（2000）A Decision Aid for Assessing the Likelihood of Fraudulent Financial Reporting.pdfVIP

Auditing : A Journal of Practice Theory Vol. 19. No, 1 Spring 2000 RESEARCH NOTES y Decision Aid for Assessing the Likelihood of Fraudulent Financial Reporting Timothy B. Bell and Joseph V. Carcello SUMMARY The auditors responsibility for detecting fraudulent financial reporting is of continu- ing importance to both the profession and society . The Auditing Standards Board has recently issued SAS No. 82 , Consideration of Fraud in a Financial Statement Audit, which makes the auditors responsibility for the detection of material fraud more explicit without increasing the level of responsibility . Using a sample of 77 fraud engagements and 305 nonfraud engagements, we develop and test a logistic regression model that estimates the likelihood of fraudulent financial reporting for an audit client, conditioned on the presence or absence of several fraud-risk factors . The significant risk factors included in the final model are : weak internal control environment, rapid company growth , inadequate or inconsistent relative profitability, management places undue emphasis on meeting earnings projections , management lied to the auditors or was overly evasive, the ownership status (public vs . private) of the entity, and an interaction term between a weak control environment and an aggressive management attitude toward financial reporting . The logistic model was significantly more accurate than practicing auditors in assessing risk for the 77 fraud observations. There was not a significant difference between model assessments and those of practici