Auditing Section Research Summaries Space

A Database of Auditing Research - Building Bridges with Practice

This is a public Custom Hive  public

research summary

    CFO Intentions of Fraudulent Financial Reporting
    research summary posted April 13, 2012 by The Auditing Section, last edited May 25, 2012, tagged 02.02 Client Risk Assessment, 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 06.04 Management Integrity 
    CFO Intentions of Fraudulent Financial Reporting
    Practical Implications:

    The results of this study call into question the legitimacy of compensation structure as a red flag for fraud risk and introduce company size as a new (and easily assessed) indicator of financial statement fraud. CFO attitude emerged as the most influential factor in the formation of intentions to misreport. This indicates that it is important that auditors attempt to assess client management’s attitude toward fraudulent financial reporting. Although directly assessing management’s attitude may not be possible, auditors can subjectively assess management attitude based on ongoing personal interactions with the client. More formal audit decision aids to assess management attitudes toward fraudulent financial reporting might also be valuable for successfully detecting fraud.


    Gillett, P.R. and N. Uddin. 2005. CFO Intentions of Fraudulent Financial Reporting. Auditing: A Journal of Practice and Theory 24 (1): 55-75.

    Financial statement fraud, reasoned action model, company size, compensation
    Purpose of the Study:

    Many studies have examined whether the fraud risk factors or “red flags” listed in Statement on Auditing Standards (SAS) No. 99 are effective for predicting fraud. However, one limitation of this prior work is that it examines whether red flags were present after a fraud has already occurred. To address this limitation, this study identifies factors which influence the intentions of CFOs to report fraudulently and examines the predictive value of those factors. Thus, a CFO who expresses an intention to misreport will be more likely to actually do so. The following four factors are investigated to determine their respective influence on CFO intentions to fraudulently misreport: 

    •  Attitude: This refers to the CFO’s attitude toward fraudulent financial reporting. An attitude toward a behavior is formed based on the expected positive and negative consequences of the action. For example, if fraudulently overstating revenue will result in a management bonus, then the CFO’s attitude toward overstating revenue might be more positive.
    •  Subjective Norms: This refers to the CFO’s perception of the expectations of specific referents (e.g., coworkers, family, and friends) and the motivation to comply with those expectations. For example, a CFO who perceives that his/her coworkers, family and friends approve of fraudulent financial reporting will be more likely to misreport, especially if the CFO tends to comply with others’ expectations.
    •  Compensation Structure: When the compensation structure is highly contingent upon company performance, it is expected that managers are more likely to participate in fraudulent financial reporting. SAS No. 99 considers earnings-based compensation to be an incentive for fraud.
    •  Company Size: There is mixed evidence about the effect of company size on unethical or illegal activity. Therefore, the authors investigate whether company size influences CFO intentions of fraudulent financial reporting.
    Design/Method/ Approach:

    The authors collected their evidence by mailing surveys to the CFOs of domestic firms selected from the Compact Disclosure database as of July 1998. CFOs were provided with a fraud scenario, followed by questions measuring their intention to fraudulently misreport. The CFOs also answered questions measuring their attitude toward misreporting, subjective norms, their personal compensation structure, and the size of the firm for which they currently work. Once this data was collected, the authors used structural equation modeling (SEM) to determine the factors that influence CFO intentions of fraudulent financial reporting.

    • The authors find that a CFO’s attitude toward fraudulent financial reporting has the strongest influence on their intention to misreport. CFO attitudes toward fraudulent financial reporting appear to be driven primarily by the negative consequences expected if they misreport.
    • The authors find that larger firms are more likely to participate in fraudulent financial reporting.
    • Compensation structure and subjective norms did not influence CFO intentions to misreport in the manner expected by the authors. The finding that CFOs’ compensation structure does not influence intentions to misreport runs counter to SAS No. 99, which contends that earnings-based management compensation is a fraud red flag.
    Risk & Risk Management - Including Fraud Risk
    Fraud Risk Assessment, Management Integrity
    home button