To facilitate the development of auditing and other professional standards and to inform regulators of insights from the academic literature, the Auditing Section of the AAA decided to develop a series of literature syntheses for the Public Company Accounting Oversight Board (PCAOB). This paper is authored by one of the research synthesis teams formed by the Auditing Section under this program.  The literature review is organized around a model that considers fraud from the perspective of the auditor. The model incorporates the fraud triangle, which auditors include in their assessment of the likelihood of fraudulent financial reporting. In addition, we examine auditors’ processes of assessing the existence and effectiveness of the client’s anti-fraud measures including corporate governance mechanisms and internal controls, and their consideration of possible fraud schemes and concealment techniques. This synthesis should be relevant to regulators, practitioners, and academics.

Trompeter, G., T. Carpenter, N. Desai, K. Jones, and R. Riley. 2013. A Synthesis of Fraud-Related Research. Auditing: A Journal of Practice & Theory 32 (Supplement 1): 287-321.

This paper was prepared as a part of the series of literature syntheses sponsored by the Auditing Section of the American Accounting Association (AAA). As such, this paper integrates and discusses implications of academic research on fraudulent financial reporting, particularly as it applies to the audit. We synthesize academic literature related to fraudulent financial reporting with dual purposes: (1) to better understand the nature and extent of the existing literature on financial reporting fraud, and (2) to highlight areas where there is a need for future research. We examine accounting and auditing research as well as related disciplines including criminology, ethics, finance, organizational behavior, psychology and sociology. We synthesize the research around a model that illustrates the auditors’ approach to fraud. The model incorporates auditors’ use of the fraud triangle (i.e., management’s incentive, attitude, and opportunity to commit fraud), their assessment of the existence and effectiveness of the client’s anti-fraud measures (e.g., corporate governance mechanisms and internal controls), and their consideration of possible fraud schemes and concealment techniques when making an overall fraud risk assessment of the client. The model further illustrates how auditors can incorporate this assessment into an overall strategy to detect fraud by implementing appropriate fraud-detection procedures. We summarize the recent literature of each component and suggest avenues for future research.

We organize our literature review around an expanded fraud model that considers fraud from the perspective of the auditor. We review accounting and auditing literature related to fraud as well as approximately 60 journals from various fields including criminology, ethics, finance, organizational behavior, psychology, and sociology. Our purpose is to broaden our perspective of fraud and to gain insights from other disciplines about the dynamics of fraud that may be useful to auditors, standard setters, and academics.

• The PCAOB finds that auditors have difficulty responding when fraud risk is high. Whether auditors simply fail to respond with appropriate fraud-related audit techniques or whether auditors do not know how to respond with appropriate testing is an important area for future research.
• Little research has been done in identifying fraud examination tools and techniques that can be used by auditors to detect fraud once initial red flags are identified. Future research is important in this area.
• Existing research has established the relationship between incentives and earnings management and fraud. Future research could address the extent to which, and the conditions under which, incentives might result in earnings management through aggressive accruals, biases in fair value estimates, and structured transactions.
• There has been a great deal of literature focused on various aspects of the fraud triangle. However, there is still interest in learning more about the factors that affect the likelihood that an individual will engage in fraud. The fraudster’s assessment of anti-fraud measures, particularly controls, with respect to the probability (perception) of detection is also important.

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