Accounting professor finds auditors spot narcissists
Tampa, FL (February 22, 2013) — It's a story that happens so often it's almost a cliché: the self-infatuated leader of a top company, with trophies all over the office and pictures on his desk of him posing with a 20-year-old bombshell on a yacht, commits fraud, cheating the company and investors out of millions.
But, if that fraud is discovered early by an auditor, many of the more dire consequences can be avoided.
USF Assistant Professor of Accounting Randy Kuhn, in a study with faculty members from Indiana University, the University of Wyoming, and West Virginia University, found that auditors are able to pick up on the signs if the head of a company is a narcissist -- and that they (perhaps unintentionally) adjust their auditing practices accordingly to account for more risk. That study, "The Impact of Client Attitude on Fraud Risk Assessment," was published in Auditing: A Journal of Theory and Practice in the February 2013 issue.
"Auditors do make that conscious relationship between a narcissistic type of person and fraud," Kuhn said. "Evidence shows those type of individuals believe they're above the law."
Kuhn has firsthand experience with that type of fraud. As an auditor for KPMG in 2003, he lived out of a hotel for a year while he investigated the WorldCom fraud, the single largest financial reporting fraud in United States history. He said that experience is part of what drew him to the client attitude study, which asked auditors from an international accounting firm to read case studies about client managers who had exhibited high or low levels of narcissistic behavior, and adjust their risk assessment accordingly. For instance, the managers who exhibited narcissism used numerous "I" and "me" statements, and would say things that reflected high self-importance, such as "I make sure things get done on time, and let me tell you, it's not always easy."
"I just thought it was interesting because everybody has worked with someone self-serving," Kuhn said.
"Professor Kuhn's study is an outstanding example of the many real-world business questions our faculty are working to solve," said Moez Limayem, dean of the College of Business. "Researchers in the College of Business are constantly inquiring into new areas of study with very real implications for the way we do business every day."
Kuhn continues to work with the other researchers on a followup study using real-life auditors with actors playing the client manager. The researchers videotape the interaction to better understand the cues that tip auditors off to the client narcissism and increased risk.
"The first study was a paper based study, but the reality of the world is there are people involved, and there are a set of cues," he said.
In addition to Kuhn's research on risk assessment, corporate governance, and enterprise risk management, he's also one of a few faculty members researching issues in the accounting information systems arena, for which the USF Lynn Pippenger School of Accountancy recently received the top ranking. He recently found companies that have IT weaknesses -- for instance, bad system upgrades that weren't tested properly -- also have weaknesses in other areas, such as how companies manage their discretionary income. However, although data show that companies with IT weaknesses have lower net income and fewer net assets than companies with non-IT weaknesses, the financial markets don't punish companies proportionally to the risks those weaknesses indicate.
"It's a symptom of a broader breakdown in corporate governance," Kuhn said. "There hasn't been enough time for the markets to gain appreciation for what IT weaknesses represent."
Kuhn, who was nearing a partnership at Grant Thornton when he left to pursue doctoral studies at UCF, has decades of experience in auditing and management. He was serving on an accounting advisory board at UCF and recruiting students for internships when he decided he wanted to take his career into academia.
"I'm still baffled as to how I went on campus to interview students and ended up quitting my job," he said, laughing. "I discovered that I wanted to share my experience with students. Other than public accounting, they don't really have exposure to what life is going to be like as a public accountant."