Is a computer programmed with the latest vocal emotion analysis software better than a highly experienced auditor at detecting fraud from listening to chief executive officers’ recorded speech?
No, it isn't, according to the latest February 2017 study Improving Experienced Auditors‘ Detection of Deception in CEO Narratives, if auditors can tap into all that professional skepticism that comes from years of audit practice.
Auditors needed a “prompt” to “unlock that potential” in an auditor’s ability to pick up heightened fraud risks. A “prompt” was a reminder to listen for vocal signs of discomfort and uneasiness.
Experienced Auditors Superior Results.
William Mayew, one of the authors from Duke University, Fuqua School of Business told Bloomberg BNA April 3 that “inside an auditor is really potent skills,” that outperform the best computer software or commercial metrics.
SEC, PCAOB on Right Track.
This research suggests that the Public Company Accounting Oversight Board is quite right to require experienced audit partners to be actively involved supervising inexperienced auditors. The authors note that the PCAOB standards already suggest that auditors listen to conference calls for signs of heightened fraud risk, but don’t specifically suggest what vocal cues to listen for.
Research on Deception Detection.
Research in psychology has shown that emotions are conveyed through an individual’s voice. Studies in finance and accounting have applied linguistic analysis to various corporate texts to detect financial misreporting and to assess fraud risk.
The study used speech samples of chief executive officers from their conversations with analysts and investors during earnings conference calls used in an earlier study Analyzing Speech to Detect Financial Misreporting, Journal of Accounting Research, Vol. 50, issue 2 (May 2012).
Cognitive Dissonance in Lying CEOs.
Cognitive dissonance in CEOs was measured using automated vocal emotion analysis software from the 2011 study.
The authors define cognitive dissonance as a state of psychological arousal and discomfort occurring when an individual is acting in a way that is in opposition to his internal beliefs and value systems. Like cheating when wanting to believe oneself to be an honest person.
Randomly Selected Conference Calls.
Thirty one experienced auditors were asked to listen to four excerpts from selected quarterly conference calls randomly drawn from samples from five fraud and five non-fraud public companies.
Only some of the auditors were given a “prompt—a prompt was a reminder to listen for vocal signs of discomfort and uneasiness.
Auditors Perform Better With Prompt.
The results showed that auditors are 63 percent accurate overall, but become 71 percent accurate with a prompt. That is better than any other non- human metrics predicting fraud, such as commercial metrics that can ascertain fraud at 69 percent, Mayew said.
“Shattering the Illusion of Objectivity.”
In an audit firm, auditors have plenty of conscious and subconscious reasons to prefer to err on the side of not noticing possible red flags if it doesn’t jump off the page. The researchers call this the “illusion of objectivity.”
Unique to an auditor’s situation, as recognized by regulators, is that:
auditors often have long-standing relationships with their clients;
they don’t want to falsely accuse a client;
they are paid by the firms they audit;
they have a budget to meet;
losing a client is expensive; and
investigating a fraud is expensive.
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