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Working Papers | 2015

The Effects of Fraud Risk Factors and Client Characteristics on Audit Procedures

Naman Desai

There has been very little prior research examining how the prescriptions of SAS No. 99 map into the auditors' fraud risk assessment process. SAS No. 99 asks the auditors to consider two major types of fraud (fraudulent financial reporting (FFR) and misappropriation of assets (MOA)) in the context of three major fraud risk factors (pressures, opportunities and rationalization). In this study we conduct an experiment to gain an understanding about the auditors' perceived responsibility for detecting FFR versus MOA. Then we examine how auditors associate the two fraud risk factors (pressures and opportunities) with the two potential types of frauds mentioned in SAS No.99. Additionally we also examine the extent which the client size of an auditor affects the auditors' perceived responsibility for detecting FFR and MOA and how the auditors associate pressures and opportunities with FFR and MOA. The results indicate that while all auditors focused equally on FFR; auditors of larger clients assessed a significantly lower responsibility for detecting MOA compared to FFR. On the other hand, auditors of smaller clients assumed equal responsibility for detecting FFR versus MOA. The results of this experiment also indicated that auditors of larger clients associated the risk of FFR more with high pressures, and the risk of MOA more with high opportunities, while auditors of smaller clients did not specifically associate the risk of FFR or MOA with either high pressures or high opportunities. Additionally the results suggest that auditors of larger clients assessed higher fraud risk and audit effort when pressure was high compared to when opportunity was high. This could be due to the fact that such auditors perceive greater responsibility for detecting FFR compared to MOA and they tend to associate high pressures with FFR and high opportunities with MOA. For the auditors engaged with smaller clients, there were no differences in the perceived responsibility for detecting FFR versus MOA, nor did they specifically associate FFR and MOA with either pressure or opportunity. As a result of which, there were no significant differences in their assessments of fraud risk and audit effort in the presence of high pressures or high opportunities.

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Working Papers | 2015

Selective Perceptions and Group Brainstorming: An Investigation of Auditors' Fraud Risk Assessment

Naman Desai and Vishal Gupta

Individuals in an organizational context are routinely faced with complex problems that are not well defined and that challenge their cognitive capacities. To deal with such complex issues, decision-makers construct "belief-structures" which in turn create selective perceptions about information and events that prevent them from being overwhelmed by the amount and complexity of information. This study examines the impact of two important contextual variables; pressures and opportunities on auditors' selective perceptions and fraud risk assessments. Research suggests that a situation relevant concept, norm, perspective, or cognitive process that is shared by a majority of the group members, will be exaggerated in a group setting where groups are trying to accomplish a task that does not have a normatively/demonstrably correct answer. In an audit setting, typically there are no normatively correct answers related to the weighting of different levels of pressures and opportunities while assessing fraud risk. Therefore we also examine how individual auditors' selective perceptions affect group decisions. The results indicate that observed differences in individual auditors fraud risk assessments were significantly accentuated during group brainstorming. Thus, our findings suggest that, group brainstorming instead of reducing the influence of contextual characteristics on selective perception, actually accentuates that effect.

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Working Papers | 2015

Are Investors Ethics Agnostic?

Saravana Jaikumar, Viswanath Pingali, and Vineet Virmani

In this paper we ask if the perception investors have regarding ethical nature of the management per se influences their action. In order to check for rent seeking behaviour that could arise when there is negative perception regarding ethics, we look a single company's management whose actions-though not related to the performance of the company-have led to doubts regarding its ethical nature. Using event study mechanism, we find that when the action leads to a positive outcome for the company, the investors' reaction is statistically insignificant. However, when another action did not lead to any potential positive outcome, the abnormal returns associated with the company's stock are negative and significant. Therefore, it is possible that unethical practices, even if unrelated to company's performance, lead to lesser trust regarding the company, thereby reducing the stock prices, which suggests rent seeking behaviour.

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Working Papers | 2015

The Effects of Group Brainstorming on the Auditor's Search for Potential Misstatements and Assessment of Fraud Risk in the Presence of Pressures and Opportunities

Naman Desai

This paper examines the effect of SAS No. 99 recommended group brainstorming on the auditor's search for potential material misstatements and assessments of fraud risk in the presence of different levels of pressures and opportunities. We argue that there are potential differences in the auditor's evaluation of pressures and opportunities while searching for potential material misstatements and assessing fraud risk, and these differences could be exaggerated when auditors brainstorm in groups. The results of a 2 x 2 x 2 between-subjects experiment (in which pressures and opportunities were manipulated at high and low levels, and brainstorming occurred individually or in three member audit teams) indicate that auditors found a significantly greater number of potential material misstatements when they observed high pressures and low opportunities compared to when they observed low pressures and high opportunities (even though there was an equal number of potential material misstatements across in all the treatments). Furthermore, this difference was significantly increased when auditors performed group brainstorming. Similarly, auditors' assessments of fraud risk were significantly higher when they observed high pressures and low opportunities as compared to when they observed low pressures and high opportunities. Again, this difference was significantly increased when auditors performed group brainstorming.

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Working Papers | 2015

Are Big 4 Audit Fee Premiums Always Related to Superior Audit Quality? Evidence from India's Unique Audit Market

Jacob Joshy, Naman Desai, and Sobhesh Kumar Agarwalla

In this study we examine the fee premiums earned by Big 4 auditors (B4As) in India. We then try to determine the primary cause of the fee premiums in an Indian context. The B4As charge fee premiums for two primary reasons. First they are considered to be a potential indemnifier of losses for the stakeholders of the company. Second they provide a better quality of audit which improves the quality of reported earnings. Since the legal regime in India in significantly less stringent and the risk of auditor litigations is relatively low, B4A premiums in India are most likely to be driven by the need for superior audit quality. The results of our analysis indicate that B4As earn significantly higher fees than Non-Big 4 auditors (NB4As) in India. However there is no difference in the quality of audit provided by the B4As and NB4As as evidenced by the quality of reported earnings. Our results also indicate that B4As earn significantly higher abnormal fees. However, unlike the results of prior research, such abnormal fees are not associated with reduction in the quality of audit and reported earnings. After eliminating the two primary causes of B4A fee premiums, we posit that the need for B4As in India is primarily driven by the need to "signal" a superior quality of reported information.

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Working Papers | 2015

Is 2% the Solution? Experimental Evidence on the New CSR Rule in India

Naman Desai, Viswanath Pingali, and Arindam Tripathy

The Indian government became the first regulator in the world to mandate a minimum CSR spending on certain specified social welfare activities. Prior research in psychology indicates that individuals tend to focus heavily (Anchor) on the initial information or estimate in a decision making context. Therefore, we conduct two experiments to examine the role of the 2% minimum CSR spending limit as an anchor. The first experiment was conducted to establish the effects of anchoring on decisions related to charitable giving. The results of this experiment indicate that participants' charitable contribution was significantly higher in the treatment where no minimum limit was stipulated compared to the treatment where a minimum limit was stipulated. This result suggests that participants did anchor on the minimum stipulated limit while deciding on the amount of charitable contribution. The second experiment was conducted to examine if anchoring specifically affected CSR spending decisions. The results of the experiment indicated that the amount of reported CSR spending was lower when the minimum 2% rule was imposed versus when it was not imposed. Additionally, the results also indicate that when the 2% rule was not imposed the participants appeared to anchor on the overall financial requirement of the CSR activity and decided to spend more or less depending on the financial requirement of the CSR activity.

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Working Papers | 2015

The Impact of Psychological Traits on Judgments Related to Ethics

Sobhesh Kumar Agarwalla, Naman Desai, and Arindam Tripathy

This paper examines how two contradictory psychological traits, self-deception (SD) and professional skepticism (PS), affect managers and auditors assessments of the ethicality of various earnings management choices. Whereas, self-deception allows individuals to reduce cognitive dissonance (Festinger 1957) arising from their self-serving behavior which could be unethical (Audi 1988; Sanford 1988), professional skepticism or trait skepticism (Hurtt 2010) would force individuals to question such self-serving behavior and, as a result, could make them less likely to act unethically. The results indicate that SD, PS and participant type (Chartered Accountant (CA) versus Manager) had a significant effect on the ethicality ratings. Managers exhibiting high (low) SD and low (high) PS view the earnings management techniques that were generally considered to be unethical, as relatively more (less) ethical. For CAs, the SD and PS scores are not significantly related to their ethicality ratings. This result appears to be driven by the fact that CAs tend to have greater exposure information that emphasizes ethics such as their standards and education and hence psychological traits did not affect their ethicality ratings.

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Working Papers | 2015

Indian Administrative Service (IAS) and Crony Capitalism:
A Review Paper

Vishal Gupta

According to international statistics, India is reckoned to be among the most corrupt countries of the world. One of the ways in which corruption can occur at the point of public service delivery is through payment of bribes to access or expedite these services. Other less overt, but equally damaging, form of corruption that has an impact on people is when decisions to allocate public resources are distorted by money, power, access, connections or some combination of the above-also known as crony capitalism. One of the significant contributors to crony capitalism in India is considered to be the Indian Administrative Services (IAS). Time and again, questions have been raised about the imperviousness, wooden-headedness, obstructiveness, rigidity, and rule- and procedure- bound attitude of the bureaucracy. Indian bureaucrats are said to be a power center in their own right at both the national and state levels, and are extremely resistant to reform that affects them or the way they go about their duties. Given the significance of bureaucracy (the executive branch of Government) in India's growth and the pursuit of happiness, the aim of the present position paper is to analyze and discuss the relationship between the Indian Administrative Service and crony capitalism. The paper examines several of the serious problems that the Indian Administrative Services faces and in the end suggests some recommendations to improve it.

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Working Papers | 2015

Exact Procedures for Non-Regular Measures of the Multi-Mode RCPSP

Dayal Madhukar and Sanjay Verma

The multi-mode resource constrained project scheduling problem (MM RCPSP) is a generalization of the well-studied RCPSP. A literature review reveals applications of inexact heuristics or metaheuristics approaches for solving these problems, however, exact approaches are few and do not consider non-renewable resources, as well as, generalized cash inflows and outflows at every time period of an activity, as is the case in real World problem instances. We present two exact solution single-processor approaches: a breadth-first tree search procedure and a best-first monotone heuristic for solving these problem instances. The algorithms are thoroughly tested on problem instances using payment schedules generated for standard PSPLIB problem sets and results presented.

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Working Papers | 2015

Examination of a Moderated-Mediation Model Linking Perceived Organizational Support, Affective Commitment, Organizational Citizenship Behavior and Work Engagement: A Study of Nurses in the Indian Context

Upasna A. Agarwal and Vishal Gupta

The present study examines the relationship between Perceived Organizational Support (POS) and work outcomes (work engagement and organization citizenship behaviour) with affective commitment as a mediator and psychological contract breach as a moderator. Drawing from data collected among a sample of nurses (N = 475), we found that affective commitment mediates the positive relationships between POS and work outcomes. Moreover, perception of unfulfilled expectations (psychological contract breach) qualifies POS-work outcome relationships such that the relationships between POS and outcomes are stronger in case of low contract breach perceptions. Implications for theory and practice are discussed.

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