Promoting Flexible Idea Generation During Audit Planning Elizabeth - PowerPoint PPT Presentation

Promoting Flexible Idea Generation During Audit Planning Elizabeth (E.B.) Altiero University of Central Florida altiero@ucf.edu

Research Question • In the face of increased regulatory scrutiny, how can we help promote flexible thinking during audit procedure design? – Specifically: idea generation regarding available audit evidence • Publicized failures lead to emphasis on error reduction -Non-audit example: The Central Intelligence Agency Performance Errors Insights Improvements (Graphic adapted from Klein 2013)

Motivation & Contribution • Prior research focuses primarily on error reduction: Performance Insights Errors Improvements  Expertise  Fraud brainstorming  Effort  Pattern recognition  Accountability  Bias reduction  Skepticism

Motivation & Contribution • Why do we want flexible idea generation during audit planning? Error reduction is not enough! – Keep up with the pace of business change (Chipman 2013; Arning 2013) Unfamiliar – Respond to unique situations encountered in the field Tasks (Altiero 2016) – Provide unpredictability in audit procedures (AICPA 2006; PCAOB 2007; IASB 2009; Bowlin 2011; Budescu et al. 2012) Familiar – Improve audit effectiveness and efficiency of existing Tasks procedures (Altiero 2016)

Rethinking Audit Evidence • Auditors need to be able to consider new types of audit evidence to achieve these goals • “New” might be: – New to an audit specifically – New to auditing in general

Rethinking Audit Evidence • Auditors need to be able to consider new types of audit evidence to achieve these goals • “New” might be: – New to an audit specifically – New to auditing in general

Rethinking Audit Evidence • Auditors need to be able to consider new types of audit evidence to achieve these goals • “New” might be: – New to an audit specifically – New to auditing in general

Promoting Idea Generation • Prior research shows auditors have difficulty modifying audit plans used in prior years (Wright 1988; Hammersley et al. 2011) • How to improve idea generation depends on why auditors are having difficulty – Adherence to industry norms – Lack of incentives (Peecher et al. 2013) – Time pressure (see Bonner 2008 for a review) – Psychological barriers, such as anchoring and production blocking (Joyce and Biddle 1981; Wright 1988; Asare and Wright 2004; Brazel et al. 2004; Carpenter 2007) – Necessary changes are unclear due to changing business environment

Search for Ideas in Associative Memory (SIAM) Problem Problem Problem Problem Problem Feature Feature Feature Feature Feature Ideas cannot be created out of Search Cue nothing, must be based on existing knowledge. Other Relevant Relevant Relevant Other Knowledge Knowledge Knowledge Knowledge Knowledge The more relevant knowledge activated, the more viable Idea Idea ideas generated. (Model adapted from Nijstad and Stoebe 2006)

Counterfactual Mindset Potential to activate larger set of relevant knowledge • Counterfactual thinking – consideration of what could have been • – Increases consideration of disconfirmatory evidence (Kray and Galinsky 2003) – Increases information sharing in groups (Galinsky and Kray 2004) – Decreases effect of curse of knowledge (Kennedy 1995) – Increases skepticism of management’s explanations (Koonce 1992) Counterfactual mindset – counterfactual thinking can carry over to • subsequent, unrelated tasks (Galinsky et al. 2000; Galinsky and Moskowitz 2000) – Helps overcome functional fixedness (Galinsky and Moskowitz 2000) Auditors are already trying to think of alternatives, so conscious prompt is not enough.

Task Characteristics Matter • Task characteristics impact the ability to process problem features into search cues • Familiarity of task particularly important to idea generation – Ease with which task cues can be linked to relevant knowledge (input clarity in Bonner 1994 and Chen et al. 2014) – Degree to which contextual cues highlight or obscure audit content (Tversky 1977; Einhorn and Hogarth 1981)

Search for Ideas: Familiar Task Problem Problem Problem Problem Problem Feature Feature Feature Feature Feature PROBLEM Search Cue Strong cue-idea link is hard to break. Suppresses other knowledge and related ideas. Other Relevant Relevant Relevant Other Knowledge Knowledge Knowledge Knowledge Knowledge SOLUTION Prompt that broadens the relevant knowledge Idea activated by any given cue.

Search for Ideas: Unfamiliar Task Problem Problem Problem Problem Problem Feature Feature Feature Feature Feature PROBLEM Ill-formed Poorly directed knowledge search due to difficulty Search Cue interpreting problem and forming search cue. Other Relevant Relevant Relevant Other Knowledge Knowledge Knowledge Knowledge Knowledge SOLUTION Prompt that improves search cue formation and Non-viable Idea directs knowledge search to relevant areas.

H1: Counterfactual Mindset x Task Counterfactual Mindset Audit Evidence Idea Generation Beneficial No Counterfactual Mindset Range of Theory Consistent Effects Counterfactual Strong Directional Mindset Prediction Unfamiliar Familiar Detrimental

Examples • So how to better direct knowledge But auditors have search (to help auditors with unfamiliar difficulty generating alternatives! tasks)? (Heiman 1990) – Improve search cue formation So maybe examples will decrease idea – Examples are well suited to task and generation… highly present in audit setting • From brainstorming and creativity literature Effectiveness depends on similarity to own ideas – Ideas of others can act as cognitive and timing of stimulants (Carpenter 2007; Chen et al. 2012) introduction – Cognitive stimulants act as, or add to, a (Nijstad et al. 2003). search cue to stimulate relevant knowledge

Counterfactual Mindset and Examples • Counterfactual mindset promotes relational processing style – Increased consideration of relationships between task embedded cues (Kray et al. 2006) • Counterfactual mindset + Examples – Relational processing fixates cognition on relationship between the problem features and the example as a solution – Skips search cue formation  delays search for relevant knowledge (non-task embedded information)

H2: Counterfactual x Example Unfamiliar Task (H2a) Familiar Task (H2b) Example Audit Evidence Idea Generation Audit Evidence Idea Generation +3 +2, +2 Absent Present -1 Example -1 -1, -1 Absent -3 Present No Counterfactual Counterfactual No Counterfactual Counterfactual Counterfactual Mindset Counterfactual Mindset

Design 2 x 2 x 2 between subjects experiment • – Counterfactual mindset (no counterfactual, counterfactual) – Example (absent, present) – Task (lower familiarity, higher familiarity) Task • – List potential audit evidence items and audit procedures for hypothetical audit engagement – DV: Flexible idea generation • Coded for originality, fluency, flexibility and elaboration (Guilford 1967) 138 experienced audit professional participants •

Task Lower Familiarity Higher Familiarity Identify audit evidence to gain Identify audit evidence to gain • • assurance over the revenues assurance over number of golf from a toll booth’s operations balls that fit in a school bus High audit content – audit High audit content – audit • • knowledge is relevant knowledge is relevant Low audit context – setting High audit context – setting • • provides clear cues to obscures relevance of audit relevance of audit knowledge knowledge

Counterfactual Mindset No Counterfactual Counterfactual • Read story prior to primary task • Read story prior to primary task Jane switches seats upon • arriving at a concert Jane wins a trip to Hawaii Jane wins a trip to Hawaii • • based on her seat at the based on her seat at the concert concert Participants list thoughts Jane Participants list thoughts Jane • • might be having might be having

Example Absent Present Sentence of task that contains the Example audit evidence that • • example is omitted could be obtained Both cases – data for use in • volume related analytical procedure Lower familiarity – school bus • dimensions Higher familiarity – average daily • traffic flow

Flexible Idea Generation Fluency (number of ideas): 89.0% coder agreement • – 1 point per evidence item listed Breadth (variety of ideas): 86.1% coder agreement • – 1 point per category: inspection of documents, inspection of tangible items, observation, inquiry, etc. (AU 326) Elaboration (detail specification of ideas): 76.6% coder agreement • – 1 point per modifier or additional detail Originality (uniqueness of ideas) • – Point scale based on number of participants who gave each response (1 participant = 8 points; 2 participants = 7 points; etc.) – Final score equal to highest scoring response

Results – H1 0.3 Lower Predicted interaction of • Familiarity Counterfactual and Task is Higher Audit Evidence Idea Generation 0.2 significant (F 1,128 = 3.23, p = Familiarity 0.038, one-tailed) 0.1 Simple effect of Counterfactual 0.0 • given Higher Familiarity is marginally significant (F 1,128 = -0.1 2.54, p = 0.057, one-tailed) -0.2 -0.3 Results support H1. No Counterfactual Counterfactual