Alternative perspectives to deal with auditors’ agency problem

Auditors’ agency problem stems from the mechanism according to which auditors (the agents) are being appointed to companies and paid for their services by the managements they audit (the principals). This mechanism creates an inherent conflict of interests for auditors. The Sarbanes-Oxley Act of 2002 was enacted as part of the efforts to strengthen auditors’ independence and mitigate the effect managements have on their auditors. However, the Act has been, and still is criticized for deficiencies embedded in its provisions. This paper presents an alternative regulatory framework for auditors based on analysis of the Sarbanes-Oxley Act provisions related to auditors and of other perspectives to deal with auditors’ agency problem from previous studies. The proposed framework aims to decrease the ability and incentives of both managements and auditors to collaborate in financial statement fraud. Under the premise that auditors need to function in a framework that discourages immoral behavior, the main provisions of the Sarbanes-Oxley Act related to auditors’ independence are addressed, requiring audit-firm rotation instead of audit-partner rotation, and expending the time-window between provision of audit and non-audit services. In addition, it is proposed that retiring audit firms accompany “entering” audit firms until completion of the first annual financial statement audit and that audit fees will be scrutinized by the SEC.     

Financial statement comparability and accounting fraud

We examine the association between financial statement comparability and the likelihood of accounting fraud. Prior research documents a negative association between the quality of a firm's reporting environment and accounting fraud. We build on this literature and show that poor financial statement comparability is associated with a greater likelihood of accounting fraud. We also find that accounting comparability declines over time as the year of fraud detection approaches and that the association between comparability and fraud becomes more negative over this time. In addition, we find that financial statement comparability improves after fraud detection, consistent with the notion that managers improve their financial reporting quality after fraud.     

The relation between earnings management and financial statement fraud

This paper provides new evidence on the characteristics of firms that commit financial statement fraud. We examine how previous earnings management impacts the likelihood that a firm will commit financial statement fraud and in doing so develop three new fraud predictors. Using a sample of 54 fraud and 54 non-fraud firms, we find that fraud firms are more likely to have managed earnings in prior years and that earnings management in prior years is associated with a higher likelihood that firms that meet or beat analyst forecasts or that inflate revenue are committing fraud. We further find that fraud firms are more likely to meet or beat analyst forecasts and inflate revenue than non-fraud firms are even when there is no evidence of prior earnings management. This paper contributes to the fraud detection literature and the earnings management literature, and can help practitioners and regulators develop better fraud detection models.     

Gender diversity and financial statement fraud

This study investigates the role of gender diversity in fraud commission and detection with a view to identifying whether companies with more female corporate leaders are less likely to be involved in financial statement fraud. Using a bivariate probit model, the role of female corporate leaders in financial statement fraud commission and detection is examined for Chinese listed companies from 2007 to 2018. The representation of female corporate leaders increases the likelihood of fraud detection, thus reducing firms’ propensity to engage in fraud. The finding confirms that women are risk averse and more committed to ethical practices than men in corporate leadership positions. Moreover, this impact of gender diversity is contingent upon the nature of ultimate controllers of listed companies: more female representation in top leadership roles can mitigate fraud commission or detect fraud effectively in non-state-owned enterprises, but not in state-owned enterprises. In addition, the recent anti-corruption campaign initiated by Chinese President Jinping Xi is a powerful form of public governance. Female corporate leaders play a more positive role in mitigating fraud commission and detecting fraud commission in the post-campaign period than in the pre-campaign period.     

Audit Committee Members’ Reputation Incentives and Their Effectiveness in Monitoring the Financial Reporting Process

We examine whether the reputation incentives of audit committee members are associated with their effectiveness in monitoring the financial reporting process. Prior research assumes that audit committee members allocate their effort proportionately across all memberships on which they serve. However, our findings suggest that audit committee members with multiple audit committee memberships tend to focus their attention on the memberships that provide them with the greatest reputation incentives. Specifically, firms with a larger proportion of audit committee members where the membership is the most prominent are associated with higher financial reporting quality and more effective monitoring of internal control. Additional tests reveal that audit committee members’ reputation incentives are driving our results rather than independent non-audit committee members’ reputation incentives. We conclude that reputation is a strong incentive for audit committee members, such that it influences their monitoring effectiveness over the financial reporting process.     

Using Nonfinancial Measures to Assess Fraud Risk

This study examines whether auditors can effectively use nonfinancial measures (NFMs) to assess the reasonableness of financial performance and, thereby, help detect financial statement fraud (hereafter, fraud). If auditors or other interested parties (e.g., directors, lenders, investors, or regulators) can identify NFMs (e.g., facilities growth) that are correlated with financial measures (e.g., revenue growth), inconsistent patterns between the NFMs and financial measures can be used to detect firms with high fraud risk. We find that the  difference  between financial and nonfinancial performance is significantly greater for firms that committed fraud than for their nonfraud competitors. We also find that this difference is a significant fraud indicator when included in a model containing variables that have previously been linked to the likelihood of fraud. Overall, our results provide empirical evidence suggesting that NFMs can be effectively used to assess fraud risk.     

Die Rolle der Versicherungsvermittler beim Versicherungsbetrug – experimentelle Ergebnisse

The GDV estimates the amount of insurance fraud across Germany to be € 4 billion per year. This work examines, using experimental approach, the role of insurance agents in insurance fraud. This research shows that fraud behavior is not only dependent on economic motives even though these can make financial sense for the agent. Different crime detection rates and reward scenarios do not lead to any significant differences in behavior. If the insurance agent, however, completed an apprenticeship in the insurance sector, then this agent generally has a lower willingness to support the customer when committing insurance fraud. Against this, specifically men (as a research category) and holders of several policies tend to be more susceptible to support customers in insurance fraud.     

The Interplay among Financial Regulations,Resilience, and Growth

Interconnectedness has been an important source of market failures, leading to the recent financial crisis. Large financial institutions tend to have similar exposures and thus exert externalities on each other through various mechanisms. Regulators have responded by putting in place more regulations with many layers of regulatory complexity, leading to ambiguity and market manipulation. Mispricing risk in complex models and the arbitrage opportunities through the regulatory loopholes have provided incentives for certain activities to be more concentrated in the regulated entities and for other activities to leave the banking into new shadow banking areas. How can we design an effective regulatory framework that would perfectly rule out bank runs and TBTF and to do so without introducing incentives for financial firms to take excessive risk? It is important for financial regulations to be coordinated across regulatory entities and jurisdictions and for financial regulations to be forward looking, rather than aiming to address problems of the past.     

Financial Statement Fraud: Some Lessons from US and European Case Studies

This paper studies 14 companies that were subject to an official investigation arising from the publication of fraudulent financial statements. The research found senior management to be responsible for most fraud. Recording false sales was the most common method of financial statement fraud. Meeting external forecasts emerged as the primary motivation. Management discovered most fraud, although the discovery was split between incumbent and new management.     

上市公司财务报告舞弊的识别——基于三角形理论的实证研究

为构建财务报告舞弊识别模型,本文选取2000—2009年发生财务报告舞弊的A股上市公司及其配对非舞弊公司为研究对象,利用配对样本t检验、Wilcoxon符号秩检验、Logistic回归,对描述三角形理论的25个指标研究发现,两类公司之间营业利润—经营现金流量、外部董事比例等指标描述的压力和机会因素存在显著差异;各指标与舞弊可能性的相关关系表明,压力越大、机会越多,舞弊可能性越大。由此建立的识别模型正确识别率达到93.7%,有助于人们识别舞弊,帮助上市公司发现舞弊根源。     

The effects of experience and explicit fraud risk assessment in detecting fraud with analytical procedures

This paper reports the results of an experiment that examined the effects of audit experience and explicit fraud risk assessment instructions on the effectiveness of analytical procedures in detecting financial statement fraud. The results of this study suggest that audit managers are more effective than audit seniors in assessing the risk of fraud with analytical procedures. Additionally, explicit fraud risk assessment instructions resulted in more effective assessments of the presence of fraud. These results have implications for the assignment of auditors to tasks and the structuring of these tasks.     

新发展格局下金融对经济高质量发展各维度支持效应研究

根据构建新发展格局要求,建立经济高质量发展评价指标体系,并将其细分为经济发展强度、合理化及外向性三个维度,进一步运用MF-VAR模型探究金融发展对经济高质量发展不同维度的具体支持效应。结果显示：金融发展能够迅速刺激经济发展强度的提升,对技术创新支持效应显著;而其对发展合理化的影响则最为显著且持久,即稳定的金融市场仍是经济长期协调发展的重要助力。特别地,金融规模的持续扩大会抑制发展强度,但对发展合理化及外向性水平的影响微弱,因此应防范可能出现的过度金融化问题。     

论对公司财务报告舞弊的治理

财务治理与财务报告舞弊之间存在密切关系，公司的内、外部财务治理结构包括管理当局、董事会、监事会、注册会计师等各方面，他们都对财务报告的生成与披露产生影响。因此，防范财务报告舞弊的措施应从分析公司相关财务治理结构对财务信息的监督与制衡功能出发，改变其中的薄弱环节，强化相关的治理功能。     

A taxonomy to guide research on the application of data mining to fraud detection in financial statement audits

This paper explores the application of data mining techniques to fraud detection in the audit of financial statements and proposes a taxonomy to support and guide future research. Currently, the application of data mining to auditing is at an early stage of development and researchers take a scatter-shot approach, investigating patterns in financial statement disclosures, text in annual reports and MD&As, and the nature of journal entries without appropriate guidance being drawn from lessons in known fraud patterns. To develop structure to research in data mining, we create a taxonomy that combines research on patterns of observed fraud schemes with an appreciation of areas that benefit from productive application of data mining. We encapsulate traditional views of data mining that operates primarily on quantitative data, such as financial statement and journal entry data. In addition, we draw on other forms of data mining, notably text and email mining.     

政府财政激励、税收征管动机与企业盈余管理——以财政"省直管县"改革为自然实验的研究

政府对企业利润享有征税权,事实上是几乎所有企业的最大的中小股东,因此有动机对企业进行严格的税收征管,进而影响公司治理。本文以1998-2006年中国工业企业为样本,以财政“省直管县”改革为自然实验,从企业盈余管理的角度对此进行了考察。研究发现:财政“省直管县”改革能够显著抑制县辖区内企业的盈余管理行为,并且仅对具有征管权限的企业发挥作用;同时,当县级政府财政状况较差和税基较大时,财政“省直管县”对辖区内企业盈余管理行为的抑制作用更强,表明财政“省直管县”改革能够激励县级政府加强税收征管,进而改善辖区内企业盈余质量。更进一步地,本文还发现财政“省直管县”改革能够抑制企业逃税,提升县级政府财政收入。本文的研究不仅丰富了政府行为影响公司治理方面的文献,同时也为财政“省直管县”如何缓解县级政府财政困难提供了微观证据。     

The Dempster‐Shafer Theory: An Introduction and Fraud Risk Assessment Illustration

This article introduces the Dempster‐Shafer theory (DS theory) of belief functions for managing uncertainties, specifically in the auditing and information systems domains. The use of DS theory is illustrated by deriving a fraud risk assessment formula for a simplified version of a model developed by Srivastava et al. (2007). In this formulation, fraud risk is the normalised product of four risks: risk that management has incentives to commit fraud; risk that management has opportunities to commit fraud; risk that management has an attitude to rationalise committing fraud; and risk that an auditor's special procedures will fail to detect fraud. The article demonstrates how to use such a model to plan for a financial audit where management fraud risk is assessed to be high. In addition, it discusses whether audit planning is better served by an integrated audit/fraud risk assessment as now suggested in SAS 107 (AICPA 2006a, see also ASA 200 in AUASB 2007) or by the approach illustrated here where a parallel, but separate, assessment is made of audit risk and fraud risk.     

Making up users

Within recent years, financial statement users have been accorded great significance by accounting standard-setters. In the United States, the conceptual framework maintains that a primary purpose of financial statements is to provide information useful to investors and creditors in making their economic decisions. Contemporary accounting textbooks unproblematically posit this purpose for accounting. Yet, this emphasis is quite recent and occurred despite limited knowledge about the information needs and decision processes of actual users of financial statements. This paper unpacks the taken-for-grantedness of the primacy of financial statement users in standard-setting and considers their use as a category to justify and denigrate particular accounting disclosures and practices. It traces how particular ideas about financial statement users and their connection to accounting standard setting have been constructed in various documents and reports including the conceptual framework and accounting standards.     

Perceived importance of red flags across fraud types

The purpose of this study is to examine whether internal auditors, external auditors and economic crime investigators perceive the importance of red flags as significantly different across two fraud types: fraudulent financial reporting and misappropriation of assets, as well as across within-subject categories. A total of 471 useable responses were collected using a web-based survey. The findings indicate that significant differences exist on both single and aggregate mean levels among the participant groups. Internal auditors report a higher perceived importance of the red flags related to detecting misappropriation of assets than of those related to fraudulent financial reporting, whereas the opposite is true for economic crime investigators. For external auditors, only small differences in aggregate means between misappropriation of assets and fraudulent financial reporting were found. As the sensitivity to fraud type may affect professional planning, procedures and techniques with regard to fraud prevention, detection and investigation, the results may have both practical and theoretical implications. Further, the focus on both fraud types adds to prior literature on fraud.     

Who Blows the Whistle on Corporate Fraud?

To identify the most effective mechanisms for detecting corporate fraud, we study all reported fraud cases in large U.S. companies between 1996 and 2004. We find that fraud detection does not rely on standard corporate governance actors (investors, SEC, and auditors), but rather takes a village, including several nontraditional players (employees, media, and industry regulators). Differences in access to information, as well as monetary and reputational incentives, help to explain this pattern. In‐depth analyses suggest that reputational incentives in general are weak, except for journalists in large cases. By contrast, monetary incentives help explain employee whistleblowing.     

上市公司舞弊性财务报告及其防范与监管——基于中国证券监督委员会处罚公告的分析

舞弊性财务报告是全世界经济社会和会计职业界关注的重大问题。我国目前也面临其挑战。本文以中国证券监督委员会2002—2006年处罚公告中涉及的上市公司舞弊性财务报告为依据,对我国上市公司舞弊性财务报告的主要类型、手段等进行了统计分析。分析发现,舞弊公司表外舞弊严重,所占比重大;同时存在多种舞弊类型,典型的是虚假利润表和虚假披露;虚构销售业务、虚增资产、隐瞒对外担保分别成为虚假利润表、虚假资产负债表和虚假披露的最主要舞弊手段;舞弊公司同时采用多种舞弊方法,且舞弊行为持续年限在两年以上,最长的达9年。本文最后提出了相应的防范与监管建议。