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Aims to identify the most important red flags as individually perceived by auditors, and explores whether auditors' demographic factors might impact on their perception of the relative importance of red flags in Malaysia, particularly in the Klang Valley area.

This study employed a mailed survey as a method of data collection. The respondents to this survey are practicing auditors from audit firms in Kuala Lumpur. The sample of auditors is taken from the population of domestic listed audit firms with the Malaysian Institute of Accountants as of 27 March 2003. A simple random technique is applied to construct the sample.

In general, subjects indicated that the operating and financial stability category was judged as most important, followed by management characteristics and influence over the control environment, and then finally by industry characteristics.

It would be interesting to examine whether these fraud risk indicators are indeed helpful in the investigation of reported misconduct and fraudulent cases in Malaysia. The findings may help researchers to develop a new fraud risk indicator that takes into consideration actual instances of fraud in Malaysia.

This paper aims to explore the effectiveness of an artificial neural network (ANN) in predicting fraudulent financial reporting in small market capitalization companies in Malaysia.

Based on the concepts of ANN, a mathematical model was developed to compare non-fraud and fraud companies selected from among small market capitalization companies in Malaysia; the fraud companies had already been charged by the Securities Commission for falsification of financial statements. Ten financial ratios are used as fraud risk indicators to predict fraudulent financial reporting using ANN.

The findings indicate that the proposed ANN methodology outperforms other statistical techniques widely used for predicting fraudulent financial reporting.

The study is one of few to adopt the ANN approach for the prediction of financial reporting fraud.

This paper aims to investigate the role of corporate governance and information technology in fraud prevention and detection within the United Arab Emirates (UAE).

This study uses a survey of financial accountants and internal and external auditors to assess their perceptions of the effectiveness of IT and corporate governance as measured in terms of the audit committee’s effectiveness, internal audit functions, external audit functions, culture of honesty and employee training programmes in preventing and detecting fraud in the UAE.

The results indicate that corporate governance has a moderate role in preventing and detecting fraud in the UAE and that IT has the same role as traditional fraud prevention and detection techniques. The results also show no significant difference between internal and external auditors in their use of technological and traditional techniques during the course of audits.

The findings suggest that the senior management and boards of directors must better understand the importance of their oversight function. The finding that a culture of honesty has a low positive impact on fraud prevention and detection in the UAE indicates that chief executive officers and boards of directors must make more efforts to set the “tone at the top” to improve the corporate environment in terms of integrity and ethics, among other factors. Furthermore, as IT and traditional techniques provide the same function, senior management and boards of directors must be alerted to the importance of developing systematic approaches to fraud investigation that involve greater reliance on technological approaches.

The moderate role of corporate governance suggests that senior management and boards of directors must better understand the importance of their oversight function to meet their obligations and fiduciary responsibilities to stakeholders. Furthermore, greater adoption of IT to detect and prevent fraud contributes to developing a systematic approach to fraud investigation, capable of identifying unusual activity using effective software.

This study contributes to the literature on the role of corporate governance and IT in preventing and detecting fraud, particularly for Middle Eastern countries and other emerging nations. The study may provide insights to academics and practitioners in the UAE and their international counterparts.

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.

In accounting and finance, researchers have used many ways to detect manager’s fraud risk. Until now, many researchers have used some data mining methods in these two fields to detect this risk. The purpose of this paper is to compare the precision of two data mining methods in detecting such a risk.

For this purpose, this paper analyzed the texts of board’s reports and used two methods including the convex optimization (CVX) method and least absolute shrinkage and selection operator (LASSO) regression method. In this way, the words of these reports, which have the greatest power in explaining the manager’s high fraud risk index, were identified. Using these words, this paper presented a model that could detect manager’s high fraud risk index in companies.

The results indicated that both methods can detect the manager’s high fraud risk index with a precision between 82.55 and 91.25 percent. The LASSO method was significantly more precise than the CVX method.

The lack of access to an official and reliable list of firms suspected to fraud and the lack of access to the Microsoft Word (MS Word) file of board’s reports were two of the most important limitations of this study.

Regulatory bodies and independent auditors can consider the proposed methods in this study for assessing the fraud risk for a firm or other legal parties.

This paper avoided using merely financial statements data to detect the manager’s fraud risk index and focused on texts of board’s reports for the detection process. The capabilities of data mining and text mining methods for detecting the manager’s fraud risk index using board’s reports were tested in this paper. By comparing CVX and LASSO results, this paper indicated that methods with a binary-dependent variable have more power and are more precise than methods with continuous-dependent variables for detecting fraud.

The purpose of this research is to determine the likelihood of financial statement manipulations in companies throughout a variety of emerging market countries and compare this potential wirh that of firms within the USA.

The authors utilize the Fraud Score Model, as set forth by Dechow et al., to determine the likelihood of financial statement manipulations. By adjusting their model to work in an international setting, the authors are able to study nine industries across 23 countries, including the USA.

The results vary from industry to industry, with some countries performing extremely well in one industry, only to prove remarkably risky in the next.

The findings may be used by a variety of market participants, especially investors, to determine the risk levels of potential foreign investments. Therefore, this research can help lead to a more overall efficient placement of global capital.

This study aims to explore methods that external auditors can use to assess the rationalization of fraud in fraud risk assessment in auditing.

An online questionnaire was used to collect data from 150 Big 4 auditors.

The results reveal a total of 18 methods that auditors can use to assess the rationalization of fraud. However, some methods were recommended more than others by the auditors in this study. These methods include incorporating the assessment of rationalization into the assessment of motives for fraud and integrity, understanding the client’s business and regulatory environment, inquiring management and the board of directors about past fraud cases and observing management responses and reactions during auditors’ inquiry about fraud-related matters.

The guidance provided by this study could help enhance auditors’ skills in assessing fraud risks, which, in turn, may increase the likelihood of detecting fraud. The guide could also be helpful for audit firms in their fraud training programs.

This study is the first to explore methods for assessing the rationalization of fraud by drawing on the experience and insights of Big 4 auditors.

This paper aims to evaluate the effects of fraud risk elements and integrity on asset misappropriation in the Royal Malaysian Police (RMP). In addition, this research also examines whether integrity moderates the relationship between fraud risk elements and asset misappropriation.

Data are gathered from the responses of the questionnaires distributed to the RMP. A total of 200 questionnaires were distributed based on simple random selection from five RMP centres in the capital city. Out of 200 questionnaires distributed, only 189 were returned.

The findings indicate that the existence of fraud risk elements significantly affects the incident of asset misappropriation. An interesting finding was made that integrity is negatively related to asset misappropriation. This implies that integrity is an important value in minimising the occurrence of asset misappropriation. The results also indicate that minimising fraud risk elements is crucial in reducing the incident of asset misappropriation.

This present paper contributes to the literature by investigating a commonly proposed but underexplored elements of integrity in mitigating fraud. Incorporating integrity and fraud risk elements simultaneously in a single framework in context of RMP would enhance the understanding and will be able to provide a framework for practitioners on how to mitigate the incident of fraud.