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The Joint Effect of Ethical Idealism and Trait Skepticism on Auditors’ Fraud Detection

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  • Inez G. F. Verwey

    (Nyenrode Business Universiteit)

  • Stephen K. Asare

    (University of Florida)

Abstract

Although regulators have identified ethical lapses as a key factor contributing to auditors’ failure to detect their clients’ fraudulent financial reporting (fraud), research using ethical theory to examine auditors’ fraud detection remains limited. We provide evidence on the joint effect of ethical idealism and trait skepticism on auditors’ fraud judgments. Ethical idealism reflects an individual’s concern for the welfare of others while trait skepticism reflects an individual’s disposition to validating a proposition. Forsyth (J Pers Soc Psychol 39:175–184, 1980) theorizes that there is an association between ethical idealism and tolerance for deception. Drawing on that insight, we posit that ethical idealism and trait skepticism have a complementary effect on auditors’ fraud planning performance. This is because the former determines an auditor’s tolerance for allowing a client to get away with an ethically questionable act while the latter is important in determining how evidence is generally sought and evaluated. We used the Forsyth (1980) ethical position questionnaire to measure ethical idealism and the Hurtt (Auditing: A J Pract Theory 29(1):149–171, 2010) scale to measure trait skepticism. Our results indicate that there is a significant positive association between trait skepticism and the number of effective audit procedures but only for auditors who have high ethical idealism. The results highlight the importance of measuring and controlling for the effects of these traits when evaluating fraud detection performance. The paper also contributes by showing that an ethics theory can generate additional understanding of and insights into an important accounting phenomenon.

Suggested Citation

  • Inez G. F. Verwey & Stephen K. Asare, 2022. "The Joint Effect of Ethical Idealism and Trait Skepticism on Auditors’ Fraud Detection," Journal of Business Ethics, Springer, vol. 176(2), pages 381-395, March.
    • Handle: RePEc:kap:jbuset:v:176:y:2022:i:2:d:10.1007_s10551-020-04718-8
    DOI: 10.1007/s10551-020-04718-8
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    References listed on IDEAS

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    Cited by:

    1. Eric Lohwasser & Yaou Zhou, 2024. "Earnings Management, Auditor Changes and Ethics: Evidence from Companies Missing Earnings Expectations," Journal of Business Ethics, Springer, vol. 191(3), pages 551-570, May.
    2. Nurul Izzaty Mat Ridzuan & Jamaliah Said & Fazlida Mohd Razali & Dewi Izzwi Abdul Manan & Norhayati Sulaiman, 2022. "Examining the Role of Personality Traits, Digital Technology Skills and Competency on the Effectiveness of Fraud Risk Assessment among External Auditors," JRFM, MDPI, vol. 15(11), pages 1-14, November.

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    More about this item

    Keywords

    Audit planning; Fraud detection; Trait skepticism; Ethical position;
    All these keywords.

    JEL classification:

    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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