Auditing Section Research Summaries Space

A Database of Auditing Research - Building Bridges with Practice

This is a public Custom Hive  public

Posts

  • Jennifer M Mueller-Phillips
    Risk-Based Auditing, Strategic Prompts, and Auditor...
    research summary posted October 15, 2013 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 06.06 Earnings Management, 08.0 Auditing Procedures – Nature, Timing and Extent 
    Title:
    Risk-Based Auditing, Strategic Prompts, and Auditor Sensitivity to the Strategic Risk of Fraud
    Practical Implications:

    This study has implications for accounting firms as well as audit standard setters.  The results suggest that prompting auditors to consider how management might anticipate and exploit the auditor’s risk assessments and resource allocations may help decrease the number of undetected misstatements.  That is, prompting auditors to consider management’s strategic attempts to conceal fraud may direct the auditor’s attention to ostensibly low-risk accounts where fraud may have been intentionally concealed.  This research also suggests that improved audit effectiveness in terms of the increased detection of fraudulent reporting can be obtained without a corresponding loss in audit efficiency.

    For more information on this study, please contact Kendall Bowlin.
     

    Citation:

    Bowlin, K. 2011. Risk-Based Auditing, Strategic Prompts, and Auditor Sensitivity to the Strategic Risk of Fraud. The Accounting Review 86 (4): 1231-1253.

    Keywords:
    audit resource allocation; strategic reasoning; fraud risk; risk-based auditing; experimental economics.
    Purpose of the Study:

    Risk based auditing instructs the auditor to focus audit attention and resources on accounts that are deemed to be high-risk for a given audit engagement.  However, because fraud is strategic in nature and not random, management may intentionally target low-risk accounts for concealing fraudulent activity.  If auditors fail to consider the potential that management may intentionally target low-risk accounts for perpetrating fraud, the auditor may fail to detect the fraud due to a lack of audit procedures for the low-risk audit areas.
    This study uses an experiment to determine if:

    • Management is likely to act strategically by targeting low-risk accounts to conceal misstatements.
    • Auditors fail to detect misstatements in low-risk accounts because audit resources have been allocated to high-risk accounts.
    • If prompting auditors to consider management’s strategic concealment of fraud results in fewer undetected misstatements and changes in audit resource allocation.
       
    Design/Method/ Approach:

    132 accounting students enrolled in upper-division classes participated in a computer based simulation analogous to an audit engagement whereby students were paired such that one participant represented a manager and the other an auditor.  In the game, two buckets representing general ledger accounts were filled with 100 marbles (200 total) by a machine.  Participants were told that one of the buckets was susceptible to an odd-colored marble (representing a misstatement) being included by the machine during the filling process by chance.  The bucket with the chance misstatement occurrence represents a high-risk account existing during the audit process.  Additionally, the manager could override the machine filling either bucket to strategically and intentionally include an odd-colored marble in either of the buckets, representing fraud. 

    The auditor participant was provided a finite number of marbles they could pull from both buckets combined in search of the odd-colored (misstatement) marble.  This guessing distribution is analogous to the allocation of audit resources in an actual audit engagement.  One group of auditors had 101 guesses while another group of auditors could use up to 181 guesses.  After the manager had made their override decision and the auditor had made their resource allocation decisions, the computer informed the participants if a misstatement had been detected by the auditor. 

    In the game, the manager was rewarded for successfully having an undetected misstatement and auditors were penalized for failing to identify misstatements.  Additionally, auditors were incentivized to use few available resources when searching for misstatements.  Finally, some auditors were prompted to consider management’s strategic nature by reporting what they believed the manager assumed about the auditor’s resource allocation, and what the manager would likely do to in response to the anticipated allocation of audit resources.  The remaining auditors received no such prompt.
     

    Findings:
    • In the audit simulation game, managers anticipate that the auditor will allocate more resources to the high-risk account and override existing processes to intentionally include the misstatement in the low-risk account.
    • Auditors who were not prompted to consider how management might strategically anticipate the auditor’s resource allocation process used significantly fewer resources in searching for misstatements in the low risk account resulting in undetected misstatements.
    • Auditors who were prompted to state what they believed the manager assumed about the auditor’s resource allocation and what the manager would likely do to in response to the anticipated allocation of audit resources allocated more of their available, unused resources to the low-risk account but did not allocate more unused resources to the high-risk account.  This suggests that the prompt did not merely increase resource consumption in all audit areas, but only in the low-risk account.  This result held in both the low available resource group as well as the high available resource group.  The increased allocation of unused resources to the low-risk account resulted in fewer undetected misstatements.
       
    Category:
    Auditing Procedures - Nature - Timing and Extent, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Assessing Risk of Material Misstatement, Fraud Risk Assessment
  • Jennifer M Mueller-Phillips
    The construction of the risky individual and vigilant...
    research summary posted November 17, 2014 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 06.02 Fraud Risk Models 
    Title:
    The construction of the risky individual and vigilant organization: A genealogy of the fraud triangle
    Practical Implications:

    What appears as a technical and neutral device, that is to say the fraud triangle, actually promotes a vision of fraud anchored in both the individual and the organization, while downplaying the social, political and cultural explanations of fraud. At the end of the day, we are confronted with a series of representations, which lie at the heart of the professional work of a range of actors in the economy, that lead us to view fraud through the lens of individual transgressions being perpetrated while leaving the systemic and socio-political aspects of fraud unchallenged. Would fraud prevention gain in effectiveness if these neglected aspects were dealt with more explicitly? The paper provides reflexivity to practitioners that might help them understand and question the normative and moralizing assumptions that underlie the devices they use.

    For more information on this study, please contact Jérémy Morales.

    Citation:

    Morales, J., Gendron, Y. and H. Guénin-Paracini. 2014. The construction of the risky individual and vigilant organization: A genealogy of the fraud triangle. Accounting, Organizations and Society 39 (3): 170-194

    Keywords:
    Organizational fraud, Fraud triangle, Fraud Risk, ACFE (Association of Certified Fraud Examiners), Auditors, Morality.
    Purpose of the Study:

    This article aims to examine how a vision of organizational fraud has been constructed around a particular technology, the fraud triangle.

    The analysis focuses on the chain of translations surrounding the triangle, examining some of its antecedents (in criminology), its initial formulation (in the emerging fraud examination community), and how it extended its influence beyond that community while being reinterpreted in diverse ways (in auditing, risk management and corporate governance domains).

    Our primary interest is not how the fraud triangle is technically used to detect fraud, but how its conceptualization and the underlying constitution of a field of knowledge have been structured around specific angles. A key goal of the study is to trace the normative assumptions that underlie the association between fraud and morality. We show that these assumptions form the basis of a discourse, not only about fraud detection and deterrence but also about normality and deviance within organizations. 

    Design/Method/ Approach:

    Our genealogy of the fraud triangle is carried out through a documentation study. We especially analyzed:

    • A pivotal practitioner book, which articulates connections between the nascent field of fraud examination and the discipline of criminology: Occupational Fraud and Abuse, by Joseph Wells (1997).
    • A number of documents connected to the ACFE, including Albrecht and Albrecht’s book entitled Fraud Examination & Prevention (2004) whose first author was ACFE’s first president.
    • Books written by well-known criminologists, such as Sutherland and Cressey.
    • SAS99 and ISA240.
    • 64 papers published primarily in academic journals, but also in a professional and hybrid journals.
    • Key documents in the risk management, professionally-based literature, issued by major accounting organizations, such as the AICPA (American Institute of Certified Public Accountants), the CIMA (Chartered Institute of Management Accountants), the CAQ (Center for Audit Quality) and the Big Four audit firms.
    Findings:
    • Our analysis indicates that fraud triangle articulations privilege individualistic explanations of fraud to the detriment of sociological explanations that highlight fraud’s sociopolitical nature and locate its causes in institutional and historical arrangements. Instead, the fraud triangle focuses attention on the fragility of individual morality and establishes the organization’s duties in controlling “risky individuals.”
    • One of our main points is that the fraud triangle constitutes a rhetorical tool that professional associations have used to create and consolidate a field of knowledge and intervention around individual morality. Our analysis brings to the fore translations representing the fraud triangle as a credible technology that allows fraud specialists to speak authoritatively and intervene, in certain ways, in organizational fraud. In so doing, a certain discourse of normality gains legitimacy through the recruitment of allies around (and fabrication of) a concept that appears to be technical and descriptive, but contains a very specific vision of fraud.
    Category:
    Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Fraud Risk Assessment, Fraud Risk Models
  • The Auditing Section
    The Effect of Audit Inquiries on the Ability to Detect...
    research summary posted May 7, 2012 by The Auditing Section, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism 
    Title:
    The Effect of Audit Inquiries on the Ability to Detect Financial Misrepresentations
    Practical Implications:

    The results of this study show that inquiry, including repeating questions and providing deception training do not increase the accuracy of those observing interviews.  However, the participants were less likely to believe interviewees when they observed the open ended question inquiry than when they observed the yes/no questions only. Therefore, there is some evidence that by observing an inquiry, professional skepticism is increased.       

    The authors recognize that their results may not generalize to experienced auditors, who may have general or specialized knowledge and abilities that enable them to detect deception better than undergraduate accounting students and recommend further research on experienced auditors.  

    Citation:

    Lee, C. C. and Welker, R. B. 2007. The effect of audit inquiries on the ability to detect financial misrepresentations. Behavioral Research in Accounting 19 (1): 161-178.

    Keywords:
    fraudulent financial reporting, audit inquiry, deception detection, deception training
    Purpose of the Study:

    There has been a recent emphasis placed on inquiries for fraud risk assessments. The present study assesses how well deception can be detected during audit inquiries.  Due to the nature of an audit inquiry, the authors predict that the inquiries will create an environment where deception is more difficult to carry out and is therefore easier to catch. Using two experiments, the authors examine whether a student observing an interview (as opposed to performing the interview) is effective at detecting deception and whether training increases the ability to detect deception. 

    Design/Method/ Approach:

    The authors performed two experiments using undergraduate accounting students.  The experiment involved a simulated interview where an interviewer (former auditor and CPA) asked an interviewee (MBA student) questions and observers (accounting students) reviewed a video of the interviews and determined whether the interviewee was telling the truth or lying.  Observers were exposed to one of three sections of the interview: just the representations of the interviewee (just yes or no questions), the representations and the inquiry (yes/no and open ended questions), or the entire interview (including repeated questions). 

    A second experiment was conducted which was consistent with the first experiment. A new set of undergraduate accounting students were observers of the same interviews used in experiment one. However, half of the observers received training and half did not. 

    Findings:
    • Students are not any better at detecting deception by observing an interview than random chance.
    • Those who observed the inquiry (open ended questions) are no better at detecting deception than those who just observed the representations (yes/no questions).
    • Those who observed the entire interview with repeated questions are no better at detecting deception than those who observed the inquiry without repeated questions.
    • Those who received training were not any better at detecting deception than those who did not receive training.
    Category:
    Risk & Risk Management - Including Fraud Risk, Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Fraud Risk Assessment, Auditors’ Professional Skepticism
    Home:
    home button
  • Jennifer M Mueller-Phillips
    The Effect of the Strictness of Consultation Requirements on...
    research summary posted October 22, 2013 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 09.0 Auditor Judgment, 09.09 Impact of Consultation on Judgments 
    Title:
    The Effect of the Strictness of Consultation Requirements on Fraud Consultation
    Practical Implications:

    In cases where fraud risks are high or time pressures are severe, auditors are more likely to consult a fraud specialist regarding the presence of fraud indicators when the requirement to do so is mandatory and the advice received is binding.  The authors indicate that a strict requirement is more likely to cause auditor compliance with the policy than a more lenient policy that merely suggests consultation and where the advice from the specialist is nonbinding.  Additionally, the auditors’ perceptions of fraud risks increased when a more strict consultation policy was in place which may indicate that the mere presence of a strict policy increases assessed fraud risks.

    For more information on this study, please contact Anna Gold.
     

    Citation:

    Gold, A., W.R. Knechel, and P. Wallage. 2011.The Effect of the Strictness of Consultation Requirements on Fraud Consultation. The Accounting Review 87 (3): 925-949.

    Keywords:
    auditing standards; consultation requirement; consultation propensity; deadline pressure; fraud; fraud risk.
    Purpose of the Study:

    This study addresses how auditors comply with a standard or policy given varying engagement and client characteristics and the strictness of the policy in question.  Specifically, the authors conduct two experiments to determine:

    • The propensity of an auditor to consult a fraud specialist when fraud risks exist and there is either a strict policy in place or a more lenient policy in place.
    • The propensity of an auditor to consult a fraud specialist when significant time pressures exist and there is either a strict policy in place or a more lenient policy in place. 

    Under the strict consultation condition, if fraud indicators are present the auditor is required to consult the fraud specialist and the advice received must be obeyed.  Under the lenient consultation condition, if fraud indicators are present it is merely suggested that the auditor consult a specialist and the advice received is nonbinding.

    The first experiment examines the strictness of the consultation policy where fraud indicators are manipulated to either be present or absent, thus creating a high fraud risk and low fraud risk condition.  The second experiment examines the strictness of the consultation policy where the audit completion deadline is either several days or many months away, thus creating a high time pressure and low time pressure condition.

    Design/Method/ Approach:

    163 Dutch audit partners and managers from 3 of the Big 4 accounting firms participated in the study.  Subjects were randomly assigned to the two experiments and to the conditions in the experiments.  80 auditors participated in experiment 1 and 83 auditors participated in experiment 2.  The auditors were provided with a hypothetical audit engagement scenario based on their inclusion in one of the treatment conditions described above and were asked to assume the role of audit partner.  After reviewing their case materials auditors indicated their propensity to seek consultation from a fraud specialist.  Data were collected in 2007.

    Findings:
    • The strictness of the consultation policy is positively associated with auditors’ propensity to seek consultation, but only in instances where fraud risks are high.  That is, when fraud risks exist, a strict, binding policy about consultation with a fraud specialist is more likely to result in an auditor consulting a specialist than if the consultation is merely suggested and the advice received is not binding.  The authors indicate that the managers used in this experiment may primarily be driving this finding, noting that the managers were more likely to seek consultation when fraud risks were high.
    • Deadline pressure is positively related to an auditor’s propensity to seek consultation when the consultation policy is strict but only moderately so.  That is, the auditor’s likelihood of consulting a fraud specialist under a strict consultation policy is only marginally greater when deadline pressure is strong as opposed to weak.
    • Auditors expressed an increased assessment of perceived fraud risk under the strict consultation policy compared to the more lenient policy.  This may indicate that the mere presence of a strict policy about consulting a fraud specialist causes auditors’ fraud risk assessments to go up.
       
    Category:
    Auditor Judgment, Risk & Risk Management - Including Fraud Risk, Standard Setting
    Sub-category:
    Fraud Risk Assessment, Impact of Consultation on Judgments
  • The Auditing Section
    The Influence of Documentation Specificity and on...
    research summary posted May 7, 2012 by The Auditing Section, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 06.08 SAS No. 99 Brainstorming – effectiveness, 09.0 Auditor Judgment, 09.02 Documentation Specificity 
    Title:
    The Influence of Documentation Specificity and on Auditors’ Fraud risk Assessments and Evidence Evaluation Decisions
    Practical Implications:

    This study provides important insights into the fraud assessment process. The most common method of risk assessment is to create summary fraud risk memos. However, the PCAOB recommends that auditors make documentation more specific in their assessments of fraud risk. This study suggests that when auditors receive specific documentation of fraud risks, alone, their fraud related judgments improve. However, the study provides evidence that when a more specific fraud risk memo is prepared and auditors are also reminded about the possibility of fraud (i.e., primed) that assessments of fraud actually decline. This is a significant finding considering that it is common in practice for auditors to be reminded about the possibilities of fraud, as a way to increase auditors’ awareness of fraud risk.

    Citation:

    Hammersley, J.S., E.M. Bamber, and T.D. Carpenter. 2010.  The influence of documentation specificity and priming on auditors’ fraud risk assessments and evidence evaluation decisions.  The Accounting Review 85 (2): 547-571.

    Keywords:
    audit documentation; evidence evaluation; fraud risk; priming; Support Theory; auditor judgment
    Purpose of the Study:

    The authors investigate the effect of fraud planning discussions on subsequent fraud risk assessments, issue identification, and collection of additional evidence.  The PCAOB has expressed concern that auditors have a mindset that is too compliance-oriented and insufficiently fraud-oriented, especially during the evidence evaluation stage of an audit.  One suggested method of increasing fraud awareness is to increase documentation around fraud risks in the planning stage of the audit.  This study seeks to increase  nderstanding about the impact of increased fraud awareness in the planning of an audit.  Specifically, this study addresses the following questions:

    • How does the level of specificity of the documentation of the fraud-related discussion prepared in the audit planning stage influence initial fraud risk assessments and subsequent evidence  evaluation?
    • How does reminding an auditor of previously identified fraud risks impact his/her fraud mindset and influence subsequent judgments?

    Much of the research is based on Support Theory, which predicts that a person will evaluate the likelihood of an event by evaluating the support for the underlying components of the events rather than assessing the probability of the event itself.

    Design/Method/ Approach:

    Audit seniors participated in this experiment.  The experiment took place prior to 2008 and was completed over two sessions.  During the first session, participants: read a case with key information regarding a client; listed 3 risks that would be raised at a fraud brainstorming session; watched a short video of the brainstorming session; read a briefing memo that outlined the planning decisions; and assessed preliminary client business risk.

    In the second session, participants: received a summary of findings from completed audit work; listed important fraud risks (in one condition); reviewed and evaluated summary workpapers; and assessed final client business risk. 

    Findings:
    • Auditors who reviewed memos that listed specific fraud risks, initially assessed fraud higher than those that reviewed summary fraud risk memos.
    • Documenting specific risks in the planning stage fraud-risk memo causes auditors to assess fraud risk higher even after evidence evaluation.
    • Auditors who review summary memos, assess fraud risk higher if they are reminded about the possibilities of fraud (i.e., primed), compared to if they are not reminded (i.e., unprimed).  Auditors who review specific memos, assess fraud risk higher if they are not reminded about the possibilities of fraud, compared to if they are reminded.
    • Auditors not reminded about the possibilities of fraud and provided a specific memo will identify more issues than those provided a summary memo. However, there is no difference in the amount of additional evidence each group requests.
    • When provided a summary memo, auditors reminded about the possibilities of fraud identify more issues and request more evidence than auditors not reminded.
    • When provided a specific memo, auditors reminded about the possibilities of fraud identify fewer issues and request less evidence than auditors who are provided the summary memo and are not reminded.
    Category:
    Risk & Risk Management - Including Fraud Risk, Auditor Judgment
    Sub-category:
    Fraud Risk Assessment, SAS No. 99 Brainstorming – effectiveness, Documentation Specificity
    Home:
    home button
  • Jennifer M Mueller-Phillips
    Triangulation of audit evidence in fraud risk assessments
    research summary posted June 21, 2013 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 09.0 Auditor Judgment, 09.03 Adequacy of Evidence, 11.0 Audit Quality and Quality Control, 11.09 Evaluation of Evidence 
    Title:
    Triangulation of audit evidence in fraud risk assessments
    Practical Implications:

    Given the level of regulatory scrutiny surrounding auditor judgment and skepticism of audit evidence, the results indicate that when assessing the risk of fraud, there is a lack of reliance on third party evidence, particularly when management provides a compelling story with its internal evidence.  The results of this study are important in enhancing awareness for auditors to use and corroborate both internal and external audit evidence for purposes of assessing and supporting the level of risk of the audit client.  In addition, in a broader context, the same could be said regarding the evaluation of evidence for purposes of procedures throughout the various stages of the audit process.

    Citation:

    Trotman, K.T., and W.F. Wright. 2012. Triangulation of audit evidence in fraud risk assessments. Accounting, Organization and Society 37: 41-53. 

    Keywords:
    Audit evidence, audit risk assessment, auditor judgment, adequacy of evidence, fraud risk
    Purpose of the Study:

    This study evaluates the impact that audit evidence has on an auditor’s fraud risk assessment using an evidence framework developed by Bell et al. (2005) called evidentiary triangulation.  The evidentiary triangulation framework is a way for auditors to evaluate complementary types of audit evidence and use the evidence to update any risk assessments.  Looking at how auditors use this notion of evidentiary triangulation is a key element in enabling audit quality improvement.

    The authors consider the following types of evidence within the study: evidence from management-controlled financial statement processes, evidence from management-controlled internal business processes, and evidence from third party external sources.   The use of evidence from a third-party external source is a key element in evaluating the concept of evidentiary triangulation with respect to fraud since it is not easily manipulated.     Using the framework, the authors specifically evaluate how auditors respond to different types of evidence when making fraud related judgments.  The authors test to determine if there are conditions that may exist whereby an auditor will alter their fraud risk assessment based on third party external evidence particularly when it contradicts the management-controlled evidence received by auditors. 

    Design/Method/ Approach:

    The authors perform a simulated case during a Big 4 audit firm’s training session with 102 participants with an average experience of approximately three years.   The authors perform a 2x2x2 subject design whereby evidence from a management-controlled financial statement process, a management-controlled internal business process, and an external source were manipulated to reflect either higher or lower fraud risk.  The dependent variable is the probability of a seeded fraud related to a higher than expected revenue from sales.  Using two different fraud concealment strategies (one where management provides a fraudulent explanation that is highly compatible to the business strategy and one that is not), the authors manipulate the management-controlled business evidence.  The participants are then asked to evaluate various pieces of information that are indicative of each of the manipulated concealment strategies and also external evidence from a customer that corroborates (or refutes) the information provided by management. 

    Findings:

    When evidence from the management-controlled financial statement process and management-controlled internal business evidence are inconsistent, auditors are more likely to request third party external evidence to corroborate management’s explanation.  The experiment shows that auditors will assess a higher risk of fraud when the third party external evidence contradicts the business objective that was provided by management only when there is conflicting internal evidence obtained from the management-controlled financial statement process and a management-controlled internal business process.  If the third party external evidence is consistent with management’s “story” (even though the “story” may be inconsistent with the internal evidence), the results indicate that it is less probable that auditors will assess a higher risk of fraud.

    Auditors do not rely on the third party external evidence when, on its own, both forms of the internal management-controlled evidence is deemed to be low fraud risk.  The results of the experiment indicate that auditors do not use the third party external evidence as a way to corroborate management’s internal evidence when management’s evidence seems trustworthy.

    Category:
    Risk & Risk Management - Including Fraud Risk, Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Fraud Risk Assessment, Adequacy of Evidence, Evaluation of Evidence
    Home:

    home button

  • Jennifer M Mueller-Phillips
    Under Which Conditions are Whistleblowing “Best P...
    research summary posted December 1, 2014 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 14.0 Corporate Matters, 14.02 Corporate Whistle Blowers 
    Title:
    Under Which Conditions are Whistleblowing “Best Practices” Best?
    Practical Implications:

    The authors’ results suggest that an external reporting channel may overcome an organization’s history of poor responsiveness to whistleblowing as well as decrease the reticence of less proactive individuals to report.  The external anonymous channel thus achieves higher reporting intentions in instances of perceived past negative outcomes of a non-anonymous internal channel and among individuals who by personal trait are less likely to report. Although, the study does not address the likely incremental costs of an external channel, its results suggest no advantage to incurring such additional costs when employees perceive a situation with past positive outcomes.

    For more information on this study, please contact Jian Zhang.

    Citation:

    Zhang, J., K. Pany and P. M. J. Reckers.  2013. Under which conditions are whistleblowing “best practices” best? Auditing: A Journal of Practice and Theory 32(3): 171-181.

    Keywords:
    fraudulent financial reporting; anonymous reporting channel; proactivity; whistleblowing.
    Purpose of the Study:

    Public companies are required by the Sarbanes-Oxley Act of 2002 to establish an anonymous reporting (whistleblowing) channel for employee reporting of questionable accounting practices.  Corporate audit committees are provided flexibility in implementing this requirement and a controversial choice is the type of reporting channel.  The purpose of the study is to examine the efficacy of externally administered versus internally administered channels.

    Use of an externally administered hotline generally has been considered a “best hotline practice” in that it is likely to lessen the reporter’s hesitation to become involved. That is, arguably, an externally administered hotline is perceived to provide a heightened likelihood of action and favorable outcome, including a reduced likelihood of whistleblower detection through greater confidentiality. This is consistent with tenants of the theory of planned behavior.  Nonetheless, this topic is controversial because such externally administered hotlines are not cost free and because some suggest that there may be a general hesitancy on the part of some individuals to report externally. 

    Design/Method/ Approach:

    The study’s participants, 130 MBA students with an average of nine years work experience, responded to differing forms of a research instrument which systematically manipulates the administrator of an anonymous reporting channel (internal vs. external), and the company’s previous whistleblowing outcomes (positive or negative to the previous non-anonymous whistleblower). The research instrument describes a current fraudulent act that violates GAAP revenue recognition principles and asks respondents about the likelihood that they would report the act.

    Findings:
    • The authors find that the preference for external whistleblowing channels may be conditional upon the perceived lack of past success of internal channels to produce good outcomes and an employee overall proactivity characteristic.
    • The authors find that the external anonymous channel achieves higher reporting intentions in instances of perceived past negative outcomes of a non-anonymous internal channel, but not when past outcomes had been positive to a whistleblower.
    • The authors find that highly proactive participants (as measured by a frequently used scale) were not influenced by the reporting channel, whereas less proactive participants reported a greater likelihood of reporting to an externally administered hotline.
    Category:
    Corporate Matters, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Corporate Whistle Blowers, Fraud Risk Assessment

Filter by Type

Filter by Tag