Thinking Outside of the Box : Engaging Auditors’ Innovation Mindset to Improve Auditors’ Fraud Judgments and Actions in a Data-Analytic Environment

Data analytics has the potential to help auditors effectively respond to audit risk and improve detection of misstatements and fraud. However, harnessing these benefits may require auditors to adopt an innovation mindset. Firms and regulators have urged auditors to adopt an innovation mindset, however, the impact of this mindset on audit quality has yet to be studied. Innovation is defined as creativity in action. Therefore, building on psychology theory on creativity, we develop an innovation mindset intervention designed to enhance auditors’ cognitive flexibility and improve their ability to generate effective fraud audit procedures when interpreting data analytic output. Further, with the advent of data analytics auditors are often encouraged to provide value-added insights to the client during the audit, in addition to their primary goal of obtaining high audit quality. While regulators have expressed concern about potential unintended consequences of this secondary goal, we draw from psychology research and predict that it may in fact strengthen the innovation mindset effect. We experimentally demonstrate as in practice, that auditors without an innovation mindset struggle to effectively identify fraud. However, the innovation mindset intervention significantly improves auditors’ development of effective fraud-related audit procedures. Moreover, this effect is amplified when auditors are asked to generate client insights, as this intervening goal boosts creativity, thus further enhancing auditors’ decision-making quality. Thus, our results are informative to research, practice, and standard setting