（2009）Using Nonfinancial Measures to Assess Fraud Risk.pdfVIP

DOI: 10.1111/j.1475-679X.2009.00349.x Journal of Accounting Research Vol. 47 No. 5 December 2009 Printed in U.S.A. Using Nonfinancial Measures to Assess Fraud Risk J O S E P H F . B R A Z E L , ∗ K E I T H L . J O N E S , † A N D M A R K F . Z I M B E L M A N ‡ Received 8 June 2006; accepted 1 July 2009 ABSTRACT This study examines whether auditors can effectively use nonfinancial mea- sures (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 non- fraud competitors. We also find that this difference is a significant fraud in- dicator 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. ∗North Carolina State University; †George Mason University; ‡Brigham Young University. We especially thank Abbie Smith (editor) and the referee for their invaluable guidance. We are grateful for helpful comments from Mark Beasley, Brian Cloyd, Andrew Felo, Glen Gray, Dana Hermanson, Diane Matson, Kevin Melendrez, Mitch Oler, Mark Peecher, and workshop partic- ipants at Indiana University, Virginia Tech Universi