAA) decided to develop aseries of literature syntheses for the Public Company Accounting Oversight Board (PCAOB). This paper (article) isauthored by one of the research synthesis teams formed by the Auditing Section under this program. The views expressedin this paper are those of the authors and do not reflect an official position of the AAA or the Auditing Section. Inaddition, while discussions with the PCAOB staff helped us identify the issues that are most relevant to setting auditingand other professional standards, the author team was not selected or managed by the PCAOB, and the resulting paperexpresses our views (the views of the authors), which may or may not correspond to views held by the PCAOB and itsstaff.

Editors note: Accepted by Jeffrey R. Cohen.

Submitted: March 2012Accepted: November 2012


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while research studies provide insights into both the antecedents to skeptical judgments

and actions, the majority of research efforts to date have focused on the antecedents to

skeptical judgments and on auditor characteristics in particular. Research findings have

implications for practice, but in order to understand how skeptical judgment translates

into skeptical action, additional research on skeptical action will need to be conducted.

Keywords: professional skepticism; skepticism; auditor skepticism; auditor judgment;

skeptical behavior.

INTRODUCTION

Professional skepticism, like independence, is essential to the auditing profession, but is often

difficult to define and measure. Various sources have defined professional skepticism as an

attitude that includes a questioning mind and a critical assessment of evidence (AICPA

2007), the ability to detect fraud (Choo and Tan 2000), the opposite of trust (Shaub 1996), a

conservatism bias in audit judgment (McMillan and White 1993), the equivalent of independence

(Kadous 2000), and presumptive doubt (Nelson 2009). In this synthesis, we accept and include

research literature that deals with professional skepticism regardless of its specific definitional

emphasis. When determining whether auditors have exercised a sufficient level of skepticism,

regulators and others who study the public accounting profession point to outcomes, such as audit

deficiencies and audit failures, as evidence that auditors professional skepticism is lacking (e.g.,

PCAOB 2008, 2011; CAQ 2010); however, often in these cases the reasons for the lack of

skepticism are unclear. In this synthesis of academic research on professional skepticism, we

provide insights regarding possible threats to professional skepticism and suggest how these threats

may be mitigated to improve audit quality. Our examination of extant literature discusses the root

causes identified by researchers in instances of inadequate professional skepticism. In addition, we

discuss promising avenues for future research in areas not addressed in the literature.

In a seminal paper, Nelson (2009) provides a comprehensive model (hereafter, the NelsonModel) and literature review of professional skepticism in auditing. Although we consider the

Nelson Model in our review and synthesis of literature on professional skepticism, our paper makes

a distinct and incremental contribution to the literature in three ways. First, building upon the

Nelson Model, we group antecedents into four subcategories: auditor characteristics, evidence

characteristics, client characteristics, and environmental characteristics. Some of these antecedent

groupings overlap with the Nelson Model and others do not. Second, our synthesis and analysis of

the literature has the primary objective of aiding and stimulating future academic research on

professional skepticism. To that end, the paper provides a detailed summary and discussion of

specific and targeted research issues worthy of future research. Finally, we conclude with policy

implications for the PCAOB and for the accounting profession with respect to the effect ofprofessional skepticism on the conduct of the audit, including auditor decision-making judgments,

and negotiations with the client.

The remainder of the paper presents our synthesis and is organized as follows: the main areas

of interest and framework for the synthesis are presented in the next section. This is followed by an

analysis of the relevant literature for each section of the framework and our recommendations for

future research. We conclude by summarizing the results of literature and discussing the

implications of the research for regulators and auditing practitioners.

AREAS OF INTEREST AND FRAMEWORK FOR SYNTHESIS

The topic of professional skepticism is complex and spans numerous academic areas, including

accounting, organizational behavior, cognitive psychology, social psychology, marketing,

46 Hurtt, Brown-Liburd, Earley, and Krishnamoorthy


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of potentially relevant literature, we limit our synthesis to articles published since 1999 in the

academic accounting literature that used the term professional skepticism.1 We also identified

unpublished working papers that are relevant to the issue.

We develop a framework based on two foundational components of the Nelson Model:

skeptical judgment and skeptical action. Skeptical judgment occurs when an auditor recognizes that

a potential issue may exist and that more work or effort is necessary. Skeptical action occurs when

an auditor changes his/her behavior based on the skeptical judgment. Both skeptical judgment and

skeptical action are essential to the audit, with skeptical judgment being a necessary condition for

skeptical action. For example, an auditor may have the necessary knowledge, experience, or traits to

recognize an issue and be able to formulate a skeptical judgment, but he/she may choose not to do

anything based on that judgment because of various pressures during the audit. On the other hand,

an auditor may be in an environment where he/she is encouraged to act skeptically (e.g., the firm

and auditing standards mandate acting with skepticism), but the auditor does not have the traits or

the knowledge to recognize a problem. In either case, an auditor may fail to exercise sufficient

professional skepticism. But if both elements exist, there is a higher likelihood that professionally

skeptical actions will occur. The Nelson Model is especially insightful when examining the factorsthat impact professional skepticism (or lack thereof ) because it recognizes and allows for

interactions between individual characteristics such as knowledge, traits, and ability, and

environmental characteristics such as incentives, and combines them with the characteristics of

the audit evidence to arrive at skeptical judgments, actions, and outcomes.

Within our framework we examine both antecedents to and outcomes from judgments and

actions that reflect auditors professional skepticism. Our model expands Nelsons model by

replacing the antecedents of professional skepticism (i.e., traits, knowledge, ability, and incentives)

with broader categories including auditor, evidential, client, and external environmental

characteristics. For example, with respect to skeptical judgment, a number of research studies

(e.g., Hurtt 2010; Hurtt et al. 2012; Quadackers et al. 2011; Brewster 2012) have examined theextent to which auditors predisposition allows them to adopt a questioning mind when

evaluating evidence (for instance, can they recognize when something appears to be offor does

not pass the smell test). In these studies, auditors predisposition would be an antecedent to

skeptical judgment. The outcome from skeptical judgment can be captured in a number of ways.

For example, research examines whether auditors are able to identify an anomaly in a pattern of

evidential cues that may or may not be an indicator of fraud (e.g., Hurtt et al. 2012; Popova 2012),

and other research examines whether auditors can perform complex tasks, such as solving difficult

analytical procedures problems (e.g., Plumlee et al. 2012).

Assuming auditors can apply an appropriate level of skeptical judgment, one must then

examine whether they will act on this judgment, that is, do they go the extra mileand conduct

additional tests to support or refute their initial judgments (i.e., engage in skeptical action). Several

studies have examined environmental features, such as audit firm rotation, that may increase

incentives for skeptical action (e.g., Wang & Tuttle 2009; Bowlin et al. 2012).2 We consider these

incentives to be antecedents to skeptical action. Examples of outcomes of skeptical action include

an increase in audit evidence gathered and auditors standing up to clients during auditor-client

negotiations.

1 SAS 99 (AICPA 1999), which emphasizes, describes, and provides examples of professional skepticism, wasissued in 1999; therefore, this date was chosen as our initial cutoff date. In instances where papers prior to 1999provide additional insight into skeptical judgments and skeptical actions, we expand the synthesis to include thesepapers as well.

2Given that Church et al. (2011) have done a thorough review of the literature relating to audit firm rotation, wewill only include studies related to audit firm rotation that lend insights into the relationship between audit firm

Research on Auditor Professional Skepticism 47


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To understand the numerous antecedents to skeptical judgment and skeptical action examined

in prior studies, our framework organizes the literature into four subcategories as noted above:

auditor characteristics, evidential characteristics, client characteristics, and external environment

characteristics.3 These subcategories are based on our review of the literature and the related

features of the audit environment that have been shown to affect auditor judgment and actions. Byorganizing the antecedents in this way, our model departs from the Nelson Model. We believe that

this organizing framework enables us to capture elements of professional skepticism that are not

present in Nelsons model, although his model provides more detail on other elements that we do

not cover in depth. Therefore, we expand upon the Nelson Model, while keeping overlap between

the two papers to a minimum. Table 1 provides a description of the differences between the two

models.

Figure 1 depicts the overall framework and the organization of the research presented in this

paper. Beginning in the next section, we synthesize and discuss literature that relates to the

antecedents to skeptical judgment (organized into subcategories), and provide avenues for future

research, especially in areas that have not been addressed by prior research. In the subsequent

section, we repeat the process with respect to antecedents to skeptical action. In addition, the

important relationships between observed judgment outcomes relating to skeptical judgment and

skeptical action by auditors are also discussed. Finally, in the conclusion of the paper, we provide a

summary of what we have learned from the literature that will be of relevance for regulators and

practicing auditors. Given that our main foci are to generate avenues for future academic research

and to provide implications for the profession, we do not discuss the details relating to the research

method and findings of each paper in detail in the sections below. Rather, for those interested in

more specifics of a given study, we provide this information in Appendix A, which provides

summaries of all of the literature synthesized in the paper.

ANTECEDENTS TO SKEPTICAL JUDGMENTS

The four antecedents in our framework (auditor characteristics, evidential characteristics, client

characteristics, and environmental influences) provide a way to organize and synthesize the factors

shown to influence auditor judgments from the accounting literature. First, auditor characteristics

play a prominent role in a large number of research studies on professional skepticism (e.g.,

Rosman 2011; Pinsker et al. 2009; Rose 2007; Payne and Ramsay 2005). Clearly each auditor

brings unique and varied combinations of individual characteristics (e.g., traits, experience,

training, motivation, moral reasoning, and affect) to each engagement. For example, research is

beginning to explore the impact of auditors affect or mood on decision making during an audit

(Chung et al. 2008; Cianci and Bierstaker 2009; Nolder 2012). Second, audit evidence (or lackthereof ) is influential in making an audit judgment, and not all audit evidence should be weighted

equally. Third, there are characteristics of each client, such as their tendencies to ingratiate

themselves with the auditor (Robertson 2010), that influence auditor judgments. Finally, external

environmental characteristics such as regulations, standards, and the control environment

surrounding each engagement influence auditors professional skepticism. We have synthesized

the available research for each of the antecedents, and have suggested research and policy

implications. Appendix B provides a summary of the significant research takeaways, as well as

suggestions for future research and policy and practice implications.

3 Because the topic of professional skepticism is complex and covers a very broad range of issues, attempting toplace papers into categories or silos can be challenging. Recognizing this challenge, we make every effort toensure that our synthesis and analysis is as complete and comprehensive as possible Accordingly a paper where



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Auditor Characteristics

We first examine the role of individual auditor characteristics as an antecedent to skeptical

judgment. On each engagement, the auditors opinion on a clients financial statements is a product

TABLE 1

Comparison of Nelson Model of Professional Skepticism to Current Model

Our Model (Figure 1) Model in Nelson (2009)

Skeptical Judgment Skeptical Judgment

Auditor Characteristics Individual differences (traits) Traits Experience and expertise Auditor experience and training (within the

Knowledge construct) Training Auditor experience and training (within the

Knowledge construct) Motivation Incentives Moral reasoning Indirectly covered under Traits Affect Traits

Evidential Characteristics Confirming versus disconfirming Evidential input Sources (subjective versus objective) Not directly covered

Client Characteristics Integrity of management Incentives Complexity of client Not covered Riskiness of client Knowledge Client preferences Incentives and judgment process Negotiation Not directly covered Client industry and relationship with audit firm Not directly covered

External Environment Characteristics Accountability to reviewers Incentives Accountability to regulators Incentives Infrequent and more frequent risk assessments Knowledge

Skeptical Action Skeptical Action

Auditor Characteristics Moral courage Traits Independence Traits and incentives Knowledge Knowledge

Evidential Characteristics Auditing standards Not directly covered

Client Characteristics

Corporate governance Not directly covered Risk characteristics Incentives

External Environment Tenure with client/firm rotation Incentives Legal liability Incentives Incentives to skeptical action Incentives International issues Not directly covered



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performing tests, evaluating evidence, and making judgments about the quantity and quality of

evidence provided to support an audit opinion. Background education and firm training, including

feedback from the review process, as well as audit programs and evaluations, are structured to

develop auditor skills necessary to effectively and efficiently acquire evidence to support the

judgments necessary for an audit opinion. Below we summarize the research identified in this area,

examining the impact of individual traits, experience and expertise, training, moral reasoning, and

affect on auditors judgments.

Individual Differences (Traits)

Several studies have focused on traits that skeptical auditors possess. We narrowly define traits

as individual characteristics that enable auditors to determine when evidence does not add up,or

the traits that allow auditors to exercise skeptical judgment. Many studies concerning the traits of

auditor skepticism use the skepticism scale developed by Hurtt (2010) (the Hurtt Professional

Skepticism Scale; hereafter, HPSS), which measures trait skepticism using a scale composed of six

FIGURE 1

A Model of Antecedents to and Outcomes of Skeptical Judgment and Skeptical Action



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interpersonal understanding, (5) autonomy, and (6) self-esteem. Other studies use scales designed

to measure trust and have equated a lower trust score with skepticism (e.g., Rose 2007; Quadackers

et al. 2011). Hurtt (2010, 150) describes skepticism as a multi-dimensional individual

characteristic. As an individual characteristic, professional skepticism can be both a trait (a

relatively stable, enduring aspect of an individual) and also a state (a temporary condition arousedby situational variables).

Overall, research into individual differences has demonstrated that auditors with higher levels

of trait skepticism (as measured by the HPSS) or lower levels of trust (as measured by the Rotter

Interpersonal Trust [RIT] and Wrightsman Trust scales [Rotter 1967; Wrightsman 1964, 1974])

tend to exhibit more skeptical judgments. These judgments are measured by the identification of

more contradictions (Hurtt et al. 2012), generation of alternative explanations (Hurtt et al. 2012),

focus on fraud cues (Popova 2012), less reliance on managements explanations (Quadackers et al.

2011), a greater tendency to view managements behavior as unethical (Farag and Elias 2012), and

paying more attention to aggressive or intentionally unethical behavior (Rose 2007). Rosman

(2011) found that factors such as personality differences and motivation also can impact the level ofskepticism exhibited.

Researchers in this area have called for additional study into whether trait skepticism can be

influenced by training or experience. Some have indicated that audit firms should be screening for

skepticism (e.g., Farag and Elias 2012), while others have called for studies examining the impact

on a team when one team member possesses high trait skepticism compared to teams with multiple

members reflecting high levels of skepticism. Some have cautioned that it is possible that

individuals high in trait skepticism could consistently over-auditand thus reduce audit efficiency

(Hurtt et al. 2012). Future research may investigate if trait skepticism influences an individuals

career path. For example, do auditors with different levels of skepticism stay or advance in audit

firms at different rates? What happens when someone who is high in trait skepticism is supervisedby someone who is not, or someone with lower trait skepticism is supervised by someone with

higher skepticism? One challenge in investigating these issues is accessing confidential data from

audit firms when such data are required. Although behavioral studies are able to look at some of

these specific questions such as evaluations of more or less skeptical individuals, the issue of the

impact of trait skepticism on auditor career trajectory would benefit from confidential employment

data from audit firms.

Experience and Expertise

This line of research examines the role that experience plays in the level of skeptical judgments

displayed by auditors. In addition to the trait measures described above, experience allows auditors

to develop domain knowledge and knowledge of patterns that will enable them to determine when

evidence does not add up.As noted by Nelson (2009, 7), Professional skepticism is facilitated if

auditors experiences have given them the knowledge of the frequencies of errors and non-errors

and the patterns of evidence that suggest a heightened risk of misstatements.Experience has been

examined in terms of general audit experience (i.e., number of years as an auditor), industry-

specific experience, experience in a certain role (e.g., reviewer), and experience with a certain task

(e.g., fraud detection).

Several researchers have suggested that audit quality is improved by a greater use of more

senior personnel who have a greater understanding of the clients business and industry (e.g.,

Peecher et al. 2007; Knechel et al. 2010), presumably because such individuals are better equipped

to make skeptical judgments. For example, Brewster (2012) demonstrates that auditors with a



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client (i.e., they can remain skeptical of the clients claims even when they are presented in a

persuasive manner).

Industry expertise has been shown to better explain auditor performance as compared to task

experience, and auditors perform better when auditing accounts in their industry specialization

(Moroney 2007). Archival research examining the effects of industry expertise suggests that

industry expertise is positively correlated with audit quality (i.e., Romanus et al. 2008; Low 2004;

Taylor 2000) and earnings quality (i.e., Balsam et al. 2003; Krishnan 2003).4 For example, industry

expertise allows auditors to deter earnings management (Krishnan 2003), be more effective in

assessing inherent risks (Taylor 2000), and assess audit risk more accurately (Low 2004). These

studies imply that audit quality is improved, perhaps because auditors with more detailed industry

knowledge may be more skeptical. However, a limitation of archival research is that industry

expertise is unobservable, and as a result there is no way of knowing whether the effect is due to

individual auditor or firm-specific industry expertise. Chi and Chin (2011) attempt to address this

issue using Taiwanese companies, and find that the likelihood of issuing a modified audit report is

greater and discretionary accruals are lower when a specialist auditor is retained. However, their

study also uses archival data, thus judgments and decisions that demonstrate skeptical judgment and

actions cannot be directly examined.

There are several other studies that have found that task-specific experience enhances skeptical

judgment. Rose (2007) finds that fraud-specific experience is positively related to judgments of

intentional misstatements on the part of the client, while general experience is not significant.

Agoglia et al. (2009) find that experienced reviewers most accurately assess fraud risk, regardless of

workpaper documentation format.

In contrast to the studies above, not all research has found experience to be beneficial. Grenier

(2011) finds that non-industry specialist auditors exhibited skepticism, but industry specialists need

to be reminded to question their own judgment process in order to exhibit skepticism. Payne and

Ramsay (2005) find that audit seniors are less skeptical than staff auditors. This finding is primarilydriven by situations with a low planning-stage fraud risk assessment, suggesting that audit seniors

anchor on the low fraud risk assessment despite subsequent evidence to the contrary.

The results from Grenier (2011) and Payne and Ramsay (2005) as well as previous research by

Shaub and Lawrence (1999) find the same pattern of less skepticism evident in more experienced

auditors. Without longitudinal studies, for which the firms have been reluctant to grant access to

data, it is impossible to know whether audit experience conditions auditors toward being less

skeptical (as suggested by Mautz and Sharaf [1961, 31] and Loebbecke et al. [1989, 25] who note:

auditors must condition themselves so that performing audit after audit without encountering a

material irregularity does not make them so complacent that they fail to recognize one when it is

encountered

). Perhaps more negative interpretations could be that more skeptical auditors may beleaving the profession earlier than less skeptical auditors, or (as noted below) that with increased

experience, auditors become capturedby the audit industry and fail to question assumptions or

client explanations.

We conclude that the impact of experience on skeptical judgment (or lack thereof ) is derived

from a number of factors, such as the level of knowledge of the clients business and industry, the

number of years one works as an auditor, task-specific experience, and experience with more

complex audit tasks. The finding that fraud-specific experience increases skepticism judgments

suggests that providing students and auditors with experiential learning in fraud detection may

increase skeptical judgments. It is clear that more research into the impact of specific types of

experience and specific types of tasks on professional skepticism is needed. For example,



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Trompeter and Wright (2010) report that analytical procedures are increasingly used to reduce the

amount of audit testing and that less experienced staff are conducting a greater portion of these

analytical procedures. The latter raises concerns about whether less experienced auditors have

sufficient knowledge and training to proficiently perform analytical procedures, and whether they

will be able to appropriately apply skeptical judgment in interpreting the results of such procedures.Accounting firms have reorganized around industry lines (Berton 1995; Emerson 1993) and

have used industry specialization to differentiate themselves from their competitors (Francis et al.

1999; Hogan and Jeter 1999). Future research that examines the macro effects of industry expertise

is necessary to gain a better understanding of how firm- and office-level factors might influence

skeptical judgment and action by audit firm members. A possible downside to industry

specialization is a lack of objectivity and independence if a firm becomes beholden to the industry

(Gramling and Stone 2001). For example, if a firm is in a highly competitive market (i.e., largely

driven by a few companies), the firm may be under more pressure to retain clients, especially on a

regional or office level. Given that industry specialization yields higher audit fees (Casterella et al.

2004; Mayhew and Wilkins 2003; Craswell et al. 1995), financially there is more to lose, especially

on a local office level. Pressures from within the firm to maintain industry competitiveness could be

a factor that influences an auditor to be less skeptical despite his/her expertise. This may be

especially relevant if the firms industry expertise is based primarily on work with one major

company in the industry versus several smaller companies in the industry. In this situation

incentives to maintain a large client may dominate and negate auditor industry expertise resulting in

less skeptical judgments. Further, because most of the research examining industry expertise is

archival in nature, the direct effects of industry expertise are unobservable. Thus, more research

using experimental or qualitative approaches is necessary to gain an in-depth understanding of

whether and how industry expertise enhances skeptical judgment and action.

Training

The antecedents to skeptical judgment discussed so far relate to auditor characteristics that

cannot easily be changed, such as an individuals predisposition to skeptical judgment or the

amount of experience he/she gains over time. The question remains as to whether auditors can be

trained to make better skeptical judgments. Wedemeyer (2010) suggests that the apprenticeship

model of developing audit judgment, which relies heavily on the teaching of earlier experiences to

new apprentices,may be susceptible to problems, such as a lack of comparability between earlier

experiences and current experiences, or an inability to adjust risk assessments to changing

circumstances. The current practice of training auditors primarily through their on-the-job

experiences may be ineffective at improving skeptical judgment, or at a minimum it may beimportant to ensure that training is heavily influenced by auditors who demonstrate skeptical

judgment and skeptical action.

Alternatively, other researchers believe that if auditors are trained to be aware of their thought

processes or the unconscious biases affecting their judgments, they may begin to engage in more

skeptical thinking. For example, Bazerman et al. (2002, 102) note, Whats needed is education that

helps auditors understand the unconscious errors they make and the reasons they make them. That

knowledge alone will not solve the problem, but once members of the auditing profession

understand the role of bias in their work, honest and visionary leaders in the profession can help

change the conduct of accounting to prevent the conflicts of interest that promote bias.

Consistent with this suggestion, Peecher et al. (2010) propose that auditors should be trained to

be skeptical of their own judgment processes and of the judgment processes exhibited by other

auditors on their engagement teams. They suggest that auditors should understand that despite



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influence each persons judgment. Possible approaches to training auditors to be skeptical of their

own judgment processes include engaging in counter-explanation, considering multiple alternatives

in addition to managements preferred alternative, and auditors challenging the thinking of other

auditors (i.e., assuming the other has been duped and made a judgment error and asking where that

most likely occurred and why

).Grenier (2011) finds that when specialist auditors are told to be skeptical of evidence, they do

not alter their judgments (and therefore are less likely to find fraud), but when primed to be

skeptical of their own process for evaluating evidence (i.e., judgment skepticism), they are more

likely to generate fraud explanations than non-specialist auditors. Harding and Trotman (2011),

however, find nearly opposite results, albeit less definitively than Greniers, when they ask auditors

to either reflect on their judgment process (inward orientation) or question the representations of

management (outward orientation). Outward orientation seems to enhance skeptical judgment

more than inward orientation. The Harding and Trotman (2011) inward orientation has more of a

focus on justification than in Grenier (2011), and they did not use industry specialist auditors, which

may account for the different results between the two studies.

Rather than requiring auditors to focus on their decision process, other research has focused on

training auditors to think differently (that is, engage in different types of unconscious processing) as

a way to get them to make more skeptical judgments. For example, Plumlee et al. (2012) trained

auditors how to use divergent and convergent thinking.5 They find that participants who received

both divergent and convergent training were more likely to generate and ultimately choose the

correct explanation compared to those who received only divergent or no training. Trotman et al.

(2009), in an experimental investigation of brainstorming, instruct one group to use pre-mortem,

or backward thinking (e.g., It is now six months after the audit and something bad has happened.

Why?). They find that groups that engaged in the pre-mortem thinking generated more

misstatements and more quality fraud ideas, and the authors encourage use of pre-mortem thinking

as an effective de-biasing technique.

Finally, there are some studies that have focused on training auditors to process information in

the same manner as specialists. For example, Carpenter et al. (2011) find that students increase their

ability to appropriately assess fraud risk after completing a forensics course. The effects of the

forensics training persist even seven months after the completion of the course, and more

importantly, the judgments of students trained in forensic accounting were similar to those of a

panel of seven individuals with expertise in fraud, forensic accounting, or law enforcement. This

finding is similar to that of Pinsker et al. (2009), who found that students trained in law were able to

remain less biased. The authors note that law students are less prone than accounting students to be

biased toward an advocacy position. This finding is presumably due to law schools emphasis on

understanding both positive and negative precedents (i.e., law students are trained in advocatingtheir position as well as explaining why contrary positions are incorrect)(Pinsker et al. 2009, 94).

Presumably this skill of viewing situations from both sides results in less biased (and therefore more

skeptical) judgments. The implication of both studies is that training auditors to think more like

specialists (forensic accountants or lawyers), or training in examining and explaining why contrary

explanations are incorrect, may improve their skeptical judgments.

Overall, the research on training auditors to be more skeptical shows promise for improving

skeptical judgments. Consensus from these studies (e.g., Peecher et al. 2010; Grenier 2011) seems

to be that simply instructing auditors to be more skeptical of evidence is not as effective as getting

them to understand (and be skeptical of) their own processing and where they might be prone to

5 Divergent thinking causes auditors to mentally generate explanations for evidence or circumstances they identify



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biases in their judgments. Alternatively, getting auditors to alter their thought processes (e.g., to

engage in more convergent and divergent thinking or more backward reasoning) and training them

to consider both sides of issues more explicitly, as law students are trained to do, can lead to more

skeptical judgments. Additional research can investigate these and other training interventions to

see if the effects are long lasting and will generalize to larger groups of auditors. Research shouldalso investigate how trait skepticism, experience, and task complexity interact with the training

interventions to either enhance or inhibit their effectiveness.

Motivation

The role of motivation and its relationship to skeptical judgment is complex, because it relates

to the larger issue of incentives, which are broadly defined by Nelson (2009) as encompassing more

than just economic motivations. For example, accountability to reviewers is a very powerful

incentive that may motivate one to act skeptically, or motivate one to forego skepticism in order to

gain the favor of a reviewer, depending on the reviewers mindset (see Rich et al. [1997] for an in-

depth discussion of these issues as well as Wilks [2002]). Other incentives include avoiding risksassociated with failed audits (reputation risk) as well as risk of litigation, and risk of PCAOB

inspection findings. The role of these risks as incentives for increased skepticism is covered in more

detail below. In addition, incentives have the ability to induce skeptical action as noted by Nelson

(2009), and we note the role of incentives in the section on skeptical action. In this section we deal

primarily with factors that directly motivate auditors toward more skeptical judgments, but

acknowledge these factors are only a small part of a larger set of incentives that drive auditors

judgments and actions.

There are a few studies examining the role of motivation as an antecedent to skeptical

judgments; however, Bazerman and Tenbrunsel (2011) suggest that when employees are not

making skeptical judgments, one should examine audit firm goals and reward incentives. Theyobserve, people see what they want to see and easily miss contradictory information when its in

their interest to remain ignoranta psychological phenomenon known as motivated blindness

(Bazerman and Tenbrunsel 2011, 61). They also note the link between skeptical judgment and

action and how that link relates to the reward structure in auditing by noting, Many managers are

guilty of rewarding results rather than high-quality decisions. An employee may make a poor

decision that turns out well and be rewarded for it or a good decision that turns out poorly and be

punished,and further laws often punish bad outcomes more aggressively than bad intentions

(Bazerman and Tenbrunsel 2011, 64). Together these observations suggest that auditors may not

feel extrinsically motivated to make skeptical judgments because incentive systems do not reward

them for the process of making skeptical judgments, but only reward them when the judgmentsresult in a beneficial outcome for the firm. It may be, as suggested by Peecher et al. (2010), that the

PCAOB, by only noting negative outcomes in its inspections, is reinforcing a belief that positive

outcomes are better than careful and well-executed processes.

The HPSS captures the level of individuals intrinsic motivation as one of its constructs,

indicating that a level of intrinsic motivation is a driver of skeptical judgments. Using HPSS scores

to measure skepticism, Rosman (2011) found a link between motivation and skepticism, noting that

highly motivated subjects were more skeptical regardless of personality type and external factors,

whereas less motivated subjects exhibited varying levels of skepticism depending on their

personality type and external factors (such as level of firm support for their decisions).

Overall, the limited research linking motivation to skeptical judgment suggests that the firms

philosophy and operating style is an important antecedent for creating incentives and motivating

auditors to become more skeptical. However, the personality traits that the individual auditor brings



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skepticism. Because the research linking motivation (both extrinsic and intrinsic) to skeptical

judgment is so limited, future research should examine the role motivation plays in such judgments.

For example, does being more motivated to think skeptically necessarily result in better judgments?

Are the audit firms currently evaluating or rewarding skeptical inquiries, regardless of outcomes? Is

skepticism and questioning weighted as heavily in staff performance reviews as maintaining apositive relationship with the client? What role do performance evaluations play in an auditors

willingness to pursue skeptical questioning? As noted above, the major challenge to examining

these issues is access to firm data regarding how performance evaluations are conducted and how

reward systems are designed and administered, but if such data were available, significant insights

into the relationship between motivation and skeptical judgment could result.

Moral Reasoning

Studying the impact of moral reasoning on skeptical judgment is complicated by the fact that

identifying factors that impact moral reasoning and measuring moral reasoning as a construct varies

between researchers and theoretical models. One often-cited model of ethical decision making is byRest (1986), who builds upon the work of Kohlberg (1976). Rest defines four components of

ethical decision making which include (1) recognition of the moral issue, (2) making the moral

judgment, (3) establishing moral intent, and (4) acting on moral concerns. As noted by Jones

(1991), most studies are concerned with either component (2) or (4) ( judgment or action), or the

interaction between these two components. Because Rests model was originally conceived to

explain the behavior of students, subsequent researchers (such as Jones 1991) have built on Rests

model to incorporate other factors that may affect moral judgment or action among adults in

professional settings, such as the intensity of the ethical situation (Jones 1991) or an individuals

innate sense of fairness (Cohen et al. 2007). We will discuss research that addresses component (2)

(the moral judgment or moral reasoning component) in this section of the paper, and those thataddress components (3) and (4) in the section below on skeptical action.

There have been few studies directly linking moral reasoning, or moral behavior, to skeptical

judgments.6 One study that attempts to do this is Kerler and Killough (2009), who posit that the

decision to trust a client is a conscious one, shaped by moral behavior, and that trust (or lack

thereof) has the potential to impact professional skepticism. However, they find no relationship

between moral reasoning and trust. This may indicate that trust is not a conscious process or may

not be shaped by moral behavior as the authors contend. In contrast, Farag and Elias (2012) find

that more skeptical auditors have a harsher view of earnings management, which the authors

consider to be a more ethical perception. Bobek et al. (2012) examine the impact of moral intensity

as defined by Jones (1991) on the judgment of audit and tax professionals in an audit versus a taxsetting, and find that auditors are more likely to recommend conceding to a contentious client in a

low moral intensity setting and more likely to recommend conceding in a tax setting versus audit

setting.7

Future research on the link between moral reasoning and skeptical judgment could expand

upon Rests (1986) basic model as others have done, to examine additional variables affecting

moral judgment, such as perceived fairness, moral intensity, and underlying values. For example,

does an auditors value system or moral reasoning ability affect his/her ability to evaluate evidence

6 Although there have been numerous studies linking moral reasoning to decisions in accounting and auditing

contexts (e.g., Jones 1991), many have focused on the impact on audit judgments in general rather thanprofessional skepticism and are therefore outside of the scope of this research synthesis.

7 Ethical decision making is issue contingent; that is characteristics of the moral issue itself collectively called



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by allowing him/her to understand the clients mindset in preparing evidence (i.e., the ability to

view the evidence through the clients eyes)? Is it possible that one who has the moral character of a

fraudster is more able to think like a fraudster? Or would someone with strong values and a high

level of moral reasoning ability be more likely to be concerned about managements intentions

toward misstatement and therefore approach the audit with more of a skeptical mindset?

Affect

Very few research studies to date have examined the direct link between affect and skepticism. 8

Exceptions include examination of how affect generated by managers efforts at ingratiating

themselves with auditors impacts the auditors skeptical judgments (Robertson 2010), the impact of

mood on hypothesis generation and auditor ethical judgments (Cianci and Bierstaker 2009), and the

effect of different mood states (i.e., positive versus negative) on auditors inventory valuation

judgments (Chung et al. 2008). Given the lack of research related to affect and skepticism, this is an

area for possible future research. Affect is most likely to be studied as a moderating or mediating

variable rather than looking at how ones emotions impact the judgments themselves. A researcherwould examine how emotions impact ones attitude toward his/her client, which would then impact

judgments (this is the approach taken by Robertson [2010]). Other possible research topics related

to affect include looking at the relationship between anger toward the client and whether one looks

for problems that are not present (i.e., becomes overly skeptical), the relationship between being

positively inclined toward the client (in a friendly or romantic way) and an inability to notice

problems, and the relationship between feeling depressed about something unrelated to the client

and the ability to evaluate evidence in a thorough and careful way.

As reviewed above, the majority of research on professional skepticism has been in the area of

individual auditor characteristics as an antecedent to skeptical judgments. However, there are a few

papers that deal with the remaining three antecedents: evidential characteristics, clientcharacteristics, and firm characteristics. We address evidential characteristics next.

Evidential Characteristics

Audit standards discuss some of the types of evidence that auditors may obtain before forming

a judgment. Research examining the relationship between skeptical judgment and evidence is

limited; however, studies have been conducted that examine confirming versus disconfirming

evidence, evaluating the source of evidence, and objective versus subjective evidence.

Confirming versus Disconfirming Evidence

We identified several studies (Fukukawa and Mock 2011; Trompeter and Wright 2010) that

examined auditors tendency to focus on evidence that will confirm a clients explanation of an

account balance fluctuation, rather than looking for disconfirming evidence (resulting in a lack of

skeptical judgment). Findings indicate that although auditors do tend to confirm given assertions,

they are less likely to confirm when assertions are stated negatively rather than positively

(Fukukawa and Mock 2011). Further, they find that the risk assessment approach influences the

effects of the framing of assertions. In addition, auditors continue to rely a great deal on clients for

information to set expectations and evaluate explanations when performing certain audit

8 In her doctoral dissertation, Nolder (2012) suggests that this is an important and under-researched area asauditors emotional reactions in high-risk settings can influence their level of skepticism. She notes, In generalthe risk research provides strong evidence to suggest that an auditors affective response to risks significantly



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procedures, such as analytical procedures (Trompeter and Wright 2010), which raises concerns

about whether auditors overrely on client representations, potentially resulting in a bias toward

confirming information (as opposed to considering both confirming and disconfirming information).

However, Trompeter and Wright (2010) report that auditors appear to be sensitive to the PCAOBs

concern regarding professional skepticism, and because they realize that the PCAOB expects themto do more than merely confirm a clients explanations, auditors may be limiting the use of

analytical procedures during audit testing.

The concern regarding overreliance on a clients explanations is echoed by Knechel (2007),

who posits that over time and especially with the use of the business risk approach to audit in the

era leading up to the collapse of Enron, audits have increasingly involved testimonial evidence

gathered through discussion-interviews with the client. Hence, there is a risk that reasonable

sounding stories are accepted by auditors, despite the requirement for professional skepticism.

However, he also argues that the business audit risk approach has potential merit since it requires

auditors to understand a clients business risk and explicitly relate it to audit risk. He recommends

combining the concepts in the traditional audit approach with that in the business audit approach,

and suggests that such action could lead to more efficient and effective audits.

Since both the business audit approach and the traditional audit approach involve subjective

audit evidence and testimonial evidence, an issue for future research is whether auditors exercise

sufficient professional skepticism when evaluating subjective evidence, especially as it relates to

reasonable-sounding stories from a clients management. The impact of decision aids, quality

corporate governance, and industry expertise on an auditors ability to evaluate reasonable-

sounding stories should be examined. Experimental methods may be particularly well suited to

examining these issues. From a regulatory perspective, the PCAOB and other standard setters such

as the IAASB and AICPA have posited that in certain circumstances (such as in evaluating

estimates, including fair value), it may be desirable for the auditor to develop his/her own estimate

independent of the client (e.g., see AU-C 540 [AICPA 2011]), which would lessen the effect of

confirmatory strategies. Although preliminary findings from Griffith et al. (2012) indicate auditors

are not independently developing estimates, future research could examine whether independently

derived estimates do demonstrate more skepticism than those that use managements calculations as

a starting point.

Source of Evidence and Subjective versus Objective Evidence

Research suggests that less credible evidence should be weighted less by auditors (e.g.,

Kizirian et al. 2005; Krishnamoorthy et al. 1999) and audit standards, such as SAS 99 (AICPA

2002) requires auditors to adjust skepticism based on evidence obtained. This skeptical orientationhas been found by Kizirian et al. (2005) and Harding and Trotman (2011). When auditors believe

that client-provided evidence is untrustworthy, they seek external validation as opposed to pursuing

additional client-supplied evidence (Kizirian et al. 2005). In addition, Harding and Trotman (2011)

examined the impact of evidence source on skeptical judgment in a brainstorming session. The

results indicate that when client management assessed a low likelihood of fraud, the auditors

responded with more skeptical judgments than when the assessment came from the partner or no

assessment was provided.

The limited number of studies examining the impact of the source of evidence on skeptical

judgments, and the dearth of studies on the impact of subjective versus objective evidence on

skeptical judgments, indicate an area for future research. Are more skeptical auditors better able to

differentiate between evidential sources? Information from the PCAOB on whether auditors seem

able to effectively deal with evidence from multiple sources with various levels of credibility would



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In the preceding sections we reviewed the literature regarding individual auditor characteristics

and evidential characteristics. There is limited research on client characteristics and the impact of

such characteristics on skeptical judgments. Following is a review of the literature on client

characteristics that deals primarily with management integrity, client complexity, client preferences,the riskiness of the client, the impact of client industry, and relationship with the audit firm.

Integrity of Management

Several studies (e.g., Earley et al. 2010; Kerler and Killough 2009; Robertson 2010) have

examined the impact of auditors beliefs about management integrity (i.e., beliefs about

managements honesty) on skeptical judgments. This research is related to the concept of trust,

which has been the subject of previous studies (see Nelson [2009] for a review of trust studies).

Research reports mixed findings with some studies finding that auditors who view management as

being of high integrity may be fooled into overlooking fraud cues (Earley et al. 2010), while

others find that auditors who had a negative experience with a clients management subsequentlymade higher fraud risk assessments, with no impact on fraud risk assessment for those who had a

positive experience (Kerler and Killough 2009). These mixed results may be due in part to the fact

that trait skepticism interacts with previous client experience, with auditors scoring low in the HPSS

being more sensitive to previous client experiences, yet less able to identify fraud cues (Popova

2012).

Robertson (2010) finds that auditors who faced ingratiating managers (i.e., those managers

who strategically attempt to induce positive affect in the auditor) did not objectively evaluate the

audit evidence and allowed the client to influence their judgments (i.e., they exhibited a lack of

professional skepticism). In addition, Robertson (2010) reports that student participants were less

likely to comply with client requests than professionals.

While these studies provide mixed directional results, together they indicate that the level of

perceived client integrity has an effect on auditors judgments. Future research should address the

relationship between client integrity and auditors skeptical judgment to determine if auditors are

able to remain skeptical of clients they believe to be honest. This issue is particularly relevant when

management is manipulating the auditor into believing that they are honest, as in the case of the

ingratiating managers in Robertson (2010).

Complexity of Client

Client complexity can interact with auditor expertise to cause auditors to become overwhelmed

with information and confused, which then leads to breakdowns in skeptical judgment. Brewster

(2012) used a complex client setting, and by manipulating his auditors understanding of the client,demonstrated a sleeper effect.With a sleeper effectafter a period of time had elapsed, auditors

with less understanding of the client remember the clients incorrect explanation and not the correct

explanation, despite the fact that the auditors had initially rejected the clients incorrect

explanation.9 Tucker et al. (2003) argue that because complexity of the client and uncertainty

are increased in situations where auditors have doubts about the companys ability to continue as a

going concern, auditors have difficulty maintaining independence and integrity in the face of

economic pressure by the client. Further, the going concern judgment is complicated by the self-

fulfilling prophecy (i.e., the auditors opinion hastens the companys end), and auditors express

fewer going concern opinions ( judgments) when the auditors report of a going concern issue is

self-fulfilling.



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Recent cases of financial statement fraud have occurred at clients who had complex businesses

or complex accounting in specific financial statement areas. As businesses continue to become more

complex or engage in accounting for transactions for which auditors are not well trained (e.g.,

derivatives and securitized investment assets), the possibility of a decline in auditor skepticism

exhibited at these clients increases. Future research regarding client complexity could focus on

judgments related to complex business models or transactions, in order to determine the impact on

auditor skeptical judgment and if greater training in base disciplines to help understand these

complexities or some other intervention will alleviate a lack of skepticism.

Riskiness of Client

Numerous studies have made the link between audit risk and skepticism, and this literature

predates our 1999 timeframe. For example, Hackenbrack and Nelson (1996) found that when risk is

moderate, auditors accept an aggressive reporting choice, but when it is high they prefer a

conservative choice. Farmer et al. (1987) find that higher risk is negatively associated with auditors

likelihood of agreeing with a clients questionable financial reporting preference, consistent with

Brown-Liburd et al. (forthcoming), described in the Negotiation section below. Earley et al. (2012)

find that auditors act more skeptically in a high-risk context, but this is attributed to the higher

litigation risk and regulatory scrutiny in these contexts, rather than client-specific risk. Quadackers

et al. (2011) examined the effect of control environment strength (a proxy for client risk) on

skeptical judgments and decisions and found that the effect of skepticism was heightened in high-

risk environments. Taken together, these studies consistently demonstrate that in a high-risk

context, auditors make more conservative judgments, and in the cases of Brown-Liburd et al.

(forthcoming), Earley et al. (2012), and Quadackers et al. (2011), more skeptical judgments as well.

Client Preferences

Several studies have examined the effect of client preferences on auditor judgments,particularly with respect to motivated reasoning,which involves searching for and overweighting

evidence that supports desired conclusions, which in the context of these studies are those favored

by the client. These studies are discussed in detail in Nelson (2009). In addition, another related line

of research examines judgments for which management makes an initial judgment, which the

auditor must then evaluate. Findings indicate that in several settings, auditors are biased toward

managements preferences, particularly when management prefers an option that is most beneficial

to itself (McDaniel and Kinney 1995; Earley et al. 2008). The fact that auditors are biased toward

the option that is most favorable to management indicates a lack of professional skepticism. Earley

et al. (2012) found the opposite of this bias in the fair value setting, that is, auditors were skeptical

of managements preferred treatment. They attribute this in part to the increased regulatory scrutinyof fair value judgments and increased liability risk post-financial crisis as opposed to scrutiny of

internal control judgments, which were much less likely to be the subject of inspection findings by

the PCAOB at the time of Earley et al. (2008).

Overall, there is evidence to support the notion that client preferences impact skeptical

judgments, but the effect appears to be context specific, with some research indicating a negative

impact on skepticism and some indicating a positive impact. Future research will need to determine

what contexts cause increases to or reductions in skeptical judgment.

Negotiation

There have been numerous studies related to auditor-client negotiations, particularly as they

relate to waiving or requiring proposed audit adjustments (Ng and Tan 2003; Brown and Johnstone

2009; Trotman et al. 2005; Gibbins et al. 2001; Sanchez et al. 2007). Because most of these studies



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judgment and are therefore covered under antecedents to skeptical action. However, there are a few

studies that examine the relationship between skeptical judgment and negotiations with clients, and

overall, the results regarding the relationship between skepticism and outcomes of auditor-client

negotiations are mixed. Brown-Liburd et al. (forthcoming) find that auditors are able to exhibit

skeptical judgments and to be conservative in their negotiations with clients, but Wolfe et al. (2009)found that ability to exercise skeptical judgment was dependent on the persuasion tactic used by

management. Similarly, Hatfield et al. (2010) found that auditors ability to remain skeptical was

dependent on certain factors, such as the size of the difference between the auditors initial

judgment and the clients amount, and whether the auditor had conceded in past negotiations.

Future research should address the circumstances under which auditors skepticism is enhanced or

threatened in negotiations, as well as the effect of training on the ability of auditors to exhibit

skepticism in negotiations.

Client Industry and Relationship with Audit Firm (e.g., Former Partner Working at Client)

We could not identify studies that examined the impact of the clients industry or the impact ofaudit firm alumni serving as senior members of management at the client on an auditors skeptical

judgment. Theoretically, each of these has been proposed as a possible source of influence on

auditors ability to use professional skepticism in making judgments. Future research that examines

these important areas is necessary.

External Environment Characteristics

As shown in Figure 1, the final group of antecedents to skeptical judgment is the influence of

the external environment. These influences include: the individual auditors interaction with his/her

firm through accountability to reviewers, the impact of accountability to regulators, and the impact

of infrequent or more difficult risk assessments. As noted above, these influences represent

powerful incentives that have the ability to motivate skeptical judgment in either a positive or

negative manner. Although conceptually this should be a rich research area, we found only a limited

number of recent papers dealing with these issues that were not covered in Nelson (2009).

Accountability to Reviewers

Accountability to reviewers acts as an incentive that can impact both skeptical judgment and

skeptical action on the part of the auditors being reviewed, and there are studies that examine both

judgment and action together. For example, Turner (2001) finds that the preference of the reviewer

influences both the type and amount of evidence that auditors select. Carpenter and Reimers (2012)find that when accountable to a partner who emphasizes professional skepticism (i.e., a partner who

tells others to maintain an appropriate level of skepticism and complete audit procedures as

effectively as possible rather than focus on efficiency concerns), audit managers make higher fraud

risk assessments and respond to risks with appropriate audit procedures (that is, they engage in

skeptical action) when fraud is present compared to those audit managers accountable to a partner

who does not emphasize professional skepticism. Peecher et al. (2010) find that audit managers

with pressure to be less skeptical coachjunior auditors toward a preferred, lenient conclusion,

and this act of coaching convinces the manager of the accuracy of the more lenient (less

skeptical) position. Collectively, the Carpenter and Reimers (2012) and the Peecher et al. (2010)

studies, together with the hierarchical nature of audit teams (Libby and Trotman 1993), highlight

the notion that in some instances the same individual (e.g., an audit manager) can be both a

reviewer and a reviewee and hence may either take the same or a different stance in these two roles



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informs us that the reviewee may engage in behaviors to persuade the reviewer about the quality of

work performed by the reviewee, and thus the review process may include effective ways in which

inconsistent evidence is considered in the audit process (Libby and Trotman 1993).

Overall, these studies indicate that reviewer preferences can have a significant influence on the

skeptical judgments (and actions) of auditors being reviewed. As reviewer skepticism increases and

is communicated to the auditors being reviewed, the reviewed auditors will exhibit increased

skepticism even when it is inefficient to do so. Unfortunately, as noted by Wedemeyer (2010), the

apprenticeship nature of public accounting also means that being trained by a reviewer inclined

toward less skepticism can perpetuate a client advocacy position within audit firms. Thus, the

review process can be one way to promote skepticism, but only as long as auditors at higher levels

in the firm exhibit a skeptical mindset themselves and communicate this to auditors whose work

they review. A natural extension of this line of research is to conduct studies on the impact of

cultural attitude toward skepticism at the firm and/or the local office level (i.e., study attitudes of

office managing partners), and examine its impact on the reviewerreviewee relationship and the

training and promotion of junior auditors.

Accountability to Regulators

Research related to accountability to regulators takes on two formsstudies that view

accountability as an incentive that drives auditors to more skeptical judgments (e.g., Earley et al.

[2012], who note that accountability to regulators may lead to auditors preferring more conservative

fair value judgments), and studies that examine how the desire to follow standards established by

regulators may impact auditors processing and therefore have an indirect effect on their skeptical

judgments (Piercey 2011; Hammersley et al. 2010). Piercey (2011) finds that the documentation

requirement outlined in Auditing Standard No. 3 (PCAOB 2004) unconsciously leads auditors to

defensively bolster their lenient judgments, which led to assessing lower audit risk levels when

documenting judgments in words, but not when doing quantitative judgments. However,Hammersley et al. (2010) find that having specific documentation of fraud risks identified during

the planning stage increases auditors final fraud risk assessments and evidence requests.

Overall, the studies related to accountability to regulators indicate that when accountability acts

as an incentive, auditors do exhibit more skeptical judgments, but that specific requirements of the

auditing standards can cause auditors to engage in cognitive processing that may result in reduced

skepticism. The studies in this area are relatively new, and future research on the role of

accountability to regulators can add more insight into the benefits as well as unintended

consequences (such as those identified by Piercey 2011) of regulation as it relates to skeptical

judgment.

Infrequent and More Difficult Risk Assessments

One type of difficult risk assessment that auditors must make is assessing the likelihood of

fraud. The standards (i.e., AU 316 [AICPA 2007]) require that the engagement team conduct a

fraud brainstorming session in an attempt to aid auditors in developing an awareness of possible

fraud risk areas. Lynch et al. (2009) find that electronic brainstorming results in a heightened

awareness of fraud risks as compared to face-to-face brainstorming and that fraud risk assessments

are higher with electronic brainstorming. Although electronic brainstorming may hold significant

benefits in terms of both efficiency and effectiveness, further research into the adoption of this type

of brainstorming should be performed.

Other Potential Areas for Research

We identified three other areas related to external environmental characteristics that might have



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accounting standards, the auditors awareness of their responsibility to third parties (e.g.,

stockholders/stakeholders), and the potential issues arising from time pressure/being overworked.

Although there is prior research on some of these topics (e.g., McDaniel [1990] on time pressure),

and the impact of such research on professional skepticism has been covered in Nelson (2009),

more recent research that directly examines the impact of these environmental factors on

professional skepticism is warranted.10 For instance, anecdotally our students and former students

indicate that the time pressure to complete an audit and the amount of hours they work during busy

season contribute to a willingness to accept information as it is presented, without probing, simply

to get finished. However, accounting researchers have not directly examined the impact of time

pressure or exhaustion on professional skepticism. This is a very important and potentially fruitful

area for research.

In summary, there are numerous studies of the antecedents to auditors exercising professional

skepticism when making audit judgments. Overall findings indicate that there are individual

differences between auditors in terms of their ability to recognize when there is a problem with

evidence (i.e., when something does not add up). Nelson (2009) discusses the role that

unconscious cognitive processes, such as error frequency knowledge and pattern recognition, aswell as traits like problem-solving ability and ethics, play in skeptical judgment. Expanding on his

discussion, we find that research regarding auditor characteristics has further established the link

between individual traits of auditors and skeptical judgment (with auditors scoring higher on scales

such as the HPSS exhibiting more skeptical judgment); however, skepticism can be influenced by

other characteristics of the audit setting.

ANTECEDENTS TO SKEPTICAL ACTIONS

As discussed above, an auditor must recognize that a problem exists before he/she can take

appropriate skeptical actions (e.g., extending fieldwork, investigating differences, or requesting the

help of an expert). In the previous section we reviewed a number of studies on the antecedents tomaking the appropriate skeptical judgment. In this section we address research that reveals what

auditors do after they identify the existence of a problem. We utilize the same four antecedents that

are identified in Figure 1: characteristics of the auditor, the evidence, the client, and the external

environment.

Auditor Characteristics

Moral Courage

Nelson (2009) discusses research relating to auditors moral reasoning as relating primarily to

the link between incentives and judgment. He reviews extant literature, explaining that in most of

this literature, auditors at higher stages of moral development are more sensitive to informationabout client competence and integrity. However, he also notes that there has been some discussion

that higher levels of moral reasoning may actually lead to more departure from auditing standards

(Nelson 2009, 9). This apparent disconnect between moral reasoning and action cannot be directly

studied without considering intermediate steps that might be present between the two. Rest (1986)

attempted to address an intermediate step through component (3) of his model, establishing moral

intent. However, subsequent researchers in organization behavior refined the incorporation of

intermediate steps by proposing a more complex model of ethical actions in the workplace, and

introduced the idea of moral courage, which is instrumental in determining the course of actions an

10 For instance, Cohen et al. (2012) find that auditors make more conservative judgments under principles-basedstandards than under rules-based standards. They do not directly examine professional skepticism under rules-versus principles-based accounting regimes; however their results are consistent with greater professional



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individual will take. For example, Serkerka and Bagozzi (2007) propose a model in which they

define the construct of moral courage and examine what drives individuals to exhibit moral courage

in the workplace. They posit that once moral reasoning has occurred, individuals engage in the

intermediate steps of a desire to act, self-regulation of the desire to act, and the decision to act

before actually performing an action (either ethical or unethical). According to their model, moralcourage is instrumental in driving these steps, in that it promotes the desire to act, and then shapes

self-regulation activities (such as reflecting on whether the action would be beneficial personally or

to the organization as a whole) and other considerations leading up to the decision to act. In

subsequent work, Serkerka et al. (2009) develop a scale to measure the construct of professional

moral courage (PMC). Hannah et al. (2011a) also further refine Rests model and expand it beyond

the intermediate steps of Serkerka and Bagozzi (2007). They view moral courage as just one facet

of a larger construct, which they refer to as moral conation,defined as the capacity to generate

responsibility and motivation to take moral action in the face of adversity and persevere through

challenges(Serkerka and Bagozzi 2007, 664). Applying this idea to the audit setting, we believe

that moral courage is influential in prompting auditors to take action on the judgments that they

make. However, in our review of the skepticism literature in auditing, we did not identify any

research on the link between moral reasoning and moral courage, or between moral courage and

skeptical action. This is not surprising, as Hannah et al. (2011a) note the lack of research in all fields

examining the link between moral courage and action, with the exception of recent work by Hannah

et al. (2011b), which examined moral courage in the military.11 The link between moral courage of

auditors and skeptical action presents an interesting area for additional research, as there are many

unanswered questions such as: Does higher-level moral reasoning automatically translate into

greater moral courage? Are auditors who exhibit moral courage more likely to act on their skeptical

judgments than those who do not? Are auditors who exhibit moral courage less influenced by client

or peer pressure when dealing with expanding investigations or taking an unpopular stance with a

client? Insights from the organizational behavior literature cited above could motivate additionalresearch questions on this topic.

Independence

Auditor independence is important to consider in the discussion of professional skepticism

because if an auditor lacks independence, specifically independence in fact, it is possible that the

auditor will not approach the audit with an appropriate level of objectivity and professional

skepticism. In recent years, research on independence has largely focused on financial incentives

(i.e., audit fees, consulting services) that potentially impair auditor independence. Very few studies

have examined the direct link between independence and skepticism; however, we identified two

articles that investigate this area.12 Perhaps validating the cooling offperiod that is now in effect

for hiring former auditors, Menon and Williams (2004) find that companies that employ a former

audit partner as an officer or director report larger accruals and are more likely to just meet earnings

forecasts. As discussed above, Tucker et al. (2003) examine the likelihood of an auditor issuing a

going concern judgment and suggest that the pressure not to create a self-fulfilling prophecy may

11 Hannah et al. (2011b) conducted a four-month field study and found that moral courage of soldiers was related tothe level of authentic leadership exhibited by their squad leaders (that is, the level of leadership as captured by aninstrument known as the Authentic Leadership Questionnaire). The higher the level of authentic leadershipexhibited by squad leaders, the greater the level of moral courage of the soldiers, which in turn was positively

related to a greater level of pro-social and ethical behavior exhibited by those soldiers.12

There is another PCAOB synthesis project that focuses on auditor independence (see Church et al. 2011);therefore we only briefly review those papers that drew a direct link between auditor independence and



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impede the auditors willingness to take skeptical action. Overall, there are relatively few studies

that examine the direct link between auditor independence and skeptical action, and more research

is needed in this area.

Knowledge

Knowledge is a component of auditor expertise and is therefore usually associated with

skeptical judgment. However, there is one study that examines how knowledge relates directly to

skeptical action, mainly by examining how knowledge relates to the consideration of additional

evidence.

Griffith et al. (2012) interviewed auditors who admitted to overreliance on management

assertions by failing to test assumptions, failing to adequately consider internal controls, and failing

to fully understand some business models. This study also identified a failure to notice and

reconcile external evidence when it conflicts with management assumptions and to overrely on

outside specialists. These findings indicate that lack of knowledge and/or other aspects such as traits

and incentives directly leads to a failure to act skeptically and a failure to gather additional evidencewhen it is warranted. This lack of action seems due to a failure to understand and evaluate instances

when more evidence is needed to support or refute managements claims.

The link between knowledge and action may provide a rich research area. Research in

psychology has consistently demonstrated that individuals overestimate their own knowledge and

are overconfident in the accuracy of their own judgments. Identifying what methods are effective

for overcoming individuals overconfidence, and understanding when an auditor needs to request

the assistance of an expert or to develop a deeper expertise before concluding in an area, should be

further investigated.

Evidential Characteristics

Audit Standards

Ng and Tan (2003) found that during negotiations with clients, auditors took a stronger

position (skeptical action) when there were authoritative standards that more explicitly supported

the auditors position but took a more conciliatory position in the face of less explicit standards.

Nelson et al. (2002) find that auditors were less likely to require that management adjust earnings

when management attempts were structured such that they complied with precise standards or were

unstructured so as to comply with imprecise accounting standards. However, future research could

examine how standards and clarity of standards enhances or impedes skeptical action by looking at

the level of ambiguity versus specificity in the standards or proposed wording of standards. This

area of research may be particularly relevant as the AICPA and IAASB issue standards relating tothe Clarity Project and/or the PCAOB continues to adopt standards of its own.


Corporate Governance

Auditors are required to discuss the quality of financial reporting alternatives with the audit

committee (AICPA 2000); and since the passage of Sarbanes-Oxley (U.S. House of Representatives

2002), the responsibilities of the audit committee have been expanded and have received increased

emphasis. Audit committees play an important role in overseeing the financial reporting process.

Interviews with auditors conducted after the implementation of the Sarbanes-Oxley Act indicate a

significant improvement in terms of audit committee expertise, authority, power, and diligence

(Cohen et al. 2010). Research demonstrates that when an auditor is in a confrontation with



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power of the auditor by serving as an important ally (Brown-Liburd and Wright 2011; Cohen et al.

2010; Ng and Tan 2003). When auditors perceive the audit committee to be strong, auditors are

more resolute (i.e., they stick to their position, and propose larger adjustments[Brown-Liburd

and Wright 2011]). Additionally, when authoritative guidance is lacking, auditors perceive that a

negotiated outcome with management will result in the client recording an adjustment when theaudit committee is effective (Ng and Tan 2003). These studies suggest that an effective corporate

governance environment is an antecedent to skeptical action on the part of auditors.

Despite findings indicating the importance of the audit committee to the financial reporting

process, management is still the more dominant party in auditor selection and retention decisions

(Cohen et al. 2010). This finding raises important questions about the professional skepticism of

members of the board, and especially those serving on the audit committee, and the impact of such

skepticism (or lack thereof ) on audit judgments and decisions. There is scant research examining

the impact of professional skepticism of audit committee members on the effectiveness with which

they discharge their responsibilities with respect to monitoring the financial reporting process.

Accordingly, a number of issues related to audit committee members professional skepticism are

worthy of future research. For instance, future research could examine if audit committee members

appointed by a truly independent board are more skeptical in making judgments about the quality of

financial reporting than members appointed by a board that is independent only in form but not in

substance (i.e., one where the appointment process is highly influenced by management [Cohen et

al. 2008]). A related issue worthy of future research is whether audit committee members who share

the same social network with the CEO (e.g., graduated from the same school or belong to the same

country club) are more likely to exhibit lower levels of professional skepticism than those who

share the same professional network (e.g., the audit committee member and the CEO have worked

together at a different organization in the past), or those who have no affiliation of any kind with the

CEO. Another issue worthy of future research is whether audit committee

research on auditor professional skepticism_hurtt 2013

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