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The need for independent audit goes back to the agency theory, the theory of delegation of power and the issue of trust. Stakeholders delegate power to management to manage the business on their behalf, yet they face the risk of information asymmetry and management motivations to commit fraud. The main aim of having an independent auditor was therefore to reduce the risk of information asymmetry and fraudulent behaviour by management. Auditors are required by the International Auditing Standards to detect material fraud and error, and they are expected to have a duty of care for stakeholders. However, recently independent auditors, whether conducting private or public audit, have been scrutinised for failing to detect material fraud. There have been a lot of discussions in the literature about the role of private auditors in detecting fraud, but very little discussions about the role of public auditors in detecting fraud. This chapter will outline the difference between private audit and public audit; explain the legal liability of public auditors in relation to fraud detection; the role of public auditors in detecting fraud; and will critically review the root causes for auditors’ failure to detect fraud.

We conduct an experiment to examine the occurrence of the bystander effect on willingness to report a fraudulent act. Specifically, we investigate the impact of evidence strength on managers’ decisions to blow the whistle in the presence and absence of other employees who have knowledge of the wrongdoing. Results indicate that when there is strong evidence indicating a fraudulent act, individuals with sole knowledge are more likely to report than when others are aware of the fraudulent act (the bystander effect). However, the bystander effect is not found when evidence of fraud is weak. Further, a mediated moderation analysis indicates that perceived personal responsibility to report mediates the relation between others’ awareness of the questionable act and reporting likelihood, suggesting that the bystander effect is driven by diffusion of responsibility. Our results have implications for all types of organizations that wish to mitigate the detrimental effect of fraud. Specifically, training or incentives may be necessary to overcome the bystander effect in an organization.

The Bureau of Economics in the Federal Trade Commission has a three-part role in the Agency and the strength of its functions changed over time depending on the preferences and ideology of the FTC’s leaders, developments in the field of economics, and the tenor of the times. The over-riding current role is to provide well considered, unbiased economic advice regarding antitrust and consumer protection law enforcement cases to the legal staff and the Commission. The second role, which long ago was primary, is to provide reports on investigations of various industries to the public and public officials. This role was more recently called research or “policy R&D”. A third role is to advocate for competition and markets both domestically and internationally. As a practical matter, the provision of economic advice to the FTC and to the legal staff has required that the economists wear “two hats,” helping the legal staff investigate cases and provide evidence to support law enforcement cases while also providing advice to the legal bureaus and to the Commission on which cases to pursue (thus providing “a second set of eyes” to evaluate cases). There is sometimes a tension in those functions because building a case is not the same as evaluating a case. Economists and the Bureau of Economics have provided such services to the FTC for over 100 years proving that a sub-organization can survive while playing roles that sometimes conflict. Such a life is not, however, always easy or fun.

With the increasing prevalence of awards for reporting fraudulent activity, it is important to learn if there are unintended consequences associated with the language offering such awards. Aside from issues regarding submitting unsubstantiated claims of fraud to the Securities and Exchange Commission (SEC), Section 922 of the Dodd–Frank Act may inadvertently encourage would-be whistleblowers to delay reporting fraud. Potential whistleblowers may choose to delay reporting due to the consideration of alternatives to external reporting, in a misguided attempt to increase the size of an award, or due to their ethical stance on the issues. Using a three-stage mixed methods (experiment, open-ended interviews, and experiment) approach, this study provides evidence that increased knowledge of statutes involving external whistleblowing may result in reporting delays. The data suggest that despite statements from the SEC forbidding this, managers may choose to delay reporting when under the threshold necessary to receive an award. In such a manner, managers may be allowing the fraud to grow to a necessary perceived level over time. As might be expected, the accountants in this study were more cautious, checking to see if internal reporting worked first. Of particular note, 16 individuals indicated that they would never report, with the motivation apparently driven by fear of job loss and/or retaliation. Lastly, the intention to delay or speed up reporting may be very different based on the perception of ethics involved in the decision.

This study investigates the relation between lawsuit attributes that support an inference of fraud and the probability and the size of securities lawsuit settlement. A sample of 607 securities lawsuits between 1996 and 2006 is used in the analysis of the probability of settlement and a subsample of 261 lawsuit settlements is used in the analysis of the size of settlement. The empirical results indicate a positive association between the probability of a settlement and accounting irregularity, SEC enforcement action and stock offer. Accounting irregularity and SEC enforcement action are also documented to be positively related to the size of the settlement. The results imply that a stock offer supports a strong inference of fraud and the presence of accounting irregularity and SEC enforcement action in a lawsuit filing strengthens the fraud allegation and increases the likelihood of a settlement. The findings also suggest that the stronger the inference of fraud, the greater the size of the settlement. The results of this study add to our understanding of the determinants of securities lawsuit settlement. Studies using securities litigation as a proxy for fraud can use the results of this study to distinguish between fraud-related and nonfraud-related lawsuits.

Purpose – This study investigates the nature, types, and methods of fraudulent financial reporting committed by Chinese listed companies with a view to understanding corporate behavior relating to management fraud in China. Such an understanding is important for preventing frauds and achieving better financial reporting compliance.

Design/Methodology/Approach – This study adopts a descriptive research approach using the data based on 182 punishment bulletins issued by the China Securities Regulatory Commission from 2002 to 2006. The study considers three categories of frauds (i.e., false income statements, false balance sheets, and insufficient or false disclosure) and uses these categories to describe and analyze the fraud cases.

Research findings/Insights – Based on the sample of 83 cases over the 5-year period from 2002 to 2006, this study finds that all the frauds in the sample involved the manipulation, alteration, and falsification of reported financial information. Fraud schemes often contained more than one technique to misstate financial statements, typically through overstating revenues and assets, and understating liabilities and expenses. Most of the sample companies committed several frauds simultaneously. This study also reveals that most of the frauds committed by Chinese listed companies lasted more than 2 years, with the longest being 9 years, and common intervals between the initial fraud year and the announcement year of punishment were more than 3 years, with the longest being 11 years.

Theoretical/Academic implications – This study provides an empirical analysis of fraudulent financial reporting cases committed by Chinese listed companies. These cases were rarely studied in the Western literature. This study contributes to the extant literature by providing an insight into management fraud in China. Research into fraudulent financial reporting in the largest developing economy is certainly of interest as prior research into this area is mostly based on developed economies.

Practitioner/Policy implications – The implications drawn from this study could be useful for a better understanding of the management behavior of companies in developing and transitional economies. This study has a potential to assist regulators and accounting professional bodies to set guidelines facilitating corporate compliance of regulated financial reporting.

Professionals who carry out the forensic accounting profession must have an extensive knowledge of accounting, as well as an effective knowledge of law, auditing, internal audit, business management, psychology, crime science, and, in particular, computer technologies. In today’s digital business environment, it has become difficult to identify fraudulent transactions with traditional methods. Developments in information (data) and information technology have helped increase anti-fraud control programs and fraud research opportunities. In particular, fraudulent financial reporting disrupts the reliability, accuracy, and efficiency of financial markets in terms of existence and continuity. The forensic accounting profession has been able to improve the effectiveness of inspections by using big data techniques, data analytics, and algorithms (Rezaee, Lo, Ha, & Suen, 2016; Seda & Kramer, 2014; Singleton & Singleton, 2010).

The aim of the author, in this chapter, is to evaluate the contribution of using big data techniques in forensic accounting applications and the skills that will be provided to students while integrating these techniques in forensic accounting trainings. For this purpose, studies on forensic accounting education and their applications were reviewed. In addition, opinions were evaluated by considering the relevant literature about the importance of big data, benefits of big data, use of big data techniques, and interest shown of them.

Corporate crime affects the stability of the international financial system and the business world system has made considerable efforts to fight all aspects of corporate crimes. Fraud and white-collar crime has increased considerably over the recent years and this trend is expected to continue.

This chapter defines corporate crime and its categories as well as considering the ways in which such crime occurs. This is set within the context of other failures such as Enron.

These crimes are considered in the context of ethical behaviour but it is reported that the various measures taken to dissuade these crimes at various levels just have not seems to reduce such crime.

In many respects this chapter introduces the contexts and acts as preparation for the other chapters in the book and so is not exhaustive in scope.

Since not all fraud and abuse is discovered and reported, the cost of fraud to businesses is hard to be estimated.

The chapter discusses the context in which corporate crime occurs.