Audit processes have come under intense scrutiny in recent years. In the wake of high-profile collapses including the Carillion Group in the UK in 2018 and Germany’s Wirecard AG fraud scandal in 2020 there has been plenty of discussion about the “expectation gap” between what the public expects auditors to do and the reality.

Inquiries into the audit sector by the UK parliament in 2019 and the Australian parliament in 2020 have signalled an urgent need to revisit the audit product and key matters.

Audits have, until now, been backward looking and used financial reports and records to peer into the past. But a behavioural audit can take a different approach.

Human behaviour is difficult to hide and a forward-looking behavioural audit would proactively detect behavioural signals of deception to identify issues meriting further investigation.

Behavioural audit strengthens traditional audit

When German payment processor Wirecard filed for insolvency in June last year, it did so among revelations of fraud and claims of a “missing” €1.9 billion in cash. Among other actions, it turned out the company deceived its auditors by hiring actors to work in fake bank branches.

A behavioural audit would have uncovered human signals of deception beyond the numbers and processes. While it doesn’t substitute the work auditors do at the moment, a behavioural audit enriches traditional processes with multimodal human information.

Picture: Andreas Hellmann FCA.

“A behavioural audit would have uncovered human signals of deception beyond the numbers and processes.”

The behavioural audit helps unpack the human behaviour behind financial statements by applying data insights to items such as emails, videos, speeches, graphs, infographics and photographs.

For example, photographs and other visuals included in a report – such as infographics or graphs – can distract the user by selecting a particular information cue. A photograph can trigger attention and shift the focus away from other information. Photos can also trigger powerful emotions and be used to subconsciously influence judgments.

My colleagues and I at Brain Value are currently developing an accountancy and audit tool capable of detecting emotions communicated through photographs. If the behavioural audit spots a photograph that conveys an emotional message that is inconsistent with the narrative that accompanies the photograph, it will flag the information for additional investigation.

Applying sentiment analysis

Another red flag arising from a behavioural audit could be when a CEO talks publicly, but analysis of the speech can show an emotional distance to what is being said. This indicates that the CEO is not necessarily supportive of the information being conveyed.

This will show up in a sentiment analysis, which can be as simple as seeing whether the use of the first-person subject pronoun – “I” increases or decreases compared with the way the speaker usually talks.

This was the case with Wirecard. Its CEO’s public statements and behaviour on TV appearances showed an emotional distance from the information he was trying to convey.

The inconsistency could have been uncovered by a behavioural audit and raised an alert to the auditors they needed to look more closely at the information being imparted

Auditors are human, too

Like everyone else, auditors operate via heuristics – the shortcuts our brain uses subconsciously to arrive at a decision.

For example, if we see a large number of items, we do not process all of these information cues with the same importance. To avoid overwhelming our brain, we are prone for the order effect, whereby it’s usually the first pieces or the last pieces in a sequence dominate in our decision-making.

Even an individual’s mood and the way information is presented can affect their judgment.

The behavioural audit can help overcome the biases that we all face when making decisions, and of which we are unaware.

Time to rethink audit

If we can learn one lesson from corporate collapses it is that fraud has and probably will be with us forever. Additional regulation is not going to stamp it out.

In light of that, we should rethink the scope and role of an audit to detect possible deceptive behavioural signs in advance of the issue. We should try to enhance or supplement the tools we currently have to help focus on human behaviour.

A behavioural audit run alongside the traditional audit may uncover early warnings of forthcoming problems that will alert our professional scepticism and encourage a questioning mind.

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