Auditors' Use of Brainstorming in the Consideration of Fraud: Evidence from the Field

Audit standards require auditors to conduct brainstorming sessions on every audit so they can discuss the potential for fraud and how to respond to the risk of fraud. The Public Company Accounting Oversight Board (PCAOB) has raised concerns about the effectiveness of auditors’ responses to fraud risks and has noted variations in the quality of brainstorming sessions. We develop a measure of brainstorming quality to examine whether and how it affects the relationships among fraud risk factors, fraud risk assessments, and auditors’ responses to fraud risks. We test our measure using data from a field survey of auditors’ actual brainstorming sessions and fraud-related judgments for 179 audit engagements. We find considerable variation in the perceived quality of brainstorming sessions conducted in practice. We find some evidence that the quality of brainstorming sessions moderates the relations between fraud risk factors and fraud risk assessments. We also find that brainstorming quality positively moderates the relations between fraud risk assessments and the nature, staffing, timing, and extent of fraud-related audit procedures. Our results suggest that the benefits of brainstorming do not apply uniformly, because low quality sessions likely incur the costs of such interactions without the attendant benefits. By documenting best practices from high quality brainstorming sessions, our evidence can inform auditors in practice on how to improve their fraud decision-making processes.

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