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1. Introduction
Public accountants, like any any business experts, are granted professional standing
by public with the expectation that they will make important contribution to the well
being of society. They provide an assurance, or audit, service which involves a
comprehensive, indepencent, and critical examination of a subject matter with the
main objective of assessing its credibility, in order to provide assurance by issuing an
objective opinion. More specifically, as external auditors, public accountants
formulate an opinion on financial statements based on evidence gathered through
the verification of assertions associated with individual account balaces and
transaction classes (Arens et al., 2002). In this regard, maintaining skeptical attitudes
through out an audit process is one of the key elements that ensures a high quality
of audit work. Indeed, skepticism has long been recognized as a fundamental
principle of auditing in the accounting profession (Sharron and Lowe, 2008; Hurtt,
2010). Statement of Audit Standard #1 (SAS 1), the first codification of auditing
standards, promulgated the notion that that public accountants must use
professional skepticism when engaged in an audit.
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Bambang Riyanto, CMA, PhD., Faculty of Economics and Business, Universitas Gadjah Mada
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As professionals, CPAs make a promise to serve the public’s interest with an
unswerving commitment to honorable behavior, even at the sacrifi ce of personal
advantage. This promise not only sets the framework for all aspects of professional
conduct and behavior for accountants, but also establishes the expectation that as
human beings we exhibit altruistic behavior in our everyday lives.However, the failure
of public accountants to send signals to the market about the management’s wrong-
doings (frauds) properly has created distrust on the accounting profession. This so-
called audit failure that led to financial scandals in large corporations in America,
such as Enron, Adelphia, WorldCom, and Dynaco, Tyco, and, Lehman Brothers, AIG,
to name a few, involved billions of dollars loss on the part of the investors. Audit
failures, unfortunately, seem to be a global phenomenon. Examples of audit failure
that happened outside the United States are the audits of One-Tel and Harris Scarfe
(in Australia), Nortel (in Canada), Parmalat (in Italy), and AHold (in Holland), Satyam
Computer Services (in India), Great River (in Indonesia). Many of those involved in
these scandals have been convicted and send to jail, and accounting firms have also
paid a large sum of money as penalties and compensations. In Indonesia, in 2006,
following the recommendation of the Indonesian Capital Market Authority, the
Ministry of Finance revoked the licence of JAS, a partner of local big accounting firm.
He was indicted for the failure to report properly important information in the audit of
the 2003 financial statements of Great Rivers, a garment company, that led to the
default of the company. In 2006, Great Rivers failed to meet its debt obligations to
creditors. In 2007, PMW, also a partner of a local accounting firm, was convicted for
his failures to follow strictly the professional standards in the audits of three
companies (2001-2004 financial statements). In the same year, the Ministry of
Finance also revoked the licence of DS for his failure to follow professional
standards during the audit of the financial statements of MYOH, Inc. (2002-2004
financial statements). More recently, in 2009, a local public accounting firm was
investigated for the possible involvement in a financial statements fraud of a car
dealer. The audited financial statements submitted by the company to apply for the
loan to a bank contained false information.
Despite the tighter regulations, accounting scandals still happens. The accounting
scandals in Lehman Brothers (2010) and Olympus (2011) are two recent examples.
While auditors are not the only party responsible for the financial scandals, it is not
naive to assume that these scandals might be prevented had the auditors been more
independent and more professionally skeptical in performing the audits. An important
empirical question to be addressed then what factors determine auditors to be more
an less skeptical. Based on a comprehensive literature review, Nelson (2009)
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proposes a model of professional skepticism. The model predicts that important
determinants of professional skepticism are trait, knowledge, incentive, and
evidencial input. Carpenter and Reimers (2011) provides evidence that incentive
(partner’s emphasis on skepticism) and evidencial input (presence of fraud) affect
skeptical judgments and actions. This paper is designed to test empirically one of the
prediction in this model: the impact of trait on professional skepticism. More
specifically, it is the first paper that examine the impact of agreeableness and
extraversion (two elements of Big Five Personality traits) on skepticism. In addition, it
is often said that lack of independence is a major threat to accounting profession; it
is also an important factor that determines professional skepticim. But, thus far,
empirical evidence about the extent to which indepedence affects professional
skepticism is still very limited. The findings of this paper, therefore, will be an
important contribution to the behavioral accounting literature.
Most of the studies in professional skepticism are commonly in private sector. This
study examines factors affecting professional skepticism among auditors working in
the Indonesian Supreme Audit Institution (SAI). It should be noted that since the
amandement of the Indonesian Constitution, there has been a substantial change in
the way the governments (both central and locals) and state institutions should
manage the public funds and resources. Following the fiscal decentralization
program launched in 1999, the Paliament of the Republic of Indonesia issued four
public finance and accountability acts:
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The inclusion of professional skepticism in the New Government Audit Standard
reflects Indonesian SAI’s awareness about current important issues in audit. It
believes that professional skepticism is as important in public sector as in private
sector. In public sector, the source of fraud is not manipulation of accounting
numbers but misappropriations of asset, corruptions, and mark-ups of price. As
experienced by many developing countries, the cost of such fraudulent actions is
very expensive as they prevent these countries from enjoying satisfactory economic
growth. Fraud and corruption of any magnitude are serious threats to prosperity and
high quality of public services. Before the issuing the new audit standard, Indonesian
SAI had already introduced Core Values in its strategic plan 2: Integrity,
Independence, and Professionalism.
There are different perpectives and definitions of professional skepticism (see Hurt,
2010 and Nelson, 2009 for excellent reviews and discussions). In this paper,
skepticism is defined as the propensity of an auditor to postpone her/his conclusion
until she/he possesses enough evidence to support the decision. According to Hurt
(2010), this definition relates to the way auditors evaluate evidence. She (p. 153)
further argues that “With the standards stating that professinal skepticism mandates
gathering and objecitvely evaluating evidence throughout the audit, this supports the
concept that judgments must be suspended until sufficient evidence is obtained.”
2
The Strategic Plan was launched in 2006.
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The hypothesis is developed on the basis of the Festinger’s Cognitive Dissonance
Theory (1957). According to this theory, individuals have a strong tendency to pursue
consistency among cognitions that they have about the environment. Cognitions in
this regard may be in the form of beliefs, attitudes, emotions, perceptions, and
behavior. Two (or more) cognitions, such attitude and emotion, are in dissonant if the
attitude (e.g., commitment) is not consistent with the emotions (e.g., bonding with the
colleagues). Simply put, cognitive dissonance happens when a person’s behaviour is
inconsistent with hes/her cognitions. This dissonance will induce stress, feeling of
discomfort, or other unpleasant psychological tensions, which will lead to anxiety and
unhappiness. Aronson (1995, p. 178) asserts that a ‘‘state of tension whenever an
individual holds two cognitions (ideas, attitudes, beliefs, opinions) that are
psychologically inconsistent’’. It may happens in many areas of life, but it commonly
occurs in situations where an individual's behavior conflicts with beliefs that are
integral to his or her self-identity. Festingers further argues that there are three way
to avoid this unpleasant feeling, namely (1) changing cognitions; (2) adding
cognitions; and (3) altering importance. Cognitive dissonance is very important to many
forms of persuasion to alter behaviors, such beliefs, values, attitudes, and
satisfactions. For example, consider a situation in which a woman who values
financial security is in a relationship with a man who is financially irresponsible.
Sears et al. (1991, p. 157) argue that dissonance ‘‘operates much like any other
drive: if we are hungry, we do something to reduce our hunger; if we are afraid we do
something to reduce our fear; if we feel dissonance we do something to reduce it
also.’’
Gramlin et al. (2010) further argue that the independence regulations are commonly
designed to restrict financial, business, and employment relationships between
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auditors and their clients. The aferiomentioned accounting scandals have inspired
regulators to take more precausions by requiring auditors to more aware about the
importance of independence. For example, many of the provisions of SOX
emphasize on auditors’ need to beindependent with respect to the companies they
audit. It can be expected that highly independent auditors will examine evidence and
reports audit findings objectively and ethically. In other words, auditors who follow
independent rules strictly have surely done some unethical things on behalf of clients
(public investors and creditors).
The success of this buy-in program of the core values is crucial to the quality of audit
works at Indonesian SAI. However, across individual auditors, the impact of the
dissemination on degree of their sense of independence may vary; the dissemination
of the core values may make some auditors to be more independent, but for some
other auditors it may not change their sense of independence. It is therefore an
important empirical issue to examine the impact of independence on the suspension
of judgment. Arens et al. (2002) and Gendron et al. (2006) assert that auditor
independence involves taking an unbiased point of view in the performance of an
audit engagement (e.g. Arens et al., 2002). Professional skepticism reflects auditors’
prospensity to postpone judgment until information or evidence provides sufficient
support for one explanation over others (Hurt, 2010).
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Auditors’ independence is strongly associated with professional skepticism; those
who have a strong sense of independence concern more about the impact of their
work on the quality and less on the management of the instituions’ interest. Auditors
with strong sense of independence are willing to collect more evidence to make sure
that their decisions are accurate. Their strong sense of independence drive them to
treat evidence with great care and not to make decision in a rush. This is what
skeptical attitude is about.
From the perspective of the Cognitive Dissonance Theory, auditors whose sense of
independence are high will be less likely to be careless, not maitain due care of their
audit works. Highly independent auditors will be comfortable to be higly careful in
evaluatig evidence and making judgment. The unbiased, objective nature of the
feeling of independence drives them to develop strong professional skeptical
attitudes in their attempts to maitain a good balance of their multiple cognitions.
Auditors with a strong feeling of independence will have unpleasant guilty feellings
when they are not skeptical. Guilty feelings create psychological burden which leads
to unhapinness. Analogously, the less auditors’ sense of independence, the less
willing they spend more time finding evidence and to support their decisions.
Auditors who have a weak sense of independence will experience dissonance if they
are very skeptical. Dissonance brings discomfort and stressful feelings that lead to
unhappiness. One way to eliminate dissonance is to the strength of professional
attitude level in such a way so that the balance of the two cognitions are achieved.
This argument leads to the following hypothesis.
H1: Independence is postively assoicated with professional skepticism
The Big Five personality traits seem to be one of the most popular personality used
to explain individuals’ behavior in wide variety of areas and professions. Two the the
big five traits, agreeableness and extraversion, are used to explain professional
skepticism among auditors. The agreeableness trait is people’s characteristic that is
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associated with good-natured, easy-going, cooperative characteristicsl it reflects the
extent to which individuals are willing to sympathetic. Highly agreeable individuals
are warm, trusting, and cooperative. Barrick and Mount (1991) describe agreeable
individuals as pleasant, tolerant, warm, cooperative, and flexible. These types of
individuals are commonly friendly, easy to get along; they tend to be sympathetic and
are not hostile towards others.
Sympathetic, flexible, and tolerant auditors potentially affect the way the evaluate
evidence and make judgment about the information provided by management.
Bazerman et al. (2002) assert because of the nature of audit works have made
auditors vulnerable to familiarity bias, a type of bias whereby individuals (i.e.,
auditors) are more willing to harm strangers than somebody they know well,
especially when that somebody is the management who pay the auditors.
Agreeableness will exarcebate this bias. Higly agreeable auditors will be much more
vulnerable to familarity bias than the less agreeagle ones. Consequently, it is quite
likely that during the audit process, highly agreeable auditors will find it hard to
evaluate evidence objectively. These auditors will have a strong tendency to take
evidence provided by management at face value; they do not have a strong incentive
to collect more evidence and postpone judgments. This suggests that agreebleness
will be likely to be negatively associated with professional skepticism.
Analogously, it may be argued that auditors with extravert auditors are very
assertive, very rational, ambitious, sanguine. This suggests that in performing audit
work, they are willing to reexamine audit evidence again to see if they need to
change their decisions. The dominance and assertive natures imply that these
auditors have a strong ambitions to be accurate in their judgments. The will take
high pride in their profession and do their work with due professional care. The
reappraisal of problems and the rational natures reflect high degrees of carefulness
in evaluating evidence and making judgments. It may be predicted, then, that
auditors with strong extraversion scores will possess high professional skepticism
attitudes; the higher the extraversion scores, the more skeptical they will be, and vice
versa.
From the perspective of the Cognitive Dissonance Theory, extravert auditors will ‘feel
guilty’ and be cognitively disturbed if they do not do their audit works with due
professional care, because being less skeptical is against their very nature. This
guilty feeling can potentially effect negatively their mood and emotions; it will create
feeling of unhappiness. Similarly, auditors whose extraversion scores are low will not
be comfortable being very highly skeptical, because being highly skeptical requires
assertive attitude and put great care in their work, which is against their very basic
nature. In other words, auditors whose extraversion are low will experience cognitive
dissonance if they are highly skeptical.
3. Methods
3.1. Sample
With the exception of agreeableness, the Cronbach Alphas for the instruments
are higher than 0.60, the minimum threshold for reliability (Nunnaly, 1968). The
reliability of agreeablenss instrumet is 0.566, slighlty below the minimum
requirement. Table 1 reports the reliability of the four instruments.
Table 1: Reliability of Measures
The three hypotheses are tested by running a regression analysis with skepticism as
the dependent variables and agreeableness, extraversion, and independence as the
independent variables. Because the hypotheses are directional in nature, the t-tests
fo regression coefficients are one-tailed tests. Table 3 reports the results of the
regression analysis.
Table 3: Results of Regression Analysis (N=101)
Table 3 shows that the variances of the three independent variables explain (R 2)
43.7% of the variance of skepticism. This goodness of fit is significant at p<0.001
(F=7.637), which suggests that the regression model is good enough to test the
hypotheses.
Hypothesis 1 predicts that independence is positively associated with professional
skepticism; more independent auditors will be more professional skeptical than the
less independent ones. The regression results show that the coefficient of
independent is positive, and it is significant at p<0.05. This finding is consistent with
the prediction of hypothesis 1; auditors’ independence score positively determines
their professional skepticism. It indicates that government auditors avoid cognitive
dissonance; those who have high score of independence tend to be more skeptical,
and those who score low on independence tend to be less skeptical. The positive
sign of the coefficient implies that as auditors’ become more independent, they will
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be more professionally skeptical. This is the first empirical evidence showing the
positive association of independence and professional skepticism.
The coefficient of the extraversion (0.106) is positive and significant at p<0.001. This
finding implies that extravesion is positively associated with skepticism. It supports
the prediction of hypothesis 1 that auditors’ extreversion scores determine their their
level of professional skepticism. Auditors who report high extraversion scores tend to
be more skepticial; the higher the extrovertion scores, the higher the professional
skepticism scores, and vice versa. This positive regression is consistent with the
prediction of the Cognitive Dissonance Theory: government auditors attempt to avoid
cognitive dissonance by adjusting their skepticism with their extraversion trait;
strongly extrovert auditors will try hard to be highly skeptical, whereas the less
extrovert auditors will be less skeptical. Thus far there is no study that examines the
impact of extraversion on professional skepticism, and hence this study is the first to
provide such empirical evidence.
The coefficient of the agreeableness, however, is not significant. This means that
agreeableness is not associated with skepticism. The finding fail to support the
prediction of hypothesis 2; auditors’ agreeableness do not determine their
professional skepticism. It should be noted that the reliability of the extraversion
instrument is below the minimum acceptable requirement; the Crobach Alpha is
0.566, smaller than 0.60 (Nunnally, 1968). The lack of reliability of the instrument
may explain the insignificant result.
5. Conclutions
This study attempts to examine empirically the impact of independence and personal
traits, agreeableness and extraversion, on professional skepticism among
government auditors (i.e., auditors of the Indonesian Supreme Audit Institution). It is
motivated by the lack of empirical evidence in this area, especially among
government auditors. The empirical findings support the prediction that
independence and extraversion affect professional skepticism positively. Bazionelos
(2004) asserts that that individuals who have high scores on extraversion must be
more likely to possess the need to occupy a central position in their work
environment so they can satisfy their ambitious and domineering tendencies. The
finding of this study is consitent with Bazionelos argument.
These findings have important implications for the Indonesian Supreme Audit
Institution, which since 2007, issued Government Audit Standards that require
government auditors to maintain their professional skepticism attitude during audit
works. The positive impact of independence on professional skepticism underscores
the importance of improving independence awareness program, one of the strategic
programs at Indonesian SAI. Indeed, since early 2007, executives of Indonesian SAI
have intensively exposed independence, together with professionalism and integrity
to auditors and staffs. In addition, the positive impact of extraversion suggests that it
may be important for ISAI to pay attention to personal trait in recruiting new auditors.
Of course, further analysis should be undertaken to look at the impact of trait on
attributes of good auditors.
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