An Investigation Into the Impact of Ethical Climate on Auditor Judgment and Fraud Risk Assessment

Posted: May 18, 2021

• Sophie Collins
• Juliette Watson
• Isabelle Reed

Abstract

The global financial landscape continues to grapple with the persistent challenge of fraud, with recent estimates suggesting that organizations lose approximately five percent of their annual revenues to fraudulent activities. Within this context, the role of auditors as gatekeepers of financial integrity becomes increasingly critical. However, traditional approaches to auditing have predominantly emphasized technical competencies, procedural frameworks, and regulatory compliance, often overlooking the psychological and environmental factors that fundamentally shape auditor judgment. This research addresses this significant gap by investigating the impact of organizational ethical climate on auditor judgment and fraud risk assessment capabilities. Ethical climate represents the shared perceptions of what constitutes correct behavior and how ethical issues should be handled within an organization. While previous research has examined ethical climate in various organizational contexts, its specific influence on auditor cognitive processes remains underexplored. The auditing profession operates within a unique environment characterized by complex judgment tasks, significant time pressures, and substantial consequences for judgment errors. These conditions make auditor decision-making particularly susceptible to both cognitive biases and environmental influences. Our study builds upon the foundational work of Ahmad, Malik, and Khan (2021), who emphasized the importance of coordinated approaches between forensic accounting and information systems auditing in fraud investigation. However, while their research focused on technical coordination mechanisms, our investigation delves into the psychological and organizational antecedents that enable or constrain effective fraud risk assessment. We propose that ethical climate serves as a critical moderating variable that either enhances or diminishes the effectiveness of auditing techniques and tools. The primary research questions guiding this investigation are: How do different types of ethical climate influence auditors' fraud risk assessment accuracy?