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Researchers are continually trying to find reliable fraud indicators (e.g., Beasley, 1996) and some are working on building fraud prediction models (e.g., Spathis, 2002) to aid auditors in fraud detection. With this same goal of predicting fraud in mind, the purpose of this study is to explore the potential of qualitative fraud risk indicators. Content analysis is used in analyzing the Management's Discussion and Analysis (MDA) section of the annual report to identify potential indicators of deception to increase the likelihood of fraud detection in a timelier manner than current quantitative models.

By examining asynchronous communication contained in annual reports for companies required by the SEC to restate their financial statements, patterns of key linguistic characteristics were identified and compared to those used by companies not required to restate. Findings evidence significant differences on several dimensions. Using language cues for detection of deception has the advantage over quantitative methods of providing a more timely method of determining deception. Quantitative models often cannot detect deception until the effects are validated by financial impairment.

Implications of the findings suggest that qualitative methods of deception detection may provide an earlier, and thus more useful, method of the detection of fraud. The results of this study should provide stakeholders with a set of indicators to aid in identifying misstated information. This approach is also one that can be generalized to other written documents used to predict fraudulent communication.

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.

Jost et al. (2003) theorizes and finds that business students, on an average, hold a positive fair market ideology (FMI), which suggests that they believe in the power of market forces to reward ethical corporate behavior and punish unethical behavior; accordingly, they tend to make an implicit association between a company's financial performance relative to the stock market and the company's ethics. We suggest that audit education in professional skepticism and ‘red flag’ analysis will mitigate this implicit bias when a company's relative market performance is unusually distant from a referent benchmark, such as an industry average. In a between-participants experiment involving 94 non-audit and 94 audit business students, we measure their FMI, and examine how they perceive the ethicality of a company's management based on the referent direction (above or below the industry average) and referent magnitude (relatively close to or distant from the industry average) of the company's relative market performance. The results suggest that both non-audit and audit students indeed hold a positive FMI, and they ascribe favorable ethical perceptions to company performance that is relatively close to the industry average, irrespective of referent direction. When company performance is relatively distant from the industry average, neither group of students makes the implicit link. Overall, the findings do not indicate that audit education differentially affects business students’ perceptions of corporate ethics when a company's relative stock market performance deviates considerably from a referent benchmark.

The purpose of this chapter is to investigate what internal auditors see as a need for improvement regarding current business risk practices for controlling employee fraud. A survey of internal auditors compares perceptions of current versus desired situations in regard to six common practices of employee fraud risk management: training in fraud risk management, understanding how job procedures are designed to manage fraud risks, recognizing basic indicators of fraud, providing appropriate employee compensation incentives, reporting suspicions of fraud, and background verification of job applicants. Comparisons for each practice are made between the United States and Canada.The main finding is that the largest weakness in the employee fraud risk management practices relates to providing employees with training in their risk management programs. Seemingly related deficiencies are also indicated in both employee understanding of how their job procedures are designed to manage fraud risks and the ability of employees to recognize basic indicators of fraud. No measure of fraud prevention is more important than those involving the employees who actually conduct the affairs of an organization. The identification and ranking of gaps in employee fraud risk management practices can be used to make a case to deal with areas needing improvement.

Extant theory tends to treat Organizational Culture (OC) and fraud-related values as static, characterizing culture as synonymous with potential ethical values − but devoting less attention to how the culture and values arose and where they are headed. Buffer/conduit theory proposes that accountants learn to use a taxonomy containing three dynamic layers: collective fraud orientation, a buffer/conduit layer, and individual fraud orientation. The middle layer contains OC-related internal controls that buffer the orientation layers from spreading fraud-encouraging values, and serve as conduits transmitting fraud-deterring values − or, when controls do not function as intended, transmitting fraud-encouraging values. A factor analysis of 11 indicators of this three-layer taxonomy suggests that older generations of accounting practitioners apply the taxonomy, but millennials do not. Predisposition to commit fraud is especially salient to internally focused millennials, who uniquely perceive recruitment and training as compensating mechanisms and as collective buffers.

Commentators express concern that when auditors investigate for but fail to detect fraud, jurors might effectively penalize the auditors for having investigated for the fraud (AICPA, 2004; Coffee, 2004; Golden, Skalak, & Clayton, 2006). Consistent with these concerns, Reffett (2010) finds that, in a between-participants setting, evaluators in cases of undetected fraud are more likely to hold auditors liable for damages when the auditors identified the perpetrated fraud as a fraud risk and then investigated for the fraud, relative to when the auditors did neither. What remains unclear, however, is the extent to which identifying versus investigating fraud risks increases evaluators’ between-participants assessments of auditor liability. That is, when auditors investigate for, but fail to detect fraud, is the increase in evaluators’ liability assessments due to the fact that the auditors identified (i.e., were aware of) the fraud risk but did not detect the fraud, or that the auditors unsuccessfully investigated for the fraud (or both)? This study addresses these questions by reporting evidence that both identifying and investigating fraud risks can each, in isolation, increase evaluators’ perceptions of auditor negligence. The processes by which identifying and investigating fraud risks increase evaluators’ negligence verdicts, however, appear to differ.

Food fraud has vexed the food industry throughout history. Today, it is still a present and multidimensional problem affecting all parts of the food industry. Food fraud encompasses adulteration, counterfeit, diversion of products outside of intended markets, over-run, simulation, tampering, theft, misrepresentation or mislabelling, malicious poisoning, bioterrorism or sabotage. It is difficult to detect and trace the source of unintentional contamination and related food safety concerns and even more difficult to detect instances of product fraud. The most common product categories that are associated with food fraud are olive oil, milk and milk-based products, fish and seafood, wine, tea, honey and organic foods. On the other hand, knowledge on what influences the occurrence of fraud in food supply chain is limited. The main research aim in this chapter is to determine key factors which influence the occurrence of food fraud within the organic supply chain, and how these factors differ between various organic marketing channel members. We focus on the application of qualitative methods for detecting key food fraud aspects including broad practical areas, such as opportunities and motivations to commit fraud, as well as the presence or lack of suitable food fraud control measures. These three key aspects are assessed to identify the perceived fraud vulnerability of the organic supply chain. The research is conducted with special attention to the context of the transition economies, since these markets require a new, comprehensive strategic approach to preventing and detecting food fraud and adulteration. The entire analysis is conducted on the Serbian market.

I reexamine the conflicting results in Frank, Lynch, and Rego (2009) and Lennox, Lisowsky, and Pittman (2013). Frank et al. (2009) conclude that firms can manage book income upward and taxable income downward in the same period, implying a positive relation between aggressive book and tax reporting. Lennox et al. (2013) conclude the relation is negative and aggressive book reporting informs users that aggressive tax reporting is less likely. I identify four key differences in the research designs across the two studies, including measures of aggressive book reporting, measures of aggressive tax reporting, sample time periods, and empirical models. I systematically examine whether each of these differences is responsible for the conflicting results by altering the key difference while holding other factors as constant as possible. I find the relation between aggressive book and tax reporting is driven by the measure of aggressive book reporting, as the relation is positive for some subsets of firms and negative for others. Firms accused of financial statement fraud have a negative relation while nonfraud firms exhibit a positive relation. Using discretionary accruals, I also look for, but do not find a “pivot point” in the relation between aggressive book and tax reporting. I provide a better understanding of the relation between aggressive book and tax reporting by identifying research design choices that are responsible for prior results. I show that measures of both discretionary accruals and financial statement fraud are necessary to gain a more complete picture of the relation between aggressive book and tax reporting.