Using Nonfinancial Measures to Assess Fraud Risk

This study examines whether auditors can effectively use nonfinancial measures (NFMs) to assess the reasonableness of financial performance and, thereby, help detect financial statement fraud (hereafter, fraud). If auditors or other interested parties (e. g., directors, lenders, investors, or regula...

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Bibliographic Details
Published in:Journal of accounting research 2009-12, Vol.47 (5), p.1135-1166
Main Authors: BRAZEL, JOSEPH F., JONES, KEITH L., ZIMBELMAN, MARK F.
Format: Article
Language:English
Subjects:
Accounting
Accounting fraud
Accounting irregularities
Auditing
Auditing procedures
Business audits
Business structures
Corruption
Evaluation
Financial audits
Financial data
Financial performance
Financial statements
Fraud
Measurement
Research fraud
Revenue
Risk assessment
Risk management
Studies
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Summary:This study examines whether auditors can effectively use nonfinancial measures (NFMs) to assess the reasonableness of financial performance and, thereby, help detect financial statement fraud (hereafter, fraud). If auditors or other interested parties (e. g., directors, lenders, investors, or regulators) can identify NFMs (e. g., facilities growth) that are correlated with financial measures (e. g., revenue growth), inconsistent patterns between the NFMs and financial measures can be used to detect firms with high fraud risk. We find that the difference between financial and nonfinancial performance is significantly greater for firms that committed fraud than for their nonfraud competitors. We also find that this difference is a significant fraud indicator when included in a model containing variables that have previously been linked to the likelihood of fraud. Overall, our results provide empirical evidence suggesting that NFMs can be effectively used to assess fraud risk.
ISSN:0021-8456
1475-679X
DOI:10.1111/j.1475-679X.2009.00349.x