Fraud Risk and Audit Quality: The Case of Us Public Firms

Abstract

The study raises questions about the fraud detection technique and the relevance of audit quality to mitigate fraud. The paper suggests a more comprehensive proxy for fraud risk that relies on the combination of Z-score and Beneish M-score. Basing on Logit, regressions are applied to a sample of 5,613 US-listed public firms. The study reveals that the existence of an internal auditor and independent members within the audit committee would potentially reduce the fraud risk. Hiring a Big external auditor and paying it high fees is also helpful. Findings show that, unlike the firm leverage, both firm profitability and growth opportunities have a negative effect of on fraud risk. Leverage provides a motivation for fraudulent financial reporting. It is important to note that this research underscores the audit’s monitoring role to mitigate fraud. Also, the adopted model helps regulators, bankers, managers and auditors to detect fraud at an early stage. So needed action can be taken at suitable time. Finally, in this study, we focus on financially distressed companies rather than those with financial restatements. We suggest a collective tool to predict fraud risk; which is expected to offer a more reliable proxy for fraud risk than do binary models.

Mendeteksi Faktor-faktor Pressure Terhadap Kecurangan Laporan Keuangan Menggunakan Artificial Neural Network

“…Tingkat leverage yang tinggi dapat menyebabkan tekanan keuangan yang lebih besar pada perusahaan dalam mencari sumber dana tambahan untuk membayar hutang (Eriyanti et al, 2022). Perusahaan mungkin berusaha untuk menyembunyikan hutang untuk memberikan kesan bahwa risiko hutang lebih rendah daripada seharusnya (Chaari et al, 2022;Saleh et al, 2021).…”

Audit quality and accrual quality: Evidence from Saudi -listed firms

“…With regards to the influence of audit quality on fraud risk, Chaari et al (2022) investigate the effect of audit quality measured by audit fees on reducing fraud risk. After regressing a sample of 5,613 US-listed public firms, they find that firms with higher audit quality have less fraud occurrences.…”

Examination of Ethical and Professional Conduct of Lebanese External Auditors

“…The agency relationship between the shareholders and managers uncovers some major problems, such as information asymmetry and conflict of interest (Diallo & Diop, 2020), which in turn lead to opportunistic behavior on the part of manager by manipulating the information under his or her management. Thus, shareholders appoint external auditors to verify the good behavior of managers (Chaari, Belanès & Lajmi, 2022) and to reassure stakeholders of the proper application of standards and the reliability of financial statements (Chaudey, 2014). Consequently, the employment of an external auditor is not entirely; sufficient; they must also high level of integrity, independence and professional conduct.…”

“…Furthermore, the affiliation of the external auditor to an international network reflects a respect both for the code of professional conduct and for the quality of the audit. A debt of gratitude is owed to the expertise, knowledge and training that only great auditors can afford (Chaari, Belanès & Lajmi, 2022).…”

“…Following the accelerated evolution of investments and financial globalization, over the years, the external audit profession underwent a wide expansion that was related to the necessity for making more reliable financial metrics available to those who need to obtain such information (Chaari, Belanès & Lajmi, 2022). This profession has thus become a social control mechanism and a widely used management tool in order to eliminate the mistrust of agents.…”