Evaluating the Relationship Between Auditor Competence and Detection of Complex Financial Misstatements

Posted: Dec 21, 2013

• Hugo Wallace
• Jasmine Pierce
• Cole Graham

Abstract

The detection of financial misstatements represents a cornerstone of financial market integrity and investor protection. While extensive research has examined various aspects of audit quality, the specific relationship between auditor competence and the detection of complex financial misstatements remains inadequately understood. Traditional approaches to conceptualizing auditor competence have predominantly emphasized technical accounting knowledge, professional certifications, and years of experience. However, the increasing sophistication of financial engineering techniques and the emergence of novel business models have created a landscape where complex misstatements often evade detection by even experienced auditors employing conventional audit procedures. This research addresses a critical gap in the literature by proposing and empirically testing a multidimensional framework of auditor competence that integrates cognitive science principles with traditional auditing metrics. We challenge the prevailing assumption that technical knowledge and experience alone suffice for detecting sophisticated financial misstatements. Instead, we argue that cognitive attributes—including pattern recognition, contextual reasoning, and cognitive flexibility—play an increasingly vital role in identifying anomalies that do not conform to traditional error patterns. The complexity of contemporary financial misstatements has evolved significantly in recent decades. Simple arithmetic errors or straightforward violations of accounting standards have given way to sophisticated schemes involving multiple entities, complex financial instruments, and intentional obfuscation techniques. These complex misstatements often involve subtle deviations from accounting norms that require auditors to recognize patterns across disparate information.