Research in psychology promotes the idea that culture determines the manner in which organizations are structured and managed, the behavior of individuals within these organizations as well as how these individuals think. In the context of audit, auditors’ ability to maintain their professionalism could be influenced by the cultural environment of the organization to which they are attached. In addressing the above issues, studies (such as Hostede, G. 1991. Culture and Organizations: Software in Mind, McGraw Hill Book Limited Berkshire UK) have identified one cultural dimension, power distance, which is consistently significant in explaining cultural differences at the country and organizational levels.

Power distance shows the degree to which members of an organization or society expect and agree that power should be unequally shared. It is logical to expect that this power distance cultural dimension could explain the similarities and differences in the application of globally accepted auditing standards by different auditors from different countries.
Overwhelming evidence in literature, that consistently demonstrates the influence of power distance on the judgments and behaviors of auditors, makes it necessary to investigate the influence of this cultural dimension on fraud risk assessment. If culture influences auditors’ professionalism, then auditors from different countries with different cultures will have different levels of professionalism and different sensitivity to fraud risk, despite adhering to the same auditing standards. This will influence their risk assessment and, in turn, lead to differences in audit quality.

In any organization, the inequality of power can be assumed because personnel or staff behave in accordance with the hierarchy in an organization. In high-power distance culture organizations, the staff is expected to show loyalty, obey their superiors uncritically, use formal standards for ethical conduct, and support the status quo. On the other hand, organizations with a low-power distance culture perceive power as a source of corruption, coercion, and dominance.

Power distance culture refers to the acceptance of inequality in power (Hofstede,1991). Superiors, or top management in the high-power distance culture, behave in a more autocratic manner and demand no consultation from subordinates. Thus, auditors in organizations with high-power distance culture tend to obey and follow instructions from their superior in order to avoid disagreements and to satisfy and impress their superiors. In other words, auditors in high-power distance culture are not innovative in gathering audit evidence. They tend to follow audit checklists religiously, as required by their superiors. Therefore, auditors in high-power distance culture organizations tend to be less skeptical compared to auditors in low-power distance culture.

In conclusion, it is expected that auditors in high-power distance culture organizations would be less likely to have high fraud risk assessment in carrying out their audit engagement. Therefore, high-power distance culture in audit organizations -which is related to the high staff loyalty level, obeying instruction with less critical argument and more autocratic style of management – generally leads to lower fraud risk assessment.

 

 

 

By: Dr. Sayed Alwee Hussnie Sayed Hussin, SAI Malaysia, Director of Policy and Internal Relations.