Internal Controls and the Detection of Management Fraud

Caplan, Dennis

doi:10.2307/2491398

Cited by 70 publications

(39 citation statements)

References 2 publications

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“…82: Consideration of Fraud in a Financial Statement Audit. This Standard requires auditors to assess the risk of fraud on each audit and encourages auditors to consider both the internal control system and management's attitude towards controls, when making this assessment (Caplan, 1999). This SAS No.…”

Section: Previous Research Background Literaturementioning

confidence: 99%

Detecting falsified financial statements: a comparative study using multicriteria analysis and multivariate statistical techniques

Spathis

Doumpos

Zopounidis

2002

European Accounting Review

179

133

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Falsifying financial statements involves the manipulation of financial accounts by overstating assets, sales and profit, or understating liabilities, expenses or losses. This paper explores the effectiveness of an innovative classification methodology in detecting firms that issue falsified financial statements (FFS) and the identification of the factors associated to FFS. The methodology is based on the concepts of multicriteria decision aid (MCDA) and the application of the UTADIS classification method (UTilités Additives DIScriminantes). A sample of 76 Greek firms (38 with FFS and 38 non-FFS) described over ten financial ratios is used for detecting factors associated with FFS. A jackknife procedure approach is employed for model validation and comparison with multivariate statistical techniques, namely discriminant and logit analysis. The results indicate that the proposed MCDA methodology outperforms traditional statistical techniques which are widely used for FFS detection purposes. Furthermore, the results indicate that the investigation of financial information can be helpful towards the identification of FFS and highlight the importance of financial ratios such as the total debt to total assets ratio, the inventories to sales ratio, the net profit to sales ratio and the sales to total assets ratio.

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Section: Previous Research Background Literaturementioning

confidence: 99%

Detecting falsified financial statements: a comparative study using multicriteria analysis and multivariate statistical techniques

Spathis

Doumpos

Zopounidis

2002

European Accounting Review

179

133

View full text Add to dashboard Cite

show abstract

“…Few papers in strategic auditing have examined allocations of audit work across time. Exceptions are Caplan 1999, Finn and Penno 1996, and Matsumura and Tucker 1992. Caplan examines a multistage audit setting in which the manager has a two-stage decision, but the audit work is essentially a one-stage problem.…”

Section: Introductionmentioning

confidence: 99%

The Interaction between Internal Control Assessment and Substantive Testing in Audits for Fraud*

Smith

Tiras

Vichitlekarn³

2000

Contemporary Accting Res

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We examine the interaction between internal control assessments and substantive testing in a model of fraud detection. The purpose of our study is to examine a two‐stage model of the auditor‐manager interaction in which the auditor assesses the “likelihood” or possibility of fraud in the first stage and conducts substantive tests in the second stage. We examine the allocation of audit resources across these two distinct facets of the audit. We find that, regardless of the auditor's allocation, the probability of undetected fraud remains the same, but the allocation of some audit resources to internal control assessment may provide cost savings for the auditor.

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“…Specifically, the compensation system can solve the moral hazard problem, but to induce truthful reporting, the principal must rely on the financial reporting system and controls. Caplan (1999) finds that managers with a propensity to misreport prefer a weak control system. However, third parties could potentially be less inclined to search for fraud given a weak control system because the third party will likely associate a "bad" outcome with an error instead of fraud.…”

Section: Literature On Monitoringmentioning

confidence: 99%

When the Cat's (Far) Away: The Effect of Control Centralization and Compensation Interdependence on Performance Misreporting

Lill

2015

SSRN Journal

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This study investigates how control features influence employees' perceptions of controls and, subsequently, their reporting behaviors. I examine whether implementing a more centralized versus decentralized monitoring control influences employees' perceptions of whether the control will detect misreporting. In an experiment that holds the true detection rate constant, Ifind that participants perceive a relatively decentralized control as more likely to detect misreporting than a centralized control. Because decisions about monitoring controls and compensation systems are interrelated (O'Donnell 2000) and made contemporaneously (Brenner and Ambos 2013), I also examine whether compensation interdependence influences the effect that control centralization has on misreporting. Prior research shows that compensation interdependence leads to more aggressive reporting behavior (Sutter 2009). This aggressive reporting behavior is likely to reduce sensitivity to differences in subjective assessment of a control's detection likelihood resulting from control centralization. Consistent with this reasoning, I find that the difference in the extent of performance misreporting between a centralized and decentralized control is greater when compensation interdependence is low than when compensation interdependence is high. This study contributes to the accounting literature by defining control centralization and providing the first academic research on a consequence of control centralization. Moreover, this study provides theory and evidence of the joint influence of control centralization and compensation interdependence on misreporting, and it provides evidence that control design choices can influence employees' perceptions of control effectiveness.ii ACKNOWLEDGEMENTS

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Internal Controls and the Detection of Management Fraud

Cited by 70 publications

References 2 publications

Detecting falsified financial statements: a comparative study using multicriteria analysis and multivariate statistical techniques

Detecting falsified financial statements: a comparative study using multicriteria analysis and multivariate statistical techniques

The Interaction between Internal Control Assessment and Substantive Testing in Audits for Fraud*

When the Cat's (Far) Away: The Effect of Control Centralization and Compensation Interdependence on Performance Misreporting

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