Audit Committee Oversight of Fraud Risk: The Role of Social Ties, Professional Ties, and Governance Characteristics

2017 ◽  
Vol 31 (3) ◽  
pp. 21-38 ◽  
Author(s):  
Robert M. Wilbanks ◽  
Dana R. Hermanson ◽  
Vineeta D. Sharma
Keyword(s):  
Financial Reporting ◽  
Audit Committee ◽  
Social Ties ◽  
Internal Audit ◽  
Future Research ◽  
Professional Experience ◽  
Fraudulent Financial Reporting ◽  
Fraud Risk ◽  
Public Company

SYNOPSIS This study examines audit committee (AC) oversight of fraudulent financial reporting (FFR) risk and management integrity, and how such oversight varies with AC social ties, professional ties, and governance characteristics. Specifically, based on a survey of 134 U.S. public company AC members, we find that AC participants with social ties (i.e., personal ties) to the CEO are negatively associated with AC actions to assess FFR risk and management integrity. Further, the AC appears to cut back on more observable FFR and MI actions when the responding AC member has a social tie to the CEO, consistent with socially connected ACs being reluctant to engage in observable monitoring actions that could jeopardize a social tie to the CEO. However, AC participants with professional ties to other independent directors and those with professional experience as corporate controllers are positively related to such actions. We also find that AC size is positively related to FFR risk assessment, while female AC participants and those serving on boards with greater independence are more likely to report engaging in AC activities to assess management integrity. Finally, when asked more broadly about who they rely on and who is responsible for assessing the risk of FFR, AC members mainly point to the external audit partner, CFO, and head of internal audit. We discuss implications and directions for future research.

scholarly journals Analysis of Fraudulent Financial Reporting With the Role of KAP Big Four as a Moderation Variable: Crowe's Fraud's Pentagon Theory

2020 ◽  
Vol 11 (5) ◽  
pp. 180
Author(s):  
Maylia Pramono Sari ◽  
Nindya Pramasheilla ◽  
Fachrurrozie ◽  
Trisni Suryarini ◽  
Imang Dapit Pamungkas
Keyword(s):  
Financial Reporting ◽  
Financial Stability ◽  
Audit Committee ◽  
Stock Exchange ◽  
Sampling Technique ◽  
Fraudulent Financial Reporting ◽  
Ceo Duality ◽  
Fraud Risk ◽  
Big Four

The purpose of this study is to provide empirical evidence of pentagon fraud risk factors sush as financial targets, financial stability, number of audit committee members, nature of industry, change in auditors, auditor opinion, change in director, proportion of the independent commissary, frequent number of CEO pictures, and CEO duality on fraudulent financial reporting with KAP big four as a moderating variable. The samples in this study were all state-owned companies listed on the Indonesia Stock Exchange in 2014-2018. The purposive sampling technique was used in sampling so that 55 companies were obtained. This study uses logistic regression analysis techniques with SPSS version 26. The results of the study indicate that financial stability and the auditor's opinion influence the fraudulent financial reporting. However, financial targets, number of audit committee members, nature of industry, change in auditors, change in director, proportion of the independent commissary, frequent number of CEO pictures, and CEO duality not effect on fraudulent financial reporting.

A Synthesis of Fraud-Related Research

2012 ◽  
Vol 32 (Supplement 1) ◽  
pp. 287-321 ◽  
Author(s):  
Gregory M. Trompeter ◽  
Tina D. Carpenter ◽  
Naman Desai ◽  
Keith L. Jones ◽  
Richard A. Riley
Keyword(s):  
Organizational Behavior ◽  
Financial Reporting ◽  
Recent Literature ◽  
Internal Controls ◽  
Future Research ◽  
Fraud Triangle ◽  
Fraudulent Financial Reporting ◽  
Academic Literature ◽  
Fraud Risk ◽  
Corporate Governance Mechanisms

SUMMARY 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 need for future research. This project extends the work of Hogan et al. (2008), who completed a similar synthesis project, also sponsored by the Auditing Section of the American Accounting Association, in 2005. We synthesize the literature related to fraud by examining accounting and auditing literature post-Hogan et al. (2008) and by summarizing relevant fraud literature from outside of accounting. We review publications in accounting and related disciplines including criminology, ethics, finance, organizational behavior, psychology, and sociology. We synthesize the research around a model that illustrates the auditor's 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 of the model and suggest avenues for future research.

scholarly journals The role of effective audit committee in strengthening the financial reporting: Evidence from Jordanian listed companies

2012 ◽  
Vol 9 (3) ◽  
pp. 59-68 ◽  
Author(s):  
Mo’taz Amin Al-Sa’eed ◽  
Soud M. Al-Mahamid
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Audit Committee ◽  
Internal Audit ◽  
Listed Companies ◽  
International Standards ◽  
Future Research ◽  
External Audit ◽  
Cross Sectional ◽  
Study Results

This study aims to understand the features of an effective audit committee and its role in strengthening financial reporting. A questionnaire based survey was circulated to public listed companies on the Amman Stock Exchange (Banking, insurance, and financial institutions). The study was aimed at internal audit managers and finance managers. Out of 156 questionnaires, we received 110 back which represents a 71% response rate. The study results show that the research respondents have a good level of education and experience. In addition, there is a relationship between internal controls, international standards on auditing, institute of internal audit; Jordan securities commission requirements, external audit, understanding of audit committee functions, and financial reporting. Furthermore, the internal control, international standard on auditing and institute of internal audit, Jordan securities commission requirements, External audit, understanding of audit committee functions can explain a significant amount of the variability in financial reporting. Finally, the research results also show that age and gender make a difference for our respondents when they evaluate financial reporting. The study like other cross sectional studies is not free of limitations. Managerial implications and new avenues of future research are supplied. Future research also can borrow the research model and apply a longitudinal study to solve the cross sectional study problems.

scholarly journals Whether Audit Committee Financial Expertise Is the Only Relevant Expertise: A Review of Audit Committee Expertise and Timeliness of Financial Reporting

2013 ◽  
Vol 7 (2) ◽  
pp. 86 ◽  
Author(s):  
Saeed Rabea Baatwah ◽  
Zalailah Salleh ◽  
Norsiah Ahmad
Keyword(s):  
Financial Reporting ◽  
Audit Committee ◽  
Future Research ◽  
Pertinent Literature ◽  
Committee Chair ◽  
Corporate Governance Mechanisms ◽  
Financial Expertise ◽  
Recent Developments

This study reviews the literature on audit committee expertise and financial reporting timeliness. Financial reporting timeliness and audit committee expertise are two areas of research gaining the attention of a large number of stakeholders because they contribute to the reliability and the  relevancy of financial reporting. Indeed, the focus of this review is primarily on the recent developments in the pertinent literature in order to show the limitations of such research and encourage future research to overcome these limitations. By also looking at the development of the audit committee expertise literature, this study concludes that (1) like most audit committee literature, financial reporting timeliness literature continues to assume the absence of the contribution of expertise other than financial expertise, and ignore the role of audit committee chair; (2) most of this literature fails to find a significant effect because it ignores the interaction among corporate governance mechanisms. Accordingly, this study posits that ignoring the issues raised in such research by future research would lead to major mistakes in reforms relating to how the quality of financial reporting can be enhanced.

Audit Committee Member Support for Proposed Audit Adjustments: Pre-SOX versus Post-SOX Judgments

2008 ◽  
Vol 27 (1) ◽  
pp. 85-104 ◽  
Author(s):  
F. Todd DeZoort ◽  
Dana R. Hermanson ◽  
Richard W. Houston
Keyword(s):  
Financial Reporting ◽  
Audit Committee ◽  
Committee Member ◽  
Audit Committees ◽  
Future Research ◽  
Reporting Accuracy ◽  
Sarbanes Oxley ◽  
Public Company

This study examines differences in audit committee member judgments before the Sarbanes-Oxley Act (“pre-SOX”) versus after the act was passed (“post-SOX”) as well as audit committee member perceptions of the effects of SOX. Based on experimental materials administered to 372 public company audit committee members (131 pre-SOX from DeZoort et al. [2003a] and 241 post-SOX), we find that audit committee support for an auditor-proposed adjustment is significantly higher in the post-SOX period. Additional analyses reveal that the effect of SOX differs between audit committee members who are CPAs versus non-CPAs. Specifically, the greater audit committee member support for the proposed adjustment post-SOX is attributable to members who are CPAs. In general, audit committee members in the post-SOX period feel more responsible for resolving the accounting issue, perceive that audit committee members have greater expertise to evaluate the accounting issue, and also are more concerned with reporting accuracy and a need for conservative financial reporting than those in the pre-SOX period. We also find that post-SOX respondents who support the auditor's proposed adjustment have more favorable views of the benefits of SOX, and they believe more strongly that audit committees in the post-SOX period are more conservative and have more power than they did pre-SOX. We discuss implications and avenues for future research.

scholarly journals The effect of applying COSO-ERM model on reducing fraudulent financial reporting of commercial banks in Jordan

2018 ◽  
Vol 13 (2) ◽  
pp. 107-115
Author(s):  
Abdul Aziz A. Abdul Rahman ◽  
Othman Hel Ajmi Al-Dhaimesh
Keyword(s):  
Risk Management ◽  
Financial Reporting ◽  
Internal Control ◽  
Commercial Banks ◽  
Audit Committee ◽  
Internal Audit ◽  
Enterprise Risk Management ◽  
Fraudulent Financial Reporting ◽  
Corporate Governance Mechanisms ◽  
Enterprise Risk

This study aims to test the effect of applying the model of the Committee Sponsoring Organizations for enterprise risk management (COSO-ERM) on reducing fraudulent financial reporting in commercial banks operating in Jordan. Furthermore, the study identifies the role of each board of directors, audit committee, executive management, human resource management, and internal audit as one of the corporate governance mechanisms in enhancing the effectiveness of internal control systems. The study revealed an impact of applying the Committee of Sponsoring Organizations model for enterprise risk management (COSO-ERM) on preventing fraudulent financial reporting, where it reached influence around 77.8% on the dependent variable (fraudulent financial reporting). The study also found that each of internal control, event identification, risk assessment and response, and control activities variables affects dependent variable (fraudulent financial reporting) in commercial banks operating in Jordan.

scholarly journals FINANCIAL REPORTING QUALITY: HOW TO OPTIMIZE THE ROLE OF INTERNAL AUDIT

2021 ◽  
Vol 9 (12) ◽  
pp. 118-125
Author(s):  
Iriyadi a ◽  
◽  
Sylvia Fettry ◽  
Nuraini Anzib ◽  
Mariyam b ◽  
...  
Keyword(s):  
Financial Reporting ◽  
Audit Committee ◽  
Quantitative Methods ◽  
Linear Regression Analysis ◽  
Internal Audit ◽  
Reporting Quality ◽  
Financial Statements ◽  
Multiple Linear Regression Analysis

The purpose of the study is to investigate the role of the internal audit function (IAF) in improving the quality of financial reporting. This is because the effectiveness of the FAIs role is often questioned considering its status as an employee who must serve two masters namely the board of directors and the audit committee as representatives of the board of commissioners. On the other hand, financial statements represent reports on the performance and quality of the companys management. The research method uses quantitative methods with multiple linear regression analysis. The research data is based on a questionnaire survey with purposively selected respondents from accounting, finance, auditing, and audit committee practitioners. The research findings indicate that the competence and objectivity of the IAF have a positive effect on the quality of financial reporting. Thus, to enhance the quality of financial reporting, internal auditors must be able to improve their competence and objectivity. Meanwhile, the most important quality of financial statements is the fundamental qualitative characteristics of faithful or honest representation by management. The results of this study answer doubt about the unique role of the IAF as a servant of the two masters, and implicitly the partnership with the audit committee enhances the check and balance function through the role of the IAF. The limitation of the study is that the low determinant coefficient which indicates that there are many other factors that affect the quality of financial reporting. For further research, it is recommended to add other factors and increase the number of sample respondents.

Human Disposition and the Fraud Cycle

2013 ◽  
Vol 2 (1) ◽  
pp. 1-16 ◽  
Author(s):  
Vasant Raval
Keyword(s):  
Financial Reporting ◽  
Future Research ◽  
Fraudulent Financial Reporting ◽  
Behavioral Tendencies ◽  
Constituent Elements

Using primarily Eastern metaphysical concepts as a guide, this study presents a theory for an interpretation of the role of human disposition in fraudulent financial reporting. The theory proposed has two major components, the TRS (Tamsik-Rajsik-Sattvik) framework and the LAG (Lust-Anger-Greed) cycle. The TRS framework includes the constituent elements of a person and the resulting dominant behavioral tendencies of the person. The LAG cycle suggests how these tendencies operate in an act of fraud. The theory is thus potentially useful in the explanation of fraud as a human act. Moreover, in a predictive manner, it also has the potential to differentiate actors (of fraud) from non-actors. The study provides a series of propositions for future research.

Using Game Theory and Strategic Reasoning Concepts to Prevent and Detect Fraud

2004 ◽  
Vol 18 (3) ◽  
pp. 173-184 ◽  
Author(s):  
T. Jeffrey Wilks ◽  
Mark F. Zimbelman
Keyword(s):  
Game Theory ◽  
Financial Reporting ◽  
Academic Research ◽  
Future Research ◽  
Fraudulent Financial Reporting ◽  
Plan Implementation ◽  
Strategic Reasoning ◽  
Audit Planning ◽  
Fraud Risk ◽  
Auditing Standards

This commentary examines academic research that can assist auditors in detecting and preventing fraudulent financial reporting. We review theoretical and empirical research from game theory, social psychology, judgment and decision making, and auditing to identify improvements in audit practice and promising areas for future research. This review focuses on the strategic fraud setting and suggests modifications in auditing standards that should facilitate auditors' use of strategic reasoning in this setting. We emphasize three critical audit tasks—fraud risk assessment, audit planning, and audit plan implementation—and recommend changes to current auditing standards and identify potential research questions for each task.

scholarly journals The relationship between corporate governance, internal audit and audit committee: Empirical evidence from Greece

2016 ◽  
Vol 14 (1) ◽  
pp. 569-577 ◽  
Author(s):  
George Drogalas ◽  
Konstantinos Arampatzis ◽  
Evgenia Anagnostopoulou
Keyword(s):  
Corporate Governance ◽  
Financial Reporting ◽  
Audit Committee ◽  
Audit Quality ◽  
Stock Exchange ◽  
Internal Audit ◽  
Audit Process ◽  
Athens Stock Exchange ◽  
The Relationship

Internal audit has been acknowledged as the main driver of corporate disclosure which aims to increase the quality of financial information, to ensure the transparency in financial reporting and to increase the confidence between managers and shareholders. The need for developing strong governance structures has led many researchers to examine the new framework of corporate governance and to explore its relationship to the internal audit process. Regarding Greece, there is a lack of research evaluating the relationship between corporate governance and internal audit. This study examines the above relationship in companies listed in the Athens Stock Exchange. In the present research, internal audit is examined in terms of audit quality and the consulting role of internal audit, in order to highlight the new management-oriented and value adding scope of internal audit. Data was collected via a survey questionnaire methodology and was analyzed using regression analysis. The results show that corporate governance is positively associated to the consulting role of internal audit, to internal audit quality and to the audit committee.

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