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Can you doubt and distrust and still do your job?

Feature | 22 July 2015

Noel Harding

Professor

Expectations of auditor scepticism may be unrealistic

Imagine a work environment where you can never take anything at face value – a place requiring constant vigilance because someone could be trying to deceive you. It may sound exhausting, yet it's integral to a modern auditor's reality.

In the corporate world it's called professional scepticism, defined in the Auditing Standards as "an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence"

According to Noel Harding, an associate professor in the school of accounting at UNSW Business School, barely a day would pass in an auditor's life where the phrase professional scepticism is not uttered, often in the context of criticism directed towards the conduct of their work.

In the wake of company accounting frauds, regulators are pressuring auditors to toughen up. The US Public Company Accounting Oversight Board has expressed concern that trust in management may have resulted in auditors being too quick to accept their explanations. The Australian Securities and Investment Commission has voiced similar concerns.

Until the late 1930s, audits involved an explicit trust in management and heavily relied on the representations of client personnel. Since then, auditors have increasingly tempered their trust in management. The change began as a "trust but verify" approach, with no expectation to specifically search for fraud, but to remain mindful of the possibility.

More recently, auditors have been required to design their audits with a view to providing a reasonable assurance of detecting material financial statement fraud.

The level of scepticism required of auditors is evolving from the original concept of neutrality to one of presumptive doubt, which assumes a degree of dishonesty until evidence suggests otherwise.

The client’s environment subconsciously impresses and influences the auditor, in ways they do not always realise
MOHAMMAD JAHANZEB KHAN

Trust and distrust

Harding contends that a tempering of trust may be easier said than done. "That disposition to trust is hard to change, because scepticism is against the grain," he says.

Referring to research in psychology, Harding notes that a disposition towards trust is a basic motivation that develops over a lifetime as our vulnerability to the actions of others is repeatedly respected and reinforced.

The nature of auditing also contributes to this disposition. Most managers don't set out to deceive the auditor and, in most cases, the financial statements are not materially misstated as a result of fraudulent activity. In such a setting, a general disposition toward trust is reinforced.

And then there's what could be termed "the seduction of the suits", the persuasive charm of splendid offices and executive attention. As UNSW Business School researcher Mohammad Jahanzeb Khan explains: "The client's environment subconsciously impresses and influences the auditor, in ways they do not always realise."

But an inclination to trust is only part of the equation.

Says Harding: "Focus should not only be on trust but also distrust. Indeed, distrust may even be more important than trust in enhancing professional scepticism. Trust and distrust, though related, are distinct feelings and not extremes of a single feeling."

Harding is the co-author of a new study, A Consideration of Literature on Trust and Distrust as They Relate to Auditor Professional Scepticism, with UNSW Business School lecturer Radzi Jidin and Swinburne University of Technology's Mohammad Azim and Janine Muir. The project was sponsored by CPA Australia.

Jidin explains that "trust is derived from an expectation that others will act in a way that is personally beneficial, while distrust is concerned with expectations that the actions of others will be personally detrimental".

The project considers both underlying (or dispositional) levels of trust and distrust, as well as the levels of situational trust and distrust that are applied in response to the circumstances of a particular setting.

Other consequences

The authors suggest that the most significant drivers of professional scepticism are the dispositional characteristics of trust and distrust, but that decreasing dispositional trust and/or increasing dispositional distrust may give rise to unintended negative consequences.

'Trust and distrust, though related, are distinct feelings and not extremes of a single feeling'
NOEL HARDING

Distrusting individuals are likely to be less effective contributors to organisational citizenship and less likely to effectively communicate with their team. And if auditors are too distrusting, there's a danger that companies could return the (non) compliment and withhold information the auditors need to do their job properly.

Other research has found that less trusting individuals – those exhibiting presumptive doubt trait characteristics – are less likely to continue their pursuit of an auditing career.

Unrealistic expectations

Notwithstanding the general disposition towards trust rather than distrust, and qualified by the potential negative consequences accompanying an increase in distrust, the authors note a number of promising means by which trust may be tempered and distrust may be elevated.

Harding explains that one approach may be to focus the auditor's attention on the risks they face from extending trust, such as an unfavourable audit inspection report.

Other possibilities include a focus on not only management's integrity, but also their competence, loyalty, consistency and benevolence, all factors that have been associated with the extension of trust.

Yet there is a limit to how sceptical auditors can be in practice. And the authors wonder if there aren't unrealistic hopes being put on the profession to identify fraud in an increasingly complex business environment, and ask whether more effective education of user groups could help reduce this expectations gap.

"We embarked on this project with a view to not only broaden the discussion on how trust may be tempered and distrust elevated such that greater levels of professional scepticism are exercised, but also to more fully understand the challenges that auditors face in this regard," says Harding.

Accounting Risk Behaviour Management

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<h1>Can you doubt and distrust and still do your job?</h1>

<figure><img src="https://assets-us-01.kc-usercontent.com:443/4df0558d-5779-0012-00f2-b3fa06d6c950/231439c0-da87-4460-9a5b-01df6b931cb3/iStock-502284270.jpg?w=1320" alt="audit distrust" /><figcaption>audit distrust</figcaption></figure>
 Imagine a work environment where you can never take anything at face value – a place requiring constant vigilance because someone could be trying to deceive you. It may sound exhausting, yet it's integral to a modern auditor's reality.
In the corporate world it's called professional scepticism, defined in the Auditing Standards as "an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence"
According to Noel Harding, an associate professor in the school of accounting at UNSW Business School, barely a day would pass in an auditor's life where the phrase professional scepticism is not uttered, often in the context of criticism directed towards the conduct of their work.
In the wake of company accounting frauds, regulators are pressuring auditors to toughen up. The US Public Company Accounting Oversight Board has expressed concern that trust in management may have resulted in auditors being too quick to accept their explanations. The Australian Securities and Investment Commission has voiced similar concerns.
Until the late 1930s, audits involved an explicit trust in management and heavily relied on the representations of client personnel. Since then, auditors have increasingly tempered their trust in management. The change began as a "trust but verify" approach, with no expectation to specifically search for fraud, but to remain mindful of the possibility.
More recently, auditors have been required to design their audits with a view to providing a reasonable assurance of detecting material financial statement fraud.
The level of scepticism required of auditors is evolving from the original concept of neutrality to one of presumptive doubt, which assumes a degree of dishonesty until evidence suggests otherwise.
<blockquote>The client’s environment subconsciously impresses and influences the auditor, in ways they do not always realiseMOHAMMAD JAHANZEB KHAN</blockquote>
<h4>Trust and distrust</h4>
Harding contends that a tempering of trust may be easier said than done. "That disposition to trust is hard to change, because scepticism is against the grain," he says.
Referring to research in psychology, Harding notes that a disposition towards trust is a basic motivation that develops over a lifetime as our vulnerability to the actions of others is repeatedly respected and reinforced.
The nature of auditing also contributes to this disposition. Most managers don't set out to deceive the auditor and, in most cases, the financial statements are not materially misstated as a result of fraudulent activity. In such a setting, a general disposition toward trust is reinforced.
And then there's what could be termed "the seduction of the suits", the persuasive charm of splendid offices and executive attention. As UNSW Business School researcher Mohammad Jahanzeb Khan explains: "The client's environment subconsciously impresses and influences the auditor, in ways they do not always realise."
But an inclination to trust is only part of the equation.
Says Harding: "Focus should not only be on trust but also distrust. Indeed, distrust may even be more important than trust in enhancing professional scepticism. Trust and distrust, though related, are distinct feelings and not extremes of a single feeling."
Harding is the co-author of a new study, <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2627545">A Consideration of Literature on Trust and Distrust as They Relate to Auditor Professional Scepticism</a>, with UNSW Business School lecturer Radzi Jidin and Swinburne University of Technology's Mohammad Azim and Janine Muir. The project was sponsored by CPA Australia.
Jidin explains that "trust is derived from an expectation that others will act in a way that is personally beneficial, while distrust is concerned with expectations that the actions of others will be personally detrimental".
The project considers both underlying (or dispositional) levels of trust and distrust, as well as the levels of situational trust and distrust that are applied in response to the circumstances of a particular setting.
<h4>Other consequences</h4>
The authors suggest that the most significant drivers of professional scepticism are the dispositional characteristics of trust and distrust, but that decreasing dispositional trust and/or increasing dispositional distrust may give rise to unintended negative consequences.
<blockquote>'Trust and distrust, though related, are distinct feelings and not extremes of a single feeling'NOEL HARDING</blockquote>
Distrusting individuals are likely to be less effective contributors to organisational citizenship and less likely to effectively communicate with their team. And if auditors are too distrusting, there's a danger that companies could return the (non) compliment and withhold information the auditors need to do their job properly.
Other research has found that less trusting individuals – those exhibiting presumptive doubt trait characteristics – are less likely to continue their pursuit of an auditing career.
<h4>Unrealistic expectations</h4>
Notwithstanding the general disposition towards trust rather than distrust, and qualified by the potential negative consequences accompanying an increase in distrust, the authors note a number of promising means by which trust may be tempered and distrust may be elevated.
Harding explains that one approach may be to focus the auditor's attention on the risks they face from extending trust, such as an unfavourable audit inspection report. 
Other possibilities include a focus on not only management's integrity, but also their competence, loyalty, consistency and benevolence, all factors that have been associated with the extension of trust.
Yet there is a limit to how sceptical auditors can be in practice. And the authors wonder if there aren't unrealistic hopes being put on the profession to identify fraud in an increasingly complex business environment, and ask whether more effective education of user groups could help reduce this expectations gap.
"We embarked on this project with a view to not only broaden the discussion on how trust may be tempered and distrust elevated such that greater levels of professional scepticism are exercised, but also to more fully understand the challenges that auditors face in this regard," says Harding.

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