Yim, Andrew (2010): Fraud Detection and Financial Reporting and Audit Delay.
Download (407Kb) | Preview
I formulate a model to emphasize the fraud detection role of auditors in the financial market, providing a theoretical framework to examine the likelihood of and market reaction to a financial reporting and audit delay. The model has an auditor considering whether to perform extended audit procedures after observing a red flag generated from regular audit procedures. An audit delay is represented by the event of extending audit procedures and manifested as a financial reporting delay observed by the market. I find that the equilibrium likelihood of a delay decreases when the reliability of regular and extended audit procedures improves and/or when the ex ante probability of fraud reduces. My result on the market reaction to a delay suggests that while a negative average reaction is intuitive and has been documented, the reaction can be positive for an individual firm. I derive a closed-form condition indicating when a positive reaction is possible. Specifically, a delay can be good news to the market when the ex ante probability of fraud, the imprecision of a red flag, and the effectiveness of extended audit procedures for detecting fraud are all high. The result is new in the literature. I also discuss the model's empirical implications with suggestions for regression equation specifications.
|Item Type:||MPRA Paper|
|Original Title:||Fraud Detection and Financial Reporting and Audit Delay|
|Keywords:||Audit delay, financial reporting lag, extended audit procedures, red flag, fraud detection, SAS 82, SAS 99, business ethics|
|Subjects:||G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
M - Business Administration and Business Economics; Marketing; Accounting > M4 - Accounting and Auditing > M42 - Auditing
K - Law and Economics > K4 - Legal Procedure, the Legal System, and Illegal Behavior > K42 - Illegal Behavior and the Enforcement of Law
M - Business Administration and Business Economics; Marketing; Accounting > M2 - Business Economics > M21 - Business Economics
|Depositing User:||Andrew Yim|
|Date Deposited:||06. Jan 2011 10:29|
|Last Modified:||12. Feb 2013 13:44|
Alford, A. W., J. J. Jones, and M. E. Zmijewski (1994): Extensions and violations of the statutory SEC form 10-K ling requirements, Journal of Accounting and Economics, 17(1-2), 229254.
Ashton, R. H., J. J. Willingham, and R. K. Elliott (1987): An Empirical Analysis of Audit Delay, Journal of Accounting Research, 25(2), 275292.
Bagnoli, M., W. Kross, and S. G. Watts (2002): The Information in Management's Expected Earnings Report Date: A Day Late, a Penny Short, Journal of Accounting Research, 40(5), 12751296.
Bamber, E. M., L. S. Bamber, and M. P. Schoderbek (1993): Audit structure and other determinants of audit report lag: An empirical analysis, Auditing: A Journal of Practice & Theory, 12(1), 123.
Begley, J., and P. E. Fischer (1998): Is there Information in an Earnings Announce- ment Delay?, Review of Accounting Studies, 3(4), 347363.
Camerer, C., and R. H. Thaler (1995): Anomalies: Ultimatums, Dictators and Man- ners, The Journal of Economic Perspectives, 9(2), 209219.
Chambers, A. E., and S. H. Penman (1984): Timeliness of Reporting and the Stock Price Reaction to Earnings Announcements, Journal of Accounting Research, 22(1), 21 47.
Decision News Media SAS (2003): Ahold delays audit results as fraud deepens, May 26, http://www.foodanddrinkeurope.com/content/view/print/81368.
Dwyer, P. D., and E. R. Wilson (1989): An empirical investigation of factors aecting the timeliness of reporting by municipalities, Journal of Accounting and Public Policy, 8(1), 2955.
Erard, B., and J. S. Feinstein (1994): Honesty and Evasion in the Tax Compliance Game, The RAND Journal of Economics, 25(1), 119.
Ettredge, M. L., C. Li, and L. Sun (2006): The impact of SOX Section 404 internal control quality assessment on audit delay in the SOX Era, Auditing: A Journal of Practice and Theory, 25(November), 123.
Evans, J. H., R. L. Hannan, R. Krishnan, and D. V. Moser (2001): Honesty in Managerial Reporting, The Accounting Review, 76(4), 537559.
Fischbacher, U., and U. Stefani (2007): Strategic Errors and Audit Quality: An Experimental Investigation, The Accounting Review, 82(3), 679.
Gennotte, G., and B. Trueman (1996): The Strategic Timing of Corporate Disclo- sures, The Review of Financial Studies, 9(2), 665690.
Givoly, D., and D. Palmon (1982): Timeliness of Annual Earnings Announcements: Some Empirical Evidence, The Accounting Review, 57(3), 486508.
Hogan, C. E., Z. Rezaee, J. Riley, and U. K. Velury (2008): Financial Statement Fraud: Insights from the Academic Literature, Auditing: A Journal of Practice & Theory, 27(2), 231252.
Johnson, L. E., S. P. Davies, and R. J. Freeman (2002): The eect of seasonal variations in auditor workload on local government audit fees and audit delay, Journal of Accounting and Public Policy, 21(4-5), 395422.
Kartik, N. (2008): Strategic Communication with Lying Costs, Review of Economic Studies, forthcoming, December 12, 2008.
Knechel, W. R., and J. L. Payne (2001): Additional Evidence on Audit Report Lag, Auditing: A Journal of Practice & Theory, 20(1), 137146.
Kreps, D. M., P. Milgrom, J. Roberts, and R. Wilson (1982): Rational cooperation in the nitely repeated prisoners' dilemma, Journal of Economic Theory, 27(2), 245252. Krishnan, J., and J. S. Yang (2009): Recent Trends in Audit Report and Earnings Announcement Lags, SSRN eLibrary.
Lambert, T. A., J. F. Brazel, and K. L. Jones (2008): Unintended Consequences of Accelerated Filings: Do Changes in Audit Delay Lead to Changes in Earnings Quality?, SSRN eLibrary, November.
Loomes, G. (2005): Modelling the Stochastic Component of Behaviour in Experiments: Some Issues for the Interpretation of Data, Experimental Economics, 8(4), 301.
Matsumura, E. M., and R. R. Tucker (1992): Fraud Detection: A Theoretical Foun- dation, The Accounting Review, 67(4), 753782.
McLelland, A. J., and G. Giroux (2000): An empirical analysis of auditor report timing by large municipalities, Journal of Accounting and Public Policy, 19(3), 263281.
Morgenson, G. (2009): S.E.C. Accuses Countrywide's Ex-Chief of Fraud, The New York Times.
Newman, D. P., E. R. Patterson, and J. R. Smith (2005): The Role of Auditing in Investor Protection, Accounting Review, 80, 289313.
Owusu-Ansah, S., and S. Leventis (2006): Timeliness of corporate annual nancial reporting in Greece, European Accounting Review, 15(2), 273287.
Patterson, E. R., and J. R. Smith (2007): The Eects of Sarbanes-Oxley on Auditing and Internal Control Strength, The Accounting Review, 82(2), 427455.
Rieskamp, J. (2008): The probabilistic nature of preferential choice, Journal of Experi- mental Psychology: Learning, Memory, and Cognition, pp. 14461465.
Sengupta, P. (2004): Disclosure timing: Determinants of quarterly earnings release dates, Journal of Accounting and Public Policy, 23(6), 457482.
Shleifer, A., and D. Wolfenzon (2002): Investor protection and equity markets, Journal of Financial Economics, 16, 328.
Smith, J. R., S. L. Tiras, and S. S. Vichitlekarn (2000): The interaction between internal control assessment and substantive testing in audits for fraud, Contemporary Accounting Research, 17(2), 327.
Wall Street Journal (1995): Sensormatic's Stock Skids 17% on News of Expanded Audit, September 1.
Wilcox, N. T. (2009): 'Stochastically more risk averse:' A contextual theory of stochastic discrete choice under risk, Journal of Econometrics, forthcoming.
Available Versions of this Item
- Fraud Detection and Financial Reporting and Audit Delay. (deposited 06. Jan 2011 10:29) [Currently Displayed]