اهمیت تصورشده پرچم های قرمز در میان انواع کلاهبرداری

The purpose of this study is to examine whether internal auditors, external auditors and economic crime investigators perceive the importance of red flags as significantly different across two fraud types: fraudulent financial reporting and misappropriation of assets, as well as across within-subject categories. A total of 471 useable responses were collected using a web-based survey. The findings indicate that significant differences exist on both single and aggregate mean levels among the participant groups. Internal auditors report a higher perceived importance of the red flags related to detecting misappropriation of assets than of those related to fraudulent financial reporting, whereas the opposite is true for economic crime investigators. For external auditors, only small differences in aggregate means between misappropriation of assets and fraudulent financial reporting were found. As the sensitivity to fraud type may affect professional planning, procedures and techniques with regard to fraud prevention, detection and investigation, the results may have both practical and theoretical implications. Further, the focus on both fraud types adds to prior literature on fraud.

Previous research indicates that fraud2 remains one of the most problematic and prevalent issues for business worldwide. A survey of global economic crime by PwC, 2009a and PwC, 2009b reported that almost one-third (30%) of all firms had faced economic crime in the past twelve months, and these crimes cause huge losses for business and society. As one of the steps to fight fraud, regulators prescribe the use of fraud risk indicators, commonly called red flags, even though research provides evidence on the limited accuracy and power of red flags in fraud risk detection and prediction (e.g. Pincus, 1989). Nevertheless, it has been noted that utilizing the red flag method raises auditors’ sensitivity to the possibility of fraud (Krambia-Kapardis et al., 2010). Prior research on the importance of various red flags (e.g. Apostolou et al., 2001, Hackenbrack, 1993, Loebbecke et al., 1989, Majid et al., 2001, Mock and Turner, 2005, Moyes, 2007 and Smith et al., 2005) has primarily examined external or internal auditors’ perceptions of the fraud risk indicators related to management fraud (Coram et al., 2008 and Liou, 2008). Findings from these studies indicate various and inconclusive results with regard to which fraud risk indicators are the most important. Over time, regulators and researchers addressing fraud prevention and detection have also identified new fraud risk indicators and taxonomies, making comparisons difficult. In recent years, professional standards, among them the International Standards on Auditing (ISA) 240 (IFAC (International Federation of Accountants), 2004), have been revised, and include an updated and comprehensive set of cues and conditions associated with fraud risk, which are, contrary to previous ISA standards,3 categorized according to fraud types. Although existing professional standards prescribe identical detection responsibilities regarding fraud type, relatively little is known about how various professionals, with regard to fraud risk detection, stress the importance of red flags across the specific nature of fraud. A recent study among internal auditors appears to have derived various results in different countries (DeZoort and Harrison, 2008a). However, no known prior study on red flag importance across fraud types has included three participant groups.4 The purpose of this study is to examine how Finnish internal auditors, external auditors, and economic crime investigators stress the importance of red flags in their consideration of intentional fraud risk in the financial statements. Specifically, this study evaluates whether the three participant groups perceive the importance of red flags differently across fraud types and within-subject categories. Following ISA 240 (IFAC, 2004) and the lead of the Finnish Institute of Internal Auditors (IIA-F, 2007), this study focuses on two distinct fraud types that are of great relevance to auditors and other professionals concerned with fraud. These two fraud types may cause material misstatements in the financial statements: misstatements resulting from fraudulent financial reporting (FFR, also known as management fraud), and misstatements resulting from misappropriation of assets (MoA, also known as employee fraud).5 Although neither fraud type is emphasized to a greater or lesser extent than the other in current professional guidelines and standards, it is, however, proposed in this study that the participant groups will perceive the importance of red flag indicators differently, with regard to single red flags as well as across fraud types and within-subject categories. This is justified by the differences among the participant groups in their professional roles and responsibilities within the fraud detection and corporate reporting processes. Further, it is suggested that the perceptions of materiality6 when judging fraud risk differ between participant groups, which may also cause differences in judgements regarding the importance of red flags. The assessment of what is material by each professional group working at different stages of the corporate reporting process is considered a matter of professional judgement. External auditors have been criticized for mainly applying a quantitative threshold in assessing materiality in practice (see Messier et al., 2005 for a review). Internal auditors usually adopt a cost-benefit approach, and crime investigators associate materiality with matters such as violation of laws and criminal intent. The remainder of the paper is structured as follows: Section 2 provides a brief overview of the extant literature, resulting in the formulation of hypotheses. Section 3 presents the design of the empirical survey used to collect data. Section 4 reports the tests of the hypotheses. Section 5 includes a discussion of the findings and some suggested implications. Section 6 concludes this paper with some directions for future research as well as a summary of the limitations of the study.

The aim of this study was to examine how internal auditors, external auditors and economic crime investigators stress the importance of fraud risk indicators in their consideration of financial statement fraud. In particular, the study examined whether the three participant groups perceive the importance of red flags as significantly different across fraud types, namely, fraudulent financial reporting (FFR) and misappropriation of assets (MoA), and related within-subject categories. The data was collected using a web-based survey. The design of the questionnaire involved a pre-stage evaluation conducted by accounting and auditing professionals, as well as the classification of the indicators into four categories according to the particular natures of fraud, based on literature and previous research. The final research instrument featured 28 red flag indicators, grouped into two fraud types and two within-subject categories for each fraud type. A total of 471 useful responses were analysed. Overall, the results indicate that no single red flag is particularly emphasized by all groups, and that significant differences exist in the participants’ perceptions of the importance of single red flags, fraud type, and within-subject categories. With regard to fraud type and within-subject categories, some significant differences exist, and partial support for our hypotheses was found. Internal auditors report higher perceived importance of red flags related to detecting MoA than of those related to FFR, in particular those related to adequacy of internal control. For the external auditor group, the small differences in the aggregate mean values might indicate that they perceive red flags of all types and categories as equally important. Economic crime investigators appear to stress the fraud indicators related to FFR significantly more than those related to detecting MoA, and in particular, they stress the red flags related to the adequacy of internal control the least. The importance of fraud detection to the accounting profession and society as a whole cannot be denied. Fraud and material misstatements in financial statements are a matter of relevance to many different users of financial information. This study emphasizes the need to adopt a more comprehensive view of fraud detection and investigation in the entire corporate reporting value chain. It is argued in this paper that research and regulations regarding fraud detection have been too narrow in scope, insofar as they have focused mainly on external auditors and single red flags. This paper proposes a new approach by broadening the scope of research to more professional groups involved in fraud detection and investigation. This comprehensive view of the fraud risk assessment highlights the focus of attention regarding fraud detection of each particular professional group, acting at different stages of the corporate reporting process. The current low detection rate of fraud provides motivation for change. This study may point to the strengths and weaknesses in the use of red flags of each particular professional group, and bring opportunities to further develop tools, methods and collaboration between those professionals. Further, this study may also offer some insight into the ongoing debate about the role of materiality in this context. While the materiality concept is generally accepted and applied to the auditing setting, concerns arise about its applicability to fraud detection. It should be emphasized again that misstatements may not be immaterial simply because they fall beneath a particular quantitative materiality threshold (DeZoort et al., 2006). On the contrary, if the materiality concept is not followed, the professionals and financial statement users could become confused by the inclusion of details of trivial matters, which could even distract attention from important matters. It is, however, important to consider whether the materiality thresholds currently used and the evaluations of the significance of detected misstatements reflect the magnitude required to change financial statement users’ decisions. Thus, these results also emphasize the need to further develop professional standards, policies and practices for fraud risk assessment, as well as pointing to the question of how much or what is “material” in this context. These findings are interesting and important, but are different from professional standards, where no distinction in importance is made across fraud types. From a practice perspective, this might emphasize the need for training or collaboration; from a theoretical perspective, it might imply that the perceptions of red flag importance are affected by the perceptions of materiality as well as the role and responsibility of each group. This study contributes to literature on fraud types (e.g. Bonner et al., 1998, DeZoort and Harrison, 2008a, DeZoort and Harrison, 2008b and DeZoort and Lee, 1998) by providing evidence that highlights the differences in perceptions across fraud types and within-subject categories, in a comprehensive, concurrent study of three professional groups. This study also adds to prior knowledge by extending the small number of previous comparative studies of three participant groups within the fraud detection area, with evidence related to economic crime investigators. Further, this study contributes to the recent discussion on materiality in the context of financial statement fraud. The findings of this study, however, need to be interpreted in light of its limitations. As a research survey, the study is typically vulnerable to the issues regarding validity and reliability of items and tests, although best practice was followed in the development and pre-test of the survey instrument. Of particular concern is the high risk of response bias in the pilot study. Despite the pre-tests, misinterpretations of the survey questions might have occurred. Furthermore, the results of this study are generally drawn from professionals’ perceptions of the importance of red flags, which in turn are primarily based on their work-related tasks and experience. Therefore, previous knowledge and biases could have affected individual responses. Furthermore, differences among the participant groups’ mean experience, age, education level, and background could have contributed to the observed differences. It is also questionable whether these findings would hold true for any specific fraud case, as each case is likely to have its own unique set of circumstances. Furthermore, while the size of the sample is considered adequate and acceptable for this type of research, the response rates were relatively low; it is also possible that the sample might not be representative of the whole population of various participant groups. Thus, any generalization of the results based on this single study would have to be made with care. It is proposed that future studies on fraud type and within-subject categories are essential. One way to extend this research would be to include the category related to corruption fraud type and industry conditions. Further, case studies on the reasons and methods behind the fact that different professional groups stress particular fraud types or categories would provide deeper insights into this issue. Examining the importance of red flag indicators in certain circumstances might also provide insights into why professionals regard some categories or fraud types as more important than others and the role of materiality in this context. Furthermore, as the participant groups of this study could be seen as partly relying on each others’ work outcome as well as balancing control and simplicity, a study on the association and relevance of red flags in the corporate reporting process would extend this study. Overall, the apparent relevance and importance of fraud-related issues provide a fruitful avenue for future studies.