Pattern Identification and Industry-Specialist Auditors

Abstract

Complex financial statement misstatements that are difficult to diagnose are likely to be described by multiple cues that individually appear innocuous, but that together form an ominous pattern. Because individual auditors are likely to obtain only some of the cues forming the pattern, it is important to understand how well auditors interpret incomplete cue patterns. In this paper, I examine experimentally whether industry-specialist auditors develop problem representations about a seeded misstatement to facilitate interpretation of incomplete patterns. Overall, I find that matched specialists (i.e., those working in their industry) are able to interpret and fill in partialcue patterns, whereas mismatched specialists do not recognize the implications of even full patterns. Matched specialists respond to a partial-cue pattern that potentially indicates misstatement by developing more complete problem representations about the seeded misstatement, assessing higher risk of misstatement, and suggesting procedures that will be efficient and effective at discriminating the presence of the seeded misstatement. Despite higher assessments of misstatement risk when receiving a partial-cue pattern, mismatched specialists' problem representations are impoverished and suggested procedures do not indicate a focus on the seeded misstatement.