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Book part
Publication date: 30 September 2019

Andrea M. Scheetz and Joseph Wall

With the increasing prevalence of awards for reporting fraudulent activity, it is important to learn if there are unintended consequences associated with the language…

Abstract

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.

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Research on Professional Responsibility and Ethics in Accounting
Type: Book
ISBN: 978-1-78973-370-9

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Article
Publication date: 12 October 2010

Harold Hassink, Roger Meuwissen and Laury Bollen

The primary research question of this study is to what extent auditors comply with auditing standards once they encounter fraud and whether compliance is associated with…

Abstract

Purpose

The primary research question of this study is to what extent auditors comply with auditing standards once they encounter fraud and whether compliance is associated with particular fraud characteristics (i.e. material versus immaterial fraud, management versus employee fraud, statutory versus voluntary audit and external versus internal fraud) as well as with auditor (experience) and audit firm characteristics (Big Four versus non‐Big Four). The study also aims to provide evidence on the role of auditors in redressing fraud. Redress refers to the auditee taking measures to nullify the consequences of the fraud, insofar as possible, and to prevent any recurrence of such fraud.

Design/methodology/approach

To gather data on the role of auditors in fraud cases, a survey was conducted among all audit partners of the top 30 Dutch audit firms. In total, 1,218 audit partners were selected and received a postal questionnaire. In total, 326 questionnaires were returned (27 per cent), of which 296 (24 per cent) were usable.

Findings

The results reveal that auditors fail to comply with some important elements of fraud standards. There are substantial differences among audit firms regarding compliance with the relevant auditing standards. Furthermore, auditors appear to encounter corporate fraud only incidentally. About half of the auditors believe they have a “significant” impact on redressing fraud.

Research limitations/implications

One of the main research findings is that it is difficult for individual auditors to build up expertise in fraud detection. There appears to be a need for specific training programs for auditors to help them to detect fraud, emphasizing the need for mandatory consultation with the technical department of the audit firm once “red flags” indicating fraud are found. Indeed, this need for change has been addressed by the Dutch professional accountancy body NIVRA as a direct result of the findings of this study.

Originality/value

This study extends existing research by investigating the compliance of auditors with fraud standards and it sheds light on the actual redress experiences of auditors. It focuses on the actions taken by auditors – or the lack thereof – in situations where auditors encounter fraud signals. The study indicates that in the absence of good oversight, auditors have mixed incentives when they are confronted with signals for fraud, resulting in actions that are not always in line with existing regulatory requirements.

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Managerial Auditing Journal, vol. 25 no. 9
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 1 September 1996

Richard A. Bernardi and Karen V. Pincus

Researchers and practitioners have long debated the arguments in favor of and against providing specific mathematical materiality guidelines in auditing standards. Yet…

Abstract

Researchers and practitioners have long debated the arguments in favor of and against providing specific mathematical materiality guidelines in auditing standards. Yet, there is little empirical evidence about the relationship between materiality thresholds and audit risk judgments in the absence of such guidelines. In this study, 152 Big Six managers evaluated materiality and risk for an audit simulation based on an actual case where material fraud was undetected. The auditor subjects were allowed to choose the evidence they would examine before reaching a decision. The major findings of the study are that while auditor materiality judgments differ, these differences were not statistically significantly related to either fraud risk judgments or the amount of evidence the auditors chose to examine before rendering their judgments. This empirical evidence does not support the need for specific quantitative guidance in accounting standards related to materiality. However, other considerations (such as concern for legal liability) could also have an impact on the advisability of providing specific quantitative guidance for setting materiality thresholds.

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Managerial Finance, vol. 22 no. 9
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 1 September 1996

Michael R. De Martinis and Ashley W. Burrowes

In reviewing contemporary literature on materiality judgement and the audit expectations gap (AEG), this paper considers an apparent void concerning that aspect of the AEG…

Abstract

In reviewing contemporary literature on materiality judgement and the audit expectations gap (AEG), this paper considers an apparent void concerning that aspect of the AEG caused by the non‐disclosure of materiality and risk thresholds and criteria in the financial reports. The review enables the formation and discussion of two premises: first, disclosing cornerstone concepts, such as materiality and risk judgements, in financial reports enhances users' understanding of the limitations of information contained therein; and second, expanding the wording in audit reports reduces the AEG and enhances users' understanding of the objectives and limitations of an audit. In supporting the validity of these premises, it is concluded that the disclosure of materiality and risk judgements in financial reports may reduce the AEG. This hypothesis may be useful for future empirical research.

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Managerial Finance, vol. 22 no. 9
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 1 April 1994

H. Gin Chong and Gerald Vinten

Materiality is an ill‐defined yet important concept in auditing. However, lack of an auditing guideline exposes auditors to possible litigations due to failure to detect…

Abstract

Materiality is an ill‐defined yet important concept in auditing. However, lack of an auditing guideline exposes auditors to possible litigations due to failure to detect material misstatement in the financial statements. This paper assesses decisions by UK courts on materiality thresholds. The results from 28 selected cases failed to reveal any consistency in the adoption of materiality thresholds. A guideline is urgently needed by the Auditing Practices Board to increase consistency in decisions on material transactions/events.

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Journal of Financial Crime, vol. 2 no. 3
Type: Research Article
ISSN: 1359-0790

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Book part
Publication date: 28 November 2017

Francesco Bellandi

Part V analyzes the details of how to assess materiality. It first tackles qualitative versus quantitative criteria and the role of professional judgment. It then analyzes…

Abstract

Part V analyzes the details of how to assess materiality. It first tackles qualitative versus quantitative criteria and the role of professional judgment. It then analyzes the selection of quantitative threshold, to expand to the choice of benchmarks. It contrasts the whole financial statements with subaggregates, line items, and components.

Specific sections contrast IASB, FASB, SEC, and other guidance on materiality applied to comparative information, interim reporting, and segment reporting.

The section on estimates mingles complex guidance coming from accounting, auditing, and internal control over financial reporting to explain how the management can improve its assessment of materiality concerning estimates.

After explaining the techniques to move from individual to cumulative misstatements, the part tackles verification ex post, and finally summarizes the intricacies of whether immaterial misstatements are permissible and their consequences.

Details

Materiality in Financial Reporting
Type: Book
ISBN: 978-1-78743-736-4

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Abstract

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Corporate Fraud Exposed
Type: Book
ISBN: 978-1-78973-418-8

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Book part
Publication date: 28 November 2017

Francesco Bellandi

Abstract

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Materiality in Financial Reporting
Type: Book
ISBN: 978-1-78743-736-4

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Article
Publication date: 1 April 2000

Janet L. Colbert

Both the international and US auditing Standards provide guidance to the auditor in searching for material misstatements caused by errors and fraud. Auditors, especially…

Abstract

Both the international and US auditing Standards provide guidance to the auditor in searching for material misstatements caused by errors and fraud. Auditors, especially those with clients interested in cross‐border securities markets, should comprehend the similarities and differences in the requirements found in the Standards in these significant audit areas. A comparison of the international Standard for error and fraud to the two US Standards for these topics discloses numerous similarities and a few differences. The findings are reassuring to auditors serving clients with cross‐border interests. Whether the auditor is utilizing the international or the US guidance, comparable audit work in searching for misstatements arising from errors and fraud is being performed.

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Managerial Auditing Journal, vol. 15 no. 3
Type: Research Article
ISSN: 0268-6902

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Abstract

Following the Supreme Court’s 1988 decision in Basic, securities class plaintiffs can invoke the “rebuttable presumption of reliance on public, material misrepresentations regarding securities traded in an efficient market” [the “fraud-on-the-market” doctrine] to prove classwide reliance. Although this requires plaintiffs to prove that the security traded in an informationally efficient market throughout the class period, Basic did not identify what constituted adequate proof of efficiency for reliance purposes.

Market efficiency cannot be presumed without proof because even large publicly traded stocks do not always trade in efficient markets, as documented in the economic literature that has grown significantly since Basic. For instance, during the recent global financial crisis, lack of liquidity limited arbitrage (the mechanism that renders markets efficient) and led to significant price distortions in many asset markets. Yet, lower courts following Basic have frequently granted class certification based on a mechanical review of some factors that are considered intuitive “proxies” of market efficiency (albeit incorrectly, according to recent studies and our own analysis). Such factors have little probative value and their review does not constitute the rigorous analysis demanded by the Supreme Court.

Instead, to invoke fraud-on-the-market, plaintiffs must first establish that the security traded in a weak-form efficient market (absent which a security cannot, as a logical matter, trade in a “semi-strong form” efficient market, the standard required for reliance purposes) using well-accepted tests. Only then do event study results, which are commonly used to demonstrate “cause and effect” (i.e., prove that the security’s price reacted quickly to news – a hallmark of a semi-strong form efficient market), have any merit. Even then, to claim classwide reliance, plaintiffs must prove such cause-and-effect relationship throughout the class period, not simply on selected disclosure dates identified in the complaint as plaintiffs often do.

These issues have policy implications because, once a class is certified, defendants frequently settle to avoid the magnified costs and risks associated with a trial, and the merits of the case (including the proper application of legal presumptions) are rarely examined at a trial.

Details

The Law and Economics of Class Actions
Type: Book
ISBN: 978-1-78350-951-5

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