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Ethics play an important role in society; however, many economics models assume that individual players act “economically” rational and ignore situations where an individual may forgo economic benefit for the public good. This chapter models the strategic interaction between auditors and management and allows for management to choose the economically irrational outcome of behaving ethically even when doing so defies their own financial self-interest. One of the model's assumption is that a certain percentage of managers do not engage in a “strategy” to misreport their financial statements because doing so is “unethical”. If recent accounting scandals are indicative of an ethical crisis in this country, this model offers hope because an increase in the percentage of unethical mangers leads to a decrease in fraudulent reporting. The model also illustrates the effects of an increase in the rewards for committing fraud (e.g., greater numbers of stock options, restricted stock, and accounting-based performance incentives) and an increase in the penalty for detected fraud (e.g., stiffer penalties for fraud from Sarbanes–Oxley).

The progressive computerization of business processes and widespread availability of computer networking make it possible to dramatically increase the frequency of periodic audits by redesigning the auditing architecture around Continuous Online Auditing (COA). Continuous auditing is viewed here as a type of auditing that produces audit results simultaneously with, or a short period of time after, the occurrence of relevant events. It is arguable that continuous auditing can be implemented only as an online system, i.e., a system that is permanently connected through computer networking to both auditees and auditors. This article proposes a research agenda for the emerging field of COA. First, the history, institutional background, feasibility of and some experiences in COA are briefly reviewed. Thereafter, a number of research issues relating to the architecture of COA, factors affecting the use of COA, and the major consequences of COA are presented. Finally, a selected number of research issues are highlighted as priorities for future research in COA.

This chapter adopts Porter’s ‘audit trinity’ approach comprising internal audit, external audit and audit committee to discuss the role auditing can play in the management of corporate fraud.

The chapter maps the historical background of and the developments in external audit as an assurance service, the internal audit function and the audit committee. Based on this, it explains the nature, types and possible causes of corporate fraud within the context of business risk with a view to establishing how auditing can help in managing such frauds.

The chapter highlights the relationships that should exist between the three audit types in order to support a sound internal control system as a tool for preventing and detecting corporate fraud.

The chapter identifies cost, opportunity, connivance and managerial override as factors that could limit the ability of auditing to manage corporate fraud. It also suggests ways of addressing these limitations.

As the current upward trend in IT adoption for corporate operations continue to open new sets of corporate fraud windows, this chapter examines how an entity’s internal controls can be used to prevent and detect these growing fraud schemes.

The chapter’s unique strength is its adoption of a holistic approach to auditing to suggest ways of managing corporate fraud – a novelty in the corporate fraud literature. It is hoped that future research in the area will bring empirical insights to the issues raised and perspectives covered in the chapter.

This study investigates whether exposure to a previous client’s earnings management behavior will impact experienced auditors’ judgments of the risk that a current client’s financial statements are materially misstated. Contrast theory predicts the context of previous information can have a priming effect on a current judgment scenario, where the information for the current judgment is contrasted with the previous information. Guided by contrast theory, we exposed auditors to either positive or negative client ethical earnings management behavior. We found the existence of contrast effects, with the positive (negative) context of the previous client resulting in auditors judging a higher (lower) likelihood of material misstatement in the current client’s financial statements. The results have implications for the effectiveness and efficiency of auditors’ judgments as well as provide insight into auditor training efforts.

The American Institute of Certified Public Accounts (AICPA) and the American Assembly of Collegiate Schools of Business (AACSB) encourage experiential learning as a component of accounting and business curriculum. This chapter introduces a business partnership framework for experiential learning in accounting information systems, internal control, and auditing courses. Accounting students establish a partnership with a business client at the beginning of their accounting information systems and internal control study and continue the learning approach through the first auditing course. The framework brings real-world experience to accounting information systems, internal control, and auditing concepts. Accounting students learn to solve unstructured problems in complex realistic business settings, integrating technical and experienced-based knowledge. The project provides a structure for strengthening students’ personal competencies including developing successful team behavior and professional skills. The author has used the business-partnership model effectively for 15 years.

Discuss the importance of the Foreign Corrupt Practices Act (FCPA) to accounting education.

This study first examines the current trends and events underlying the reasons for increasing the incorporation of the FCPA and related anti-bribery issues into the accounting curriculum. Then best practices of increasing FCPA coverage and presenting the material to students are presented and explained.

The recent increase in FCPA and anti-bribery prosecutions, the penalties assessed, and the costs of internal investigation and compliance are significant. In addition, corruption is a way of life in many countries. Thus, the need for consultants, auditors, and accounting firms knowledgeable about FCPA issues is growing, especially as the FCPA has a books and records provision and demands effective internal control. However, universities have been slow to acknowledge this trend.

Pedagogical strategies for including FCPA issues in the accounting curriculum range from incorporating role-playing and developing case studies in existing classes to creating separate stand-alone FCPA and anti-bribery classes.

Accounting students, during their future business careers, will be better prepared to identify, evaluate, and choose appropriate actions/responses when faced with FCPA and bribery situations.

Despite the underlying trends that indicate the importance of integrating FCPA issues into the accounting education, many universities have lagged in introducing this subject area into their curriculum. This study is the first to provide the rationale and multiple pedagogical methods for facilitating accounting student education about identifying FCPA issues and selecting proper responses.

This study explores the question of whether investors can successfully detect management fraud using a firm's financial statements. Using financial ratios obtained from fraudulent companies’ financial statements, we examine the effectiveness of both logit and discriminant analyses in predicting the likelihood of fraud. Sixty-eight fraudulent companies used in the study are identified from the SEC's Accounting and Auditing Enforcement Releases. Our research design has addressed certain weaknesses present in prior fraud-detection studies. The empirical results suggest that ratio analysis is grossly ineffective in detecting financial statement fraud. We also discuss the implications of our findings on future research.