Audit management, need for closure and detection of misstatements

2019 ◽  
Vol 9 (2) ◽  
pp. 237-250
Author(s):  
Mojtaba Safipour Afshar ◽  
Omid Pourheidari ◽  
Bakr Al-Gamrh ◽  
Asghar Afshar Jahanshahi
Keyword(s):  
Financial Statements ◽  
Mediating Effect ◽  
Financial Statement ◽  
Need For Closure ◽  
Certified Public Accountants ◽  
Cognitive Closure ◽  
Content Type ◽  
Need For Cognitive Closure ◽  
Audit Firms ◽  
Audit Management

Purpose The purpose of this paper is to study whether diverting auditors to erroneous accounts leads to higher effectiveness and detection of errors. Also, this paper investigates the effect of the need for cognitive closure of auditors on audit effectiveness and detection of errors in the presence of audit management. Design/methodology/approach The authors used a financial statement containing a diverting statement and several errors for measuring audit management and used a survey to measure auditors’ need for closure. Research sample consisted of 79 independent auditors having above three years of audit experience. The set of financial statement and questionnaire (measuring the need for closure of auditors) was given to auditors and they had enough time to fill them. Findings Results show that diverting auditors to accounts containing error does not lead to higher effectiveness and detection of errors. Also, auditors need for closure character does not affect their effectiveness and detection of errors in the financial statements. Practical implications Diverting auditors to erroneous accounts leads to higher detection of earning management. With this regard, the results increase the awareness of auditors that diverting auditors away from important errors to easy-to-detect erroneous accounts leads to their belief of achieving the audit objectives by detecting phony errors and misstatements. In other words, the results alert auditors of managers’ techniques of audit management. Originality/value This study contributes to the literature on audit management and need for cognitive closure of auditors in Iran’s audit environment and introduces these concepts to this environment. The paper will be of value to Association of Iranian Certified Public accountants to include stricter measure in appraisal of audit firms’ quality and educate its participants about audit management and mediating effect of the need for closure of auditors on the detection of errors and misstatements in financial statements.

scholarly journals Handling conflict at work

2015 ◽  
Vol 26 (1) ◽  
pp. 25-43 ◽  
Author(s):  
Jocelyn J Bélanger ◽  
Antonio Pierro ◽  
Barbara Barbieri ◽  
Nicola A De Carlo ◽  
Alessandra Falco ◽  
...  
Keyword(s):  
Conflict Management ◽  
Soft Power ◽  
Design Methodology ◽  
Management Strategies ◽  
Need For Closure ◽  
Organizational Setting ◽  
Cognitive Closure ◽  
Content Type ◽  
Constructive Solution ◽  
Need For Cognitive Closure

Purpose – This research aims to explore the notion of fit between subordinates’ need for cognitive closure and supervisors’ power tactics on organizational conflict management. Design/methodology/approach – Two-hundred and ninety employees drawn from six different Italian organizations were recruited for the purpose of this study. Findings – Results indicated that high-need-for-closure subordinates utilized more constructive (solution-oriented) conflict management strategies when their supervisors relied on harsh power tactics, whereas low-need-for-closure subordinates were more inclined to use solution-oriented conflict management strategies when their supervisors relied on soft power tactics. Additionally, results indicated that, overall, supervisors’ use of harsh power tactics increased subordinates reliance on maladapted (control-oriented) conflict management strategies, but even more so for subordinates with low need for cognitive closure. Originality/value – This study highlights the importance of supervisor–subordinate fit to understand conflict management in organizational setting.

Performance measurement and management for manufacturing SMEs: a financial statement-based system

2017 ◽  
Vol 21 (1) ◽  
pp. 17-36 ◽  
Author(s):  
Moujib Bahri ◽  
Josée St-Pierre ◽  
Ouafa Sakka
Keyword(s):  
Performance Measurement ◽  
Low Cost ◽  
Secondary Data ◽  
Specific Area ◽  
Financial Statements ◽  
Financial Statement ◽  
Business Practices ◽  
Content Type ◽  
Overall Performance ◽  
Probabilistic Sample

Purpose The purpose of this paper is to propose a performance measurement and management system (PMMS) for small- and medium-sized enterprises (SMEs) based on an analysis of the connections between the firm’s business practices and financial results as reported in the financial statements. Design/methodology/approach Secondary data on the business practices and financial statements of 108 Canadian manufacturing SMEs were taken from a private database. Items from financial statements were used to measure the firm’s performance in specific areas such as sales and current assets management, while net profit was used to measure the overall performance. Information about the level of adoption of more than 120 business practices by the sampled firms was also used. Step-wise regression was then performed for two consecutive years to identify the business practices that had significantly influenced the items in the financial statements. Findings The findings show that an understanding of the business practice/financial statement connection can be useful in managing SME performance. The regression analyses provide rich and interesting results. They indicate that some practices influence performance quickly, while others have a deferred effect. In addition, some practices have impacts that are significant in specific areas of the organization but insignificant in terms of overall performance, while others affect the firm’s overall performance but not the specific area they are intended to improve. Research limitations/implications The main limitation of the study is the non-probabilistic sample. However, the sampled SMEs vary widely in their characteristics, which should partially mitigate the negative impacts of a non-probabilistic sample. Practical implications The paper offers a useful and low-cost PMMS for SMEs, using information that is easily available to owner-managers. It shows that SME performance can be managed using a simple system built around the firm’s financial statements. Originality/value The study is one of the first to empirically test the connection between an extensive list of SME business practices and the financial results presented in the firms’ financial statements.

scholarly journals Financial statement analysis

2019 ◽  
Vol 4 (2) ◽  
pp. 233-245
Author(s):  
Reginald Masimba Mbona ◽  
Kong Yusheng
Keyword(s):  
Financial Performance ◽  
Financial Reporting ◽  
Principal Component ◽  
Financial Statements ◽  
Financial Statement ◽  
Content Type ◽  
Know How ◽  
China Telecom ◽  
To Come ◽  
China Unicom

Purpose The Chinese Telecoms Industry has been rapidly growing over the years since 2001. An analysis of financial performance of the three giants in this industry is very important. However, it is difficult to know how many ratios can be used best with little information loss. The paper aims to discuss this issue. Design/methodology/approach A total of 18 financial ratios were calculated based on the financial statements for three companies, namely, China Mobile, China Unicom and China Telecom for a period of 17 years. A principal component analysis was run to come up with variables with significance value above 0.5 from each component. Findings At the end, the authors conclude how financial performance can be analysed using 12 ratios instead of the costly analysis of too many ratios that may be complex to interpret. The results also showed that ratios are all related as they come from the same statements, hence, the authors can use a few to represent the rest with limited loss of information. Originality/value This study will help different stakeholders who are interested in the financial performance of each company by giving them a shorter way to analyse performance. It will also assist those who do financial reporting on picking the ratios which matter in reflecting the performance of their companies. The use of PCA gives unbiased ratios that are most significant in assessing performance.

Fintech in financial reporting and audit for fraud prevention and safeguarding equity investments

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Paulina Roszkowska
Keyword(s):  
Financial Reporting ◽  
Financial Statements ◽  
Financial Statement ◽  
Financial Fraud ◽  
Financial Statement Fraud ◽  
Content Type ◽  
Financial Scandals ◽  
External Auditor ◽  
Equity Investments

Purpose The purpose of this paper is to explore the audit-related causes of financial scandals and advice on how emerging technologies can provide solutions thereto. Specifically, this study seeks to look at the facilitators of financial statement fraud and explain specific fintech advancements that contribute to financial information reliability for equity investments. Design/methodology/approach The study uses the case studies of Enron and Arthur Andersen to document the evidence of audit-related issues in historical financial scandals. Then, a comprehensive and interdisciplinary literature review at the intersection of business, accounting and engineering, provides a foundation to propose technology advancements that can solve identified problems in accounting and auditing. Findings The findings show that blockchain, internet of things, smart contracts and artificial intelligence solutions have different functionality and can effectively solve various financial reporting and audit-related problems. Jointly, they have a strong potential to enhance the reliability of the information in financial statements and generally change how companies operate. Practical implications The proposed and explained technology advancements should be of interest to all publicly listed companies and investors, as they can help safeguard equity investments, thus build investors’ trust towards the company. Social implications Aside from implications for capital markets participants, the study findings can materially benefit various stakeholder groups, the broader company environment and the economy. Originality/value This is the first paper that seeks solutions to financial fraud and audit-related financial scandals in technology and not in implementing yet another regulation. Given the recent technology advancements, the study findings provide insights into how the role of an external auditor might evolve in the future.

Auditors’ response to readability of financial statement notes

2020 ◽  
Vol 28 (3) ◽  
pp. 463-480
Author(s):  
Mahdi Salehi ◽  
Mahmoud Lari Dasht Bayaz ◽  
Shaban Mohammadi ◽  
Mohammad Seddigh Adibian ◽  
Seyed Hamed Fahimifard
Keyword(s):  
Stock Exchange ◽  
Financial Statements ◽  
Audit Fees ◽  
Financial Statement ◽  
Audit Report ◽  
Financial Reports ◽  
Statistical Population ◽  
Content Type ◽  
Listed Firms ◽  
Going Concern Opinion

PurposeThe main objective of the present study is to assess the potential impact of readability of financial statement notes on the auditor's report lag, audit fees and going concern opinion (GCO).Design/methodology/approachThe statistical population of this study includes all listed firms on the Tehran Stock Exchange (TSE) for the period of 2012–2017. The systematic elimination method is used for sampling and multiple regression and EViews software are used for testing the hypothesis models.FindingsThe obtained results show that there is a significant and positive relationship between audit report lags and readability of financial statements. Moreover, it is also revealed that readability of financial statements is positively associated with audit fees. Furthermore, the findings suggest a negative correlation between readability indexes and issuing GCOs, denoting hard-to-read statements is considered as a risk factor by auditors. Finally, the observations of our robustness tests suggest that the association between audit report lag and readability of financial statements is robust.Originality/valueThis is the first conducted investigation concerning auditor's response to the readability of financial statement notes in TSE. The outcome of current paper may pave the way for revising and developing Iranian accounting standards in order to give a fairer and clearer picture of financial reports.

Amtek Auto debacle: financial statement analysis

2020 ◽  
Vol 10 (2) ◽  
pp. 1-24
Author(s):  
Asheesh Pandey
Keyword(s):  
Learning Outcomes ◽  
Financial Statements ◽  
Financial Statement ◽  
Financial Statement Analysis ◽  
Content Type ◽  
Academic Level ◽  
Reserve Bank ◽  
Financial Decision ◽  
The Relationship ◽  
A Company

Learning outcomes The learning outcomes are as follows: developing an understanding of financial statement analysis among students; students would be able to calculate various ratios, understand their meaning and interpret them to take a financial decision; and exploring the relationship between financial leverage and risk. Case overview/synopsis Amtek Auto is a leading auto-components manufacturer established in 1988 which entered into bankruptcy in through the order of Reserve Bank of India in 2017. The company started with a humble beginning and later on the promoter decided to expand exponentially both through organic as well as inorganic growth in past 15 years. To grow a company kept on taking debt which made it riskier and deteriorated its financial position over a period. The case covers a 10-year timeline from 2008 to 2017. It gives an opportunity to analyze its financial statements to understand how its decisions shaped its performance Complexity academic level The case aims for students to take a comprehensive view of the financial statement analysis of Amtek Auto including the following: vertical and horizontal analysis; comprehensive ratio analysis including liquidity, profitability, leverage and turnover ratios with special emphasis on debt as a double-edged sword; analysis of Armtek Auto’s financial performance over a period of 10 years. Supplementary materials Teaching Notes are available for educators only. Subject code CSS 1: Accounting and Finance.

scholarly journals The scope and limitations of external audit in detecting frauds in company’s operations

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Dragomir Dimitrijevic ◽  
Biljana Jovkovic ◽  
Suncica Milutinovic
Keyword(s):  
Bosnia And Herzegovina ◽  
Financial Statements ◽  
Mean Value ◽  
Financial Statement ◽  
External Audit ◽  
Content Type ◽  
External Auditors ◽  
The Republic ◽  
Practical Implications ◽  
Early Detection And Prevention

Purpose This study aims to investigate what are the capabilities and limits of external audit in detecting frauds in companies operating in the territory of the Republics: Serbia, Croatia, Macedonia and Bosnia and Herzegovina. Design/methodology/approach In total, 51 certified auditors from Serbia, Croatia, Macedonia and Bosnia and Herzegovina were surveyed to analyze what are the most frequent warning signals of the existence of the frauds auditors encounter during the verification of company’s financial statements. Findings The study indicated that the auditors of the Republic of Serbia more often encountered groundless overstatement of revenues compared with other countries, while regarding manipulative representation of inventories, the largest mean value and median are still among the auditors of the Republic of Serbia. Practical implications Based on the research results, it can be concluded that it is necessary to expand the legal obligation and power of external auditors when, in financial statement auditing, they come to clear findings that indicate fraud. Expansion of external auditors’ powers would reduce their current limitations and expand the domain of action. Originality/value Limitations in external auditors’ work prevent the processing of frauds. However, auditors’ analysis of financial statements and pointing to potential irregularities can be a good manner for the early detection and prevention of frauds in company’s operations.

Using Beneish model to detect corporate financial statement fraud in Greece

2016 ◽  
Vol 23 (4) ◽  
pp. 1063-1073 ◽  
Author(s):  
Spyridon Repousis
Keyword(s):  
Stock Exchange ◽  
Banking System ◽  
Limited Liability ◽  
Growth Index ◽  
Financial Statements ◽  
Financial Statement ◽  
Financial Statement Fraud ◽  
Gross Margin ◽  
Data Set ◽  
Content Type

Purpose This paper aims to investigate empirically the eight-variables Beneish M-model to identify occurrence of financial statement fraud or tendency to engage in earning manipulation. Design/methodology/approach A data set of 25,468 companies (Société Anonyme and Limited Liability Companies) in Greece was analyzed during two-year period of 2011-2012. Financial statements of banks are excluded. Findings The results showed that 8,486 companies or 33 per cent of the whole sample has a greater than −2.2 score, which is a signal that companies are likely to be manipulators. Also, for manipulators, results using F-distribution showed that days sales in receivable index (DSRI), asset quality index (AQI), depreciation index, selling, general and administrative expenses index (SGAI), total accruals to total assets index and leverage index (LVGI) are significant at 99 per cent confidence level in its effect on Beneish M-score. Also, there is a significant relationship between earning management, as expressed by Beneish M-score and each one of variables, DSRI, AQI, gross margin index, sales growth index, SGAI and LVGI. Most of all, DSRI explains 95.92 per cent of the variation in Beneish M-score in statistical terms. Practical implications Results are important for banking system, because financial statements information influence credit decisions of banks. Debt agreements include terms based upon accounting numbers. Also, using Beneish Model, it is a cheap and easy way for examiners of possible fraudulent activity. Originality/value To the best of the author’s knowledge, there is a great lack of research in Greece, using Beneish model. There is only one more study using the Beneish model, examining only a few companies listed in Athens Stock Exchange during 1999-2000. Findings have also important implications not only for banks but also for users of Greek financial statement accounts, especially to investors, auditors, regulators, to taxation and other state authorities.

Transaction-based lending and accrual quality

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Stephen Gray ◽  
Arjan Premti
Keyword(s):  
Earnings Quality ◽  
Financial Statements ◽  
Financial Statement ◽  
Cost Of Debt ◽  
Accrual Quality ◽  
Content Type ◽  
Income Statement ◽  
Prior Literature ◽  
The Cost

PurposeThis study examines how lenders modify their behavior and their use of traditional, transaction-based lending models in credit decisions when faced with low earnings quality.Design/methodology/approachTo measure the earnings quality, following Bharath, Sunder and Sunder (2008), the authors use three measures of accrual quality and combine them into a simple parsimonious measure of accrual quality. Subsequently, the authors apply the incremental R-square approach used by Kim and Kross (2005) to determine the degree to which lenders modify their reliance on financial statement ratios when faced with low accrual quality.FindingsConsistent with prior literature, this study shows that the cost of debt is higher when accrual quality is low. In addition, this study extends prior literature by showing that lenders decrease their reliance on income statement data to make credit decisions as accrual quality decreases.Originality/valueThis paper broadens existing literature on the pricing of information risk in capital markets by being the first to show that lenders modify their reliance on financial statement data when faced with low-quality accruals. In addition, this paper extends the findings of Billings and Morton (2002) and demonstrates to managers the futility of using accrual manipulations to obtain more favorable credit terms. Lastly, this paper aids regulators and standard setters who seek to improve the usefulness of financial statements by showing that creditors do not appear to be misled by reporting choices that lower the quality of accruals.

The roles of whistleblowing system and fraud awareness as financial statement fraud deterrent

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Nanang Shonhadji ◽  
Ach Maulidi
Keyword(s):  
Capital Investment ◽  
Financial Statements ◽  
Financial Statement ◽  
Theoretical Discussion ◽  
Financial Statement Fraud ◽  
Accounting Firms ◽  
Content Type ◽  
Effective Deterrent ◽  
Fraudulent Financial Statements

Purpose This paper aims to provide new theoretical discussion about the role of whistleblowing system and fraud awareness as an effective deterrent for financial statement fraud. Design/methodology/approach The authors conducted surveys to 13 reputable public accounting firms in East Java, Indonesia. Findings It is well acknowledged, as fraud attacks grow more sophisticated, whistleblowing system and fraud awareness can be possible deterrents. By increasing employees’ fraud awareness, they do not only recognise fraud symptoms and typologies but also support to raise concerns in good faith and on reasonable grounds. This study also suggests the role of fraud awareness as a human capital investment that increase sensitivity on identifying fraud symptoms and discouraging participation in crimes. Originality/value This study produces new theoretical discussion about fraud prevention. Then this study also offers several aspects that can help organisation to establish effective whistleblowing systems and reporting mechanisms. Those aspects identified can encourage an individual to report malpractice or wrongdoing. This study also offers how fraud awareness can support the implementation of whistleblowing system in preventing fraudulent financial statements and other irregularities.

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