International cultural differences influence professional skepticism of auditors

Research by Olof Bik and Reggy Hooghiemstra

In order to be able to provide a high audit quality, an auditor must have an 'attitude of professional skepticism', according to the international standards. A lack of professional skepticism has caused many of the well-known scandals in the auditing world. In order to strengthen professional skepticism among auditors, attention is increasingly being paid to options for an international approach. But is such an approach possible without taking into account cultural differences between countries?

Restoring confidence by raising awareness of cultural factors
Dr. Olof Bik RA (Associate Professor, Nyenrode Business Universiteit) and Dr. Reggy Hooghiemstra (Associate Professor, Rijksuniversiteit Groningen) researched the impact of what are known as 'informal institutions', in other words underlying traditions, customs, values, religion and unwritten social rules, on the professional skepticism of the auditor. They concluded that these informal institutions needed to be taken into account in the context of effectively strengthening professional skepticism at the international level. When setting up training courses, sharing knowledge and setting standards, academics, firms of auditors and regulators should therefore consider different approaches for different parts of the world.

"OOlof Bik en Reggy Hooghiemstraur research shows that restoring confidence in the accountancy profession should focus on increasing awareness of the influence of culture and other factors which affect behavior, rather than on new rules alone," according to Bik. "Auditors and their regulators must be aware that there are more roads that lead to Rome, without this negatively affecting the intention of the rules."

Research into 1,152 audit assignments in 29 countries
One important aspect of professional skepticism is the way in which an auditor looks at fraud risks. Bik and Hooghiemstra researched dossier data from 1,152 audit assignments of big 4 offices in 29 countries. In particular, they looked at the relationship between the assessment of fraud risks (as an expression of professional skepticism) and, respectively, collectivism, public trust, religiosity and power distance. Collectivism is the extent to which the group is important compared to the individual; countries with a high level of collectivism include Brazil, China and Russia. Public trust in this context refers to: the extent to which individuals believe that they can rely on others. And power distance is defined as: the extent to which people expect and accept that power is concentrated at a high level.

The influence of collectivism, public trust, religiosity and power distance
The finding that professional skepticism is lower in countries with more collectivism and a greater public trust was in line with their expectations. The literature on the subject already suggests that people in a collectivist culture are less prone to ask difficult questions, and that they have less confidence in their own personal judgment. And as the researchers expected, there was a positive link between professional skepticism and religiosity. An empirical confirmation of the theory that individuals who comply with religious values to a great extent placed greater value on honesty and ethics, and at the same time were more conservative and practiced greater risk avoidance. However, they did not find any relationship between professional skepticism and power distance. In this respect, therefore, their research results contradict the theory that auditors in countries with greater power distance, such as Argentina, China, Germany and Russia, are more likely to give in to pressure from customers and to ask fewer critical questions.

Implications of the research
Bik and Hooghiemstra foresee various implications of their research. A one size fits all approach of international firms of auditors to strengthen the professional skepticism of audit teams can only be effective if the effect of informal institutions is taken into account. In the case of standards for group audits, it is to be recommended that explicit advice be given on the way in which cultural differences in the team should be handled. The research has provided empirical evidence for what was already assumed in theory: that external environmental factors differ between countries and have an impact on the judgment of the auditor.

Partner involvement and cultural differences
Bik and Hooghiemstra previously investigated the relationship between national culture and the level of involvement of the auditor-in-charge in the audit team. This is because the time spent by the partner-in-charge on an audit is seen as an indicator of the audit quality. In that study, based on unique access to 2,251 audit assignments in 50 countries, they came to the conclusion that the involvement of the responsible partner is connected to cultural differences in power distance, collectivity and risk-avoiding behavior. According to the researchers, therefore, account must also be taken of cultural differences between countries when drawing up standards in the area of the desired level of involvement of responsible partners. The article about this research, ‘The Effect of National Culture in Auditor-in-Charge Involvement’, will be published in the leading American academic journal Auditing: A Journal of Practice & Theory.

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