The case for better brainstorming

Greg Jenkins wins 2014 American Accounting Association Deloitte Wildman Medal Award

Greg Jenkins
Greg Jenkins

Auditors are accounting detectives of sorts, testing and analyzing a company’s financial records to reveal large misstatements and add credibility to financial reports.

Before embarking on its examination, an audit team must have a discussion of how fraud might occur and how to respond to it. These brainstorming sessions have been a required part of the auditing process by the Auditing Standards Board and the American Institute of Certified Public Accountants since 2002.

Wide latitude for discussions

Besides the discussion among key members of the audit team, however, there are no other stipulations. How brainstorming meetings are organized or executed is determined by the auditing firm.

There are no specific guidelines, said Greg Jenkins, professor of accounting and information systems and holder of the Curling and William S. Gay fellowships. The standards merely require that there is to be a discussion.

Better brainstorming improves auditing outcomes.
allow auditors to consider all the factors
that may lead to fraud.

Basic attributes of successful sessions

This relatively new brainstorming requirement in the auditing process inspired Jenkins and his colleagues, Joe Brazel from N.C. State University and Tina Carpenter from the University of Georgia, to investigate brainstorm quality and its effects on auditors’ decision-making processes — the first study of its kind. Their resulting article, Auditors’ Use of Brainstorming in the Consideration of Fraud: Reports from the Field, was published in The Accounting Review in 2010. In 2014, the article won the American Accounting Association’s Deloitte Wildman Medal Award, a prize awarded for research that will make a significant contribution to the advancement of the practice of public accountancy.

Jenkins and his colleagues analyzed data from surveys of 179 audit engagements by the Big 4 accounting firms and an international firm. They found that there were basic attributes of brainstorming sessions that appeared to lead to good outcomes, and that the assessments and testing approaches resulting from these discussions were considered to be more effective by the audit team.

Planning for success

Simply holding a discussion to comply with the standard is not sufficient, Jenkins said. There are ways to go about conducting a brainstorming session that make it more effective. Having the proper person lead the discussion; active participation by managers and partners; holding the discussion early on, before testing begins; having extensive discussion of how fraud might be perpetrated and determining how to respond to the risks of fraud — these are all important to having a high–quality brainstorming session.

Jenkins and his colleagues found that higher quality brainstorming sessions determined how closely linked the risk assessment and testing approach were. The quality of the session positively moderated the relationship between the risk assessment and the audit tests, Jenkins said.

Preparing for surprises

A high-quality brainstorm session beforehand allows auditors to plan an effective approach, to a potential problem, instead of being unprepared to deal with the complications of a surprise. For example, an audit team that has identified particular fraud risks can, in a timely manner, deploy appropriate resources on the audit, such as using a more experienced auditor to conduct audit tests, include forensic specialists on the audit team, or make greater use of technology tools to analyze a company’s transactions.

Scott Showalter, professor of practice in accounting at N.C. State, and a retired partner from KPMG, nominated the article for the award. I’ve used this paper to teach my students what is an effective brainstorming session and how to conduct one, Showalter said. I recognize how practice has struggled in conducting effective brainstorming sessions. This problem has been acknowledged by regulators, and I know how the research can add value to the field.

Department's alumni supported research

This research was something Jenkins wanted to tackle for a long time. He co–authored a paper about brainstorming in the Journal of Accountancy in 2003 and considered continuing his investigations.

When Jenkins came to Virginia Tech in 2005, he discussed his proposed study with alumni. They were incredibly interested in our research and eager to support us by asking other auditors within their firms to respond to our survey, he said.

Without alumni to recognize the value of this research and champion his cause, the project would not exist, Jenkins said. "This research was possible because of the participation of audit firms, particularly Deloitte & Touche, Ernst & Young, Grant Thornton, KPMG, and PricewaterhouseCoopers, and the backing of the department’s alumni," he said. "I am really fortunate to be a faculty member in a department with an alumni base that has such loyalty."

Virginia Tech Pamplin College of Business Virginia Tech Pamplin College of Business Magazine Fall 2014

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