Do Auditor Professional Scepticism and Client Narcissism Affect Fraud Risk Assessment?

Rijadh Djatu Winardi, Arizona Mustikarini, Yoga Pernama


Abstract: This study investigates the effect of professional skepticism and client narcissism on auditors’ fraud risk assessment. Financial reporting fraud has become a concern for auditors as part of their responsibility. Auditors are expected to assess the risk of fraud as well as its impact on financial reporting. During fraud risk assessment, several factors can influence auditors, namely professional skepticism as an internal factor and client's narcissism as an external factor. Professional skepticism is related to the level of details and awareness to conduct assessment work. Narcissistic clients are more likely to demonstrate higher inherent and control risk. The purpose of this study is to investigate the effect of professional skepticism and client narcissism on auditors’ fraud risk assessment. This study employs a 2x2 between-subjects experimental design, where professional skepticism and client narcissism are manipulated into are high and low level. The participants in this study are 107 accounting students from undergraduate, master, and professional program in a major university in Indonesia. The results of this study suggest that auditors with a higher level of professional skepticism are more sensitive to the higher incident of fraud and client's narcissism positively affect auditors’ assessment of fraud risk. This study contributes to the current fraud risk assessment literature, particularly within Indonesian auditing profession.

Abstrak: Penelitian ini menyelidiki efek skeptisisme profesional dan narsisme klien pada penilaian risiko penipuan auditor. Pelaporan keuangan penipuan telah menjadi perhatian bagi auditor sebagai bagian dari tanggung jawab mereka. Auditor diharapkan untuk menilai risiko penipuan serta dampaknya pada pelaporan keuangan. Selama penilaian risiko penipuan, beberapa faktor dapat mempengaruhi auditor, yaitu skeptisisme profesional sebagai faktor internal dan narsisisme klien sebagai faktor eksternal. Skeptisisme profesional terkait dengan tingkat rincian dan kesadaran untuk melakukan pekerjaan penilaian. Klien narsistik lebih mungkin untuk menunjukkan risiko yang melekat dan kontrol yang lebih tinggi. Tujuan dari penelitian ini adalah untuk menyelidiki efek skeptisisme profesional dan narsisisme klien pada penilaian risiko penipuan auditor. Penelitian ini menggunakan 2 x 2 desain eksperimental antar subyek, di mana skeptisisme profesional dan narsisisme klien dimanipulasi menjadi tinggi dan rendah. Para peserta dalam penelitian ini adalah 107 mahasiswa akuntansi dari program sarjana, master, dan profesional di universitas besar di Indonesia. Hasil penelitian ini menunjukkan bahwa auditor dengan tingkat skeptisisme profesional yang lebih tinggi lebih sensitif terhadap insiden penipuan yang lebih tinggi dan narsisisme klien secara positif memengaruhi penilaian auditor terhadap risiko penipuan. Studi ini berkontribusi pada literatur penilaian risiko penipuan saat ini khususnya dalam profesi audit Indonesia.


Auditing, Fraud Risk Assessment, Professional Skepticism, Client Narcissism

Full Text:



Altman, E. I., and E. Hotchkiss. 2006. Corporate Financial Distress and Bankruptcy: Predict and Avoid Bankruptcy, Analyze and Invest in Distressed Debt. 3rd ed. Hoboken, N.J.: Wiley.

Aretz, K., and S. M. Bartram. 2010. Corporate hedging and shareholder value. Journal of Financial Research 33 (4):317-371.

Arnott, R. D., and C. S. Asness. 2003. Surprise! Higher dividends = higher earnings growth. Financial Analysts Journal 59 (1):70-87.

Barnett, D., B. Blake, and B. A. McCarl. 1982. Goal programming via multidimensional scaling applied to Senegalese subsistence farms. American Journal of Agricultural Economics 64 (4):720-727.

BCBS. 2011. Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems. Switzerland: Bank for International Settlements.

Beck, T., A. Demirgüç-Kunt, and O. Merrouche. 2013. Islamic vs. conventional banking: Business model, efficiency and stability. Journal of Banking and Finance 37 (2):433-447.

Berle, A. A., G. C. Means, and S. H. William. 1932. The Modern Corporation and Private Property. New York: Macmillan Co.

Birge, J. R., and P. Júdice. 2013. Long-term bank balance sheet management: Estimation and simulation of risk-factors. Journal of Banking and Finance 37 (12):4711-4720.

Brealey, R. A., S. C. Myers, and F. Allen. 2016. Principles of Corporate Finance. 12th ed. New York: McGraw-Hill Irwin.

Brink, L., and B. McCarl. 1979. The adequacy of a crop planning model for determining income, income change, and crop mix. Canadian Journal of Agricultural Economics 27 (3):13-25.

Brodt, A. I. 1978. A dynamic balance sheet management model for a Canadian chartered bank. Journal of Banking and Finance 2 (3):221-241.

Brown, P., W. Beekes, and P. Verhoeven. 2011. Corporate governance, accounting, and finance: A review. Accounting and Finance 51:96-173.

Bryan, S., L. Hwang, and S. Lilien. 2000. CEO stock-based compensation: An empirical analysis of incentive-intensity, relative mix, and economic determinants. The Journal of Business 73 (4):661-693.

Carleton, W. T., C. L. Dick, Jr., and D. H. Downes. 1973. Financial policy models: Theory and practice. The Journal of Financial and Quantitative Analysis 8 (5):691-709.

Chakroun, F., and F. Abid. 2013. A multiobjective model for bank asset liability management: The case of a Tunisian bank. IUP Journal of Financial Risk Management 10 (4):35-56.

Chambers, D., and A. Charnes. 1961. Inter-temporal analysis and optimization of bank portfolios. Management Science 7 (4):393-410.

Chi, G. T., H. C. Dong, and X. Y. Sun. 2007. Decision-making model of bank's assets portfolio based on multi-period dynamic optimization. Systems Engineering - Theory and Practice Online 27 (2):1-16.

Cohen, K. J., and F. S. Hammer. 1967. Linear programming and optimal bank asset management decisions. The Journal of Finance 22 (2):147-165.

Copeland, T. E., J. F. Weston, and K. Shastri. 2005. Financial Theory and Corporate Policy. 4th ed. Boston, MA: Addison-Wesley.

Crane, D. B. 1971. A stochastic programming model for commercial bank bond portfolio management. The Journal of Financial and Quantitative Analysis 6 (3):955-976.

Damodaran, A. 2013. Valuing financial service firms. Journal of Financial Perspectives 1 (1):59-74.

Demski, J. S. 2008. Managerial Uses of Accounting Information. Vol. 4. New York: Springer.

Dickens, R. N., K. M. Casey, and J. A. Newman. 2002. Bank dividend policy: Explanatory factors. Quarterly Journal of Business and Economics 41 (1/2):3-12.

Douma, S. W., and H. Schreuder. 2008. Economic Approaches to Organizations. 4th ed. Harlow, England; New York: Financial Times/Prentice Hall.

Drever, M., P. A. Stanton, and S. McGowan. 2007. Contemporary Issues in Accounting. Milton, Qld: John Wiley & Sons Australia.

Eisenhardt, K. M. 1989. Agency theory: An assessment and review. The Academy of Management Review 14 (1):57-74.

Frontline. 2013. Frontline Solver Version 12.5 User Guide. Nevada: Frontline Systems, Inc.

Gardner, M. J., D. L. Mills, and E. S. Cooperman. 2005. Managing Financial Institutions. London: South-Western.

Gershefski, G. W. 1969. Building a corporate financial model. Harvard Business Review 47 (4):61-72.

Guidry, F., A. J. Leone, and S. Rock. 1999. Earnings-based bonus plans and earnings management by business-unit managers. Journal of Accounting and Economics 26 (1-3):113-142.

Güven, S., and E. Persentili. 1997. A linear programming model for bank balance sheet management. Omega 25 (4):449-459.

Hamilton, W. F., and M. A. Moses. 1973. An optimization model for corporate financial planning. Operations Research 21 (3):677-692.

Ho, T. S. Y., and S. B. Lee. 2004. The Oxford Guide to Financial Modeling: Applications for Capital Markets, Corporate Finance, Risk Management, and Financial Institutions. Oxford: Oxford University Press.

Holmstrom, B. 1979. Moral hazard and observability. Bell Journal of Economics 10 (1):74-91.

Holmstrom, B. R., and J. Tirole. 1989. The theory of the firm. In Handbook of Industrial Organization, edited by R. Schmalensee and R. D. Willig. Amsterdam: Elsevier Science Publishers B. V., 61-133.

Ijiri, Y., F. K. Levy, and R. C. Lyon. 1963. A linear programming model for budgeting and financial planning. Journal of Accounting Research 1 (2):198-212.

Indjejikian, R. J. 1999. Performance evaluation and compensation research: An agency perspective. Accounting Horizons 13 (2):147-157.

Ittner, C. D., D. F. Larcker, and M. V. Rajan. 1997. The choice of performance measures in annual bonus contracts. The Accounting Review 72 (2):231-255.

Jedicke, V., W. L. Wilbur, and A. K. Rifai. 1994. Goal programming: An effective tool in commercial bank management. American Journal of Business 9 (1):31.

Jensen, M. C., and W. H. Meckling. 1976. Theory of the firm: Managerial behaviour, agency cost, and ownership structure. Journal of Financial Economics 3 (4):305-360.

Jensen, M. C., and K. J. Murphy. 1990. Performance pay and top management incentives. Journal of Political Economy 98 (2):225-264.

Kanodia, C. 2014. Game theory models in accounting. In Game Theory and Business Applications, edited by K. Chatterjee and W. Samuelson. New York: Springer Science+Business Media, 43-79.

Khan, H. 2015. Optimal incentives for takaful (Islamic insurance) operators. Journal of Economic Behavior and Organization 109:135-144.

Koch, T. W., and S. S. MacDonald. 2006. Bank Management. Mason, Ohio: Thomson Higher Education.

Koo, D. 1977. Elements of Optimization: With applications in Economics and Business. New York: Springer-Verlag.

Korhonen, A. 2001. Strategic financial management in a multinational financial conglomerate: A multiple goal stochastic programming approach. European Journal of Operational Research 128 (2):418-434.

Kosmidou, K., and C. Zopounidis. 2004. Combining a goal programming model with simulation analysis for bank asset liability management. INFOR 42 (3):175-187.

Lange, H. P., A. Saunders, and M. M. Cornett. 2013. Financial Institutions Management. 3rd ed. North Ryde, N.S.W: McGraw-Hill Australia.

Langen, D. 1989. A multi-objective decision model for bank asset/liability management. Mathematical and Computer Modelling 12 (10):1419-1435.

Lee, A. C., C. F. Lee, and J. C. Lee. 2009. Financial Analysis, Planning and Forecasting: Theory and Application. Singapore: World Scientific.

McCarl, B. A., and T. H. Spreen. 2011. Applied Mathematical Programming Using Algebraic Systems. Texas, TX: Texas A&M University, College Station.

McGuigan, J. R., R. C. Moyer, and F. H. Harris. 2014. Managerial Economics: Applications, Strategy, and Tactics. 13th ed. Stamford, CT, USA: Cengage Learning.

Morris, J. R., and J. P. Daley. 2009. Introduction to Financial Models for Management and Planning. Boca Raton: CRC Press.

Moss, C. B. 2010. Risk, Uncertainty, and the Agricultural Firm. Singapore: World Scientific Publishing Company.

Mulbert, P. O. 2013. Corporate Governance of Banks. In Risk Management and Corporate Governance, edited by A. Jalilvand and A. G. Malliaris. Hoboken, N.J.: Taylor and Francis.

Mullineux, A. 2006. The corporate governance of banks. Journal of Financial Regulation and Compliance 14 (4):375-382.

Nuryanah, S., and S. M. N. Islam. 2015. Corporate Governance and Financial Management: Computational Optimisation Modelling and Accounting Perspectives. United Kingdom: Palgrave Macmillan.

Rethel, L., and T. J. Sinclair. 2012. The Problem with Banks. New York: Zed Books.

Rezaee, Z. 2011. Financial Services Firms: Governance, Regulations, Valuations, Mergers, and Acquisitions. Hoboken, N.J: Wiley-Blackwell.

Samuelson, W., and S. G. Marks. 2015. Managerial Economics. 8th ed. Hoboken, NJ: John Wiley & Sons, Inc.

Schroeck, G. 2002. Risk Management and Value Creation in Financial Institutions. edited by G. Schroeck. U.S.: Wiley.

Scott, W. R. 2015. Financial Accounting Theory. 7th ed. Toronto, Ontario Pearson Canada.

Song, F., and A. V. Thakor. 2007. Relationship banking, fragility, and the asset-liability matching problem. Review of Financial Studies 20 (6):2129-2177.

Stern, J. M. 1972. The Dynamics of Financial Planning. In Applications of Management Science in Banking and Finance, edited by S. Eilon and T. R. Fowkes. Essex: Gower Press, 25-48.

Subramanyam, K. R., and J. J. Wild. 2014. Financial Statement Analysis. 11th ed. Boston: McGraw-Hill Irwin.

Tirole, J. 2001. Corporate Governance. Econometrica 69 (1):1-35.

Titman, S., A. J. Keown, and J. D. Martin. 2014. Financial Management: Principles and Applications. Upper Saddle River: Pearson.

Van Greuning, H., and S. B. Bratanovic. 2009. Analyzing Banking Risk: A Framework for Assessing Corporate Governance and Risk Management. Washington, DC: World Bank.

Van Horne, J. C., and J. M. Wachowicz. 2005. Fundamentals of Financial Management. Harlow, Essex, England: FT Prentice-Hall.

Williams, H. P. 2013. Model Building in Mathematical Programming. Fifth ed. United Kingdom: John Wiley & Sons, Ltd.

Zenios, S. A. 2007. Practical Financial Optimization: Decision Making for Financial Engineers. Malden, MA: Blackwell Pub.



  • There are currently no refbacks.


The Indonesian Journal of Accounting Research (IJAR)

Editorial Secretariat

Master of Science and Doctoral Programs
Faculty of Economics and Business, Gadjah Mada University

Jl. Nusantara, Bulaksumur Yogyakarta 55281
CP : Novita
Phone  : +62 812-2848-2829
Fax    : +62 274 524606
Email  :

Marketing and Sales Office

Ikatan Akuntan Indonesia
Graha Akuntan, Jl. Sindanglaya No.1 Menteng, Jakarta Pusat 10310
CP : Reza Fauzi
Divisi Pelayanan, Keanggotaan dan Mitra IAI.
Grha Akuntan, Jl. Sindanglaya No.1, Menteng.
Telp.021-31904232 Ext.324/321



ISSN 2086-6887 (Print)
ISSN 2655 - 1748 (online)


Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.