Encouraging Professional Skepticism in the Industry Specialization Era

Jonathan H. Grenier ()
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Jonathan H. Grenier: Miami University

Journal of Business Ethics, 2017, vol. 142, issue 2, No 6, 256 pages

Abstract: Abstract This paper provides theory and experimental evidence that, under common audit conditions, industry specialization inhibits some aspects of auditors’ professional skepticism. As auditors amass industry experience, they develop extensive knowledge of non-misstatement explanations for unusual financial statement fluctuations. This knowledge coupled with confidence in their ability to analyze audit evidence inhibits their inclination to be skeptical when there are no overt indicators of elevated misstatement risk. Although these conditions are, by definition, the conditions where misstatements are least likely, they are also the same conditions where the PCAOB has alleged pervasive insufficient professional skepticism and where well-concealed fraud is possible. These results pose an ethical dilemma for the PCAOB in terms of weighing its charge to protect the public interest against the fairness of its inspections to audit firms. Encouragingly, I also predict and find that audit firm efforts to promote professional skepticism are more effective for specialists as non-specialists are skeptical regardless of these efforts.

Keywords: Professional skepticism; Industry specialization; Fraud; Self-criticism (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s10551-016-3155-1

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