Academic journal article Journal of Accountancy

Detection of Fraudulent Financial Reporting

Academic journal article Journal of Accountancy

Detection of Fraudulent Financial Reporting

Article excerpt

Are internal auditors not spotting red flags?

Internal auditors are responsible for pursuing perpetrators of fraud every day. They always, according to the Institute of Internal Auditors' Standards for the Professional Practice of Internal Auditing, should be alert to the possibility of wrongdoing and have sufficient knowledge to recognize potential fraud. Researchers found company managers sometimes have concerns that may tempt them to pad earnings--for example, improving their bonuses, appeasing shareholders or lienholders or both and attracting potential investors. Our research examined whether internal auditors, as part of their duties, were sensitive to what might signal numbers fudging, especially when they performed analytical procedures.

We asked 127 internal auditors from 38 companies to explain a hypothetical unexpected fluctuation in operating income under various conditions and to assess the chances of fraud. We found internal auditors were more likely to consider fraud when income surpassed, than when it fell short of, expectations. They also bore fraud in mind when debt covenants were restrictive in a situation where income was better than expected. In this circumstance, managers might beef up earnings to maintain a particular ratio of assets to liabilities required by a lienholder. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.