External auditors are crucial in maintaining the reliability of financial statements. However, significant accounting scandals in recent years have cast doubt on their efficacy, prompting inquiries into the reasons behind auditors’ occasional oversight of financial irregularities.

In a collaborative research effort between the Tepper School of Business at Carnegie Mellon University and the University of Denver, investigators focused on the impact of two personality characteristics — honesty, humility, and agreeableness — on an auditor’s propensity to identify and report financial misstatements.

The research uncovered that auditors who scored higher on honesty – humility were more likely to uphold professional integrity and disclose financial wrongdoings. In contrast, those with lower scores were less inclined to do so. On the other hand, agreeableness, typically linked to avoiding conflict and favouring social cohesion, did not consistently influence auditors’ reporting behaviours. This suggests that agreeableness may not be as essential in ensuring the quality of audits.

“Personality traits are significant in pinpointing individuals who are prepared to challenge clients and maintain rigorous financial reporting standards,” stated Taya Cohen, Professor of Organizational Behaviour and Business Ethics at the Tepper School of Business, who co-authored the research. “Our results suggest that selecting auditors based on their honesty-humility levels could improve monitoring quality and avert expensive errors of oversight.”

The research utilised the HEXACO model of personality, which defines six personality dimensions (honesty-humility, emotionality, extraversion, agreeableness, conscientiousness, and openness). It comprised two studies, one involving around 200 certified public accountants. Within these studies, the trait of HEXACO honesty-humility, marked by a commitment to fairness and modesty, was consistently linked to superior monitoring quality.

“The auditor’s role in preventing financial misreporting is pivotal, and these findings are highly pertinent,” remarked Lily Morse, Assistant Professor of Management at the University of Denver’s Daniels College of Business and the study’s lead researcher. Morse, who earned her PhD from the Tepper School of Business, further suggested, “Firms should look to employ auditors who exhibit strong honesty-humility traits and consider interventions that foster behaviours associated with this trait for auditors who might benefit from such development.”

While the study sheds valuable light on the subject, the authors advocate for additional research to validate their findings in various auditing settings and with different auditor fraud detection capabilities measures.

More information: Lily Morse et al, Predicting monitoring failures using the HEXACO framework: The effects of honesty-humility and agreeableness, Negotiation and Conflict Management Research. DOI: 10.34891/qvpz-9a66

Journal information: Negotiation and Conflict Management Research Provided by Carnegie Mellon University