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A Framework for Identifying (and Avoiding) Fraudulent Financial Reporting

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  • Wally Smieliauskas

Abstract

This commentary analyzes the relationship of fraud risk assessments to other risk assessments by auditors. The Public Company Accounting Oversight Board notes that this is a problem area of current practice. Effective detection of fraudulent financial reporting requires an integrative accounting/auditing conceptual framework. As a result, this paper is as much about accounting theory as it is about auditing. To simplify the development of such an integrated framework, this paper uses an expanded risk model. This effectively results in a risk perspective on fraudulent financial reporting. There are many potential implications but the major findings are as follows. First, the study identifies the crucial role of benchmarks based on acceptable levels of risk to help differentiate between intentional and unintentional misstatements. Such differentiation is critical to successfully implementing the American Institute of Certified Public Accountants' Statement on Auditing Standards (SAS) No. 99 and international standards ISA Nos. 240, 540, and 700. Second, the paper shows the importance of not allowing the major categories of risks identified here from getting too high. This paper explains the need to set acceptable levels of these risks, either by standard‐setters as a matter of broad policy, or by individual practitioners as part of the terms of specific engagements. I propose that a major factor in the concept of “present fairly” be the acceptable levels of accounting risks that are defined here, especially the risks due to intentional forecast errors. Third, this paper clarifies how the fraud risk of SAS No. 99, and similar international standards, relates to the current audit risk model framework.

Suggested Citation

  • Wally Smieliauskas, 2008. "A Framework for Identifying (and Avoiding) Fraudulent Financial Reporting," Accounting Perspectives, John Wiley & Sons, vol. 7(3), pages 189-226, August.
    • Handle: RePEc:wly:accper:v:7:y:2008:i:3:p:189-226
    DOI: 10.1506/ap.7.3.1
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    References listed on IDEAS

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    1. Peecher, Mark E. & Schwartz, Rachel & Solomon, Ira, 2007. "It's all about audit quality: Perspectives on strategic-systems auditing," Accounting, Organizations and Society, Elsevier, vol. 32(4-5), pages 463-485.
    2. David Alexander, 1999. "A benchmark for the adequacy of published financial statements," Accounting and Business Research, Taylor & Francis Journals, vol. 29(3), pages 239-253.
    3. Mary Barth, 2006. "Including estimates of the future in today's financial statements," BIS Working Papers 208, Bank for International Settlements.
    4. Erickson, M & Mayhew, BW & Felix, WL, 2000. "Why do audits fail? Evidence from Lincoln Savings and Loan," Journal of Accounting Research, Wiley Blackwell, vol. 38(1), pages 165-194.
    5. Knechel, W. Robert, 2007. "The business risk audit: Origins, obstacles and opportunities," Accounting, Organizations and Society, Elsevier, vol. 32(4-5), pages 383-408.
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    Cited by:

    1. Wally Smieliauskas, 2012. "Principles‐Based Reasoning about Accounting Estimates," Accounting Perspectives, John Wiley & Sons, vol. 11(4), pages 259-296, December.

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