Auditors ’ Ability to Detect Financial Deception : The Role of Auditor Experience and Management Cognitive Dissonance

We are grateful to the accounting professionals from various audit firms who participated in the study. We appreciate helpful comments from We examine how extensive audit experience and a prompt to attend to the CEO's cognitive dissonance individually and jointly influence auditors' detection of financial deception. We predict and find that experienced auditors outperform both chance and inexperienced auditors, especially when prompted to attend to managers' cognitive dissonance. This is encouraging, as meta-analyses from psychology find that experts generally outperform neither chance nor novices in detecting deception. Also as predicted but more worrisome, unprompted experienced auditors' performance edge over novices arises predominantly from fewer false positives. While false positives about fraud could strain an auditor's relationship with management, false negatives jeopardize audit effectiveness and increase the risk that financial statement users will suffer loss from fraud. In supplemental process analysis, we find that experience enables auditors to identify more, and more accurate, red flags in CEO's narratives. This red flag advantage, when experienced auditors are prompted to attend management's cognitive dissonance, translates into more accurate fraud detection. Finally, in exploring whether adding audio to written transcripts improves accuracy, we observe it does so only for inexperienced auditors.

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