New research finds that when auditors issue a going concern report on fraudulent financial statements there is a greater likelihood that they will be named in an enforcement action by the Securities and Exchange Commission. The study by Erin Nickell, assistant professor of accountancy at the University of Denver’s Daniels College of Business, was published in the Accounting Horizons journal. Nickell’s co-authors of the paper titled, “Fraud Risk Awareness and the Likelihood of Audit Enforcement Action,” are Jared Eutsler from University of North Texas and Sean Robb from University of Central Florida.
“Overall, our results suggest that how auditors respond to fraud risk is critical in minimizing liability for undetected fraud,” Nickell says. “If opinion modification is warranted, auditors should take great care in documenting their consideration of known fraud risks.”
Nickell says that this finding is consistent with Counterfactual Reasoning Theory and suggests that, from a regulatory perspective, auditors may be penalized for documenting their awareness of fraud risk when financial statements are later determined to be fraudulent.
“The results of this study have important implications for audit practice,” according to the study. “First, they contribute to the ongoing dialogue between auditors and regulators regarding potential changes to the standard audit report. The International Auditing and Assurance Standards Board (IAASB) has already issued new guidance designed to enhance the audit report and the PCAOB is currently considering a similar proposal.”
Erin Nickell earned her Ph.D. and Masters in Accounting from the University of Central Florida. Before pursuing a career in academia, Nickell worked for Grant Thornton LLP as a senior audit associate. Her experience in public accounting has contributed to her research interests, including fraud, professional skepticism and auditor decision making. She is a licensed CPA in the state of Virginia as well as a Certified Valuation Analyst (CVA) in the state of Colorado.