Fraud Detection: The Effect of Client Integrity and Competence and Auditor Cognitive Style

Abstract

This research studies the influence of client integrity and competence and auditor cognitive style on fraud detection. The study was supported by five Big Six auditing firms with 152 managers and 342 seniors. The case study used in the research involves a restaurant client that materially overstated ending inventory (Pincus 1990). The subjects were randomly assigned to one of three groups for the client integrity and competence manipulation (high, low, and control). This research provides three important findings for the practice and theory of auditing. First, client integrity and competence did not affect the auditors' fraud detection ability except for high-moral-development managers. Second, managers outperformed seniors, but this difference was moderated by the manager's level of moral development. That is, high-moral-development managers detected fraud at a higher rate. Finally, the research validates Pincus (1990); fraud detection increases directly with an auditor's prior beliefs concerning the existence of fraud.