Assessment of Tone at the Top

The Psychology of Control Risk Assessment

Susan S. Lightle, PhD, CPA (inactive), and Bud Baker, PhD, and Joseph F. Castellano, PhD

In BriefStandards require that auditors assess an entity's internal controls over financial reporting (ICFR), including the control environment, which is influenced by the tone set by management and the board regarding the importance of ICFR and the expected standards of employee conduct. This article argues that auditors cannot assess the tone at the top by simply checking off a list of control mechanisms; they must understand what motivates behavior within the organization (what might be called the psychology of control risk assessment). It also illustrates a model to help auditors anticipate when an organization is prone to earnings manipulation, and suggests how to assess the tone at the top of an organization.