Therese Grohnert, PhD candidate at Maastricht University, wanted to know why audit firms sometimes form insufficiently supported judgements on their clients’ financial statements. Over the past years, these firms regularly received bad publicity because of insufficiently supported judgements. She examined the judgements of 252 auditors and discovered that only one third of those were sufficiently founded. Grohnert presented these results to the involved audit firms and succeeded in convincing them of the solution: learning at the workplace. The auditors received her advice with great professionalism and relief.
Auditors are obliged to form a judgement on the financial statements prepared by their clients. They establish if all the financial information has been fairly presented according to the current standards. Such a judgement has to be solidly founded on relevant information and evidence. The Netherlands Authority for the Financial Market (AFM), the national independent inspection body, carries out random checks to evaluate the quality of auditors’ judgments. If that is not the case, the audit firms concerned can be fined. In fact, the Financieele Dagblad, the main financial newspaper in the Netherlands, publicly names auditors who form insufficiently supported judgements. That can damage the firm’s reputation and lead to the loss of trust and profit. Audit firms therefore search for ways of understanding and tackling this problem.
Grohnert collaborated with several audit firms and experimentally studied over 400 judgements. Two thirds of those turned out to be insufficiently supported by evidence. Reason for Grohnert to search for the cause: “Earlier research shows that incentives, so punishments and rewards, have only a small influence. Another possible cause could be lack of motivation. In other words: do they know how to make sufficiently supported judgments, but simply do not do it? Existing research shows that this is not the case. Conclusion: it has to be lack of knowledge. Without sufficient knowledge, auditors are not aware enough of what they have to look out for while searching for evidence. And that is in fact good news, because this knowledge can be developed through learning.”
She discovered that many auditors systematically overestimate their own knowledge and performance. That is a logical explanation for the fact that they are less inclined to request additional information for their judgement. Participants relied too much on routine, while the audit environment and tasks are very complex and often change. At the same time, auditors have little critical experience, for example with fraud or unpredictable client behaviour. Exactly this critical experience appears to be crucial, however, for learning when auditors cannot rely on routine. In fact, Grohnert found that this may be a matter of fear: “After delivering a positive judgement, auditors are terrified of being confronted with dubious issues with their customer, such as fraud or creditors that never received their money. Then why not found the judgements more solidly? Some researchers state that this is caused by certain characteristics of the audit domain. Because of time pressure, complexity and the allocation of tasks across several hierarchical levels you don’t always ask a colleague to help you. It may also be risky to admit when you made a mistake: therefore you will not always communicate a potential problem to your superior. That has to change.”
Learning at the workplace
In workshops following her research, Grohnert presented the results to the participating firms. In spite of the unexpected results on the share of insufficiently supported judgment, she was welcomed very professionally and with a positive attitude. She shared with the auditors that professionals learn most from their daily work, so at the workplace: for example, by interacting with colleagues, from mistakes that were made, from client feedback, etc. That only works when there is an open organizational climate where exchanging knowledge and experience is regarded as normal and even desirable. Grohnert’s ideas were welcomed with open arms. The involved auditors experienced Grohnert’s message as an eye-opener: this means that something can be done about it! All firms in the research are now looking for opportunities to implement Grohnert’s advice: more room for learning from each other’s experiences and mistakes.
This article originally appeared on the Maastricht University website.