The Use of Nonfinancial Measures to Assess the Likelihood of Fraud
Abstract
For auditors, failing to detect fraud at their clients is usually accompanied by substantial monetary penalties and/or negative publicity. Thus, the profession has re-evaluated its fraud assessment processes and has attempted to find new ways in which material misstatements due to fraud can be identified. The purpose of this study is to determine whether auditors can effectively use nonfinancial measures (NFMs) in their analyses of fraud. Given that auditors can identify NFMs (e.g., facilities growth) that should coincide with financial measures (e.g., revenue growth), inconsistencies between these two variables may be indicative of higher fraud risk. The results show that all of the respondents believed that financial measures should be accounted for most in an auditing, but more than half disagreed that only the financial measures dictate the performance of the company. While majority of the respondents agreed that NFMs are effective indicators in assessing fraud risk, less than half opined that NFMs can be used effectively in conducting an audit. Auditors believed that the differences between NFMs and financial measures are very significant in assessing fraud risk. Majority agreed that NFMs are highly acceptable and highly recommended fraud risk indicators. It appears from the study that NFMs are merely supporting data for financial measures, which are still considered as primary tool in auditing. NFMs are useful indicators, but only with the presence of a primary financial data.
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For several decades, the audit profession has attempted to find efficient and effective methods of improving auditors’ fraud risk assessments so as to enhance audit quality, reduce auditor liability, and improve investor protection. This study examined whether auditors can effectively use nonfinancial measures (NFMs) to assess the reasonableness of financial performance and, thereby, help detect financial statement fraud (hereafter, fraud).
1
If auditors or other
For auditors, failing to detect fraud at their clients is usually accompanied by substantial monetary penalties and/or negative publicity. Thus, the profession has re-evaluated its fraud assessment processes and has attempted to find new ways in which material misstatements due to fraud can be identified. The purpose of this study is to determine whether auditors can effectively use nonfinancial measures (NFMs) in their analyses of fraud. Given that auditors can identify NFMs (e.g., facilities growth) that should coincide with financial measures (e.g., revenue growth), inconsistencies between these two variables may be indicative of higher fraud risk. The results show that all of the respondents believed that financial measures should be accounted for most in an auditing, but more than half disagreed that only the financial measures dictate the performance of the company. While majority of the respondents agreed that NFMs are effective indicators in assessing fraud risk, less than half opined that NFMs can be used effectively in conducting an audit. Auditors believed that the differences between NFMs and financial measures are very significant in assessing fraud risk. Majority agreed that NFMs are highly acceptable and highly recommended fraud risk indicators. It appears from the study that NFMs are merely supporting data for financial measures, which are still considered as primary tool in auditing. NFMs are useful indicators, but only with the presence of a primary financial data.
.
For several decades, the audit profession has attempted to find efficient and effective methods of improving auditors’ fraud risk assessments so as to enhance audit quality, reduce auditor liability, and improve investor protection. This study examined whether auditors can effectively use nonfinancial measures (NFMs) to assess the reasonableness of financial performance and, thereby, help detect financial statement fraud (hereafter, fraud).
1
If auditors or other