Using Nonfinancial Measures to Assess Fraud Risk

2009 ◽  
Author(s):  
Joseph F. Brazel ◽  
Keith L. Jones ◽  
Mark F. Zimbelman
Keyword(s):  
Fraud Risk ◽  
Nonfinancial Measures

scholarly journals Disclosure and Audit Implications of Nonfinancial Measures: A Teaching Case

2018 ◽  
Vol 12 (1) ◽  
pp. I1-I13 ◽  
Author(s):  
Matthew L. Hoag ◽  
Gabriel D. Saucedo
Keyword(s):  
Financial Statements ◽  
Risk Assessments ◽  
Microsoft Excel ◽  
Teaching Case ◽  
Fraud Risk ◽  
Nonfinancial Measures ◽  
Analytical Procedures ◽  
Fraud Risk Assessments ◽  
Substantive Analytical Procedures

SUMMARY This case introduces students to nonfinancial measures (NFMs) and encourages thoughtful consideration and discourse surrounding their reporting and use by managers and auditors. NFMs are commonly reported by companies to provide increased transparency of operations and to more effectively describe performance. External parties such as analysts and auditors make use of NFMs in performing valuation assessments, fraud risk assessments, and substantive analytical procedures. In completing this case, students will be exposed to actual NFMs disclosed in SEC filings and employ Microsoft Excel knowledge to perform foundational analytical procedures. Students will also analyze how these NFMs link to the financial statements, as well as reflect upon the implications of NFMs for both internal and external users.

scholarly journals Do Auditors and Audit Committees Lower Fraud Risk by Constraining Inconsistencies between Financial and Nonfinancial Measures?

2018 ◽  
Vol 12 (2) ◽  
pp. P7-P15
Author(s):  
Joseph F. Brazel
Keyword(s):  
Audit Committee ◽  
Audit Committees ◽  
Audit Process ◽  
Revenue Growth ◽  
Fraud Risk ◽  
Nonfinancial Measures ◽  
Industry Expert ◽  
Industry Expertise

SUMMARY Prior research finds that companies committing fraud exhibit large inconsistencies between reported revenue growth and growth in revenue-related nonfinancial measures (e.g., number of stores, employees, patents). Prior research also suggests that auditors, on average, are not adept at identifying and constraining these differences. This article summarizes a recent study by Brazel and Schmidt (2018) that examines whether certain auditors and audit committees are able to lower fraud risk by constraining inconsistencies between financial and related nonfinancial measures (NFMs). This practitioner summary first summarizes the motivation for the study, then discusses the methods used, explains the results, and concludes with a discussion of the study's implications. Brazel and Schmidt (2018) find that auditors with greater industry expertise and tenure, and audit committee chairs with greater tenure are less likely to be associated with companies that exhibit large inconsistencies between their reported revenue growth and related NFMs (higher fraud risk). Surprisingly, they observe that audit committees with industry expert chairs are more likely to be associated with large inconsistencies than audit committees without industry expert chairs. Overall, Brazel and Schmidt (2018) conclude that the audit process can constrain fraud risk, but not all forms of audit committee expertise may be beneficial.

scholarly journals Using Nonfinancial Measures to Assess Fraud Risk

2009 ◽  
Vol 47 (5) ◽  
pp. 1135-1166 ◽  
Author(s):  
JOSEPH F. BRAZEL ◽  
KEITH L. JONES ◽  
MARK F. ZIMBELMAN
Keyword(s):  
Fraud Risk ◽  
Nonfinancial Measures

Nonfinancial Measures and Fraud Risk:Evaluating Investors’ Reactions to Greater Transparency

2021 ◽  
Author(s):  
Joseph F. Brazel ◽  
Tina Carpenter ◽  
Keith Jones ◽  
Jane Thayer
Keyword(s):  
Financial Reporting ◽  
Relevant Information ◽  
Fraudulent Financial Reporting ◽  
Financial Measures ◽  
Nonprofessional Investors ◽  
Fraud Risk ◽  
Nonfinancial Measures ◽  
Red Flag ◽  
The Individual ◽  
Reporting Environment

We examine whether increased transparency in the comparison of financial measures and nonfinancial measures (NFMs) influences nonprofessional investors’ reactions to the risk of fraudulent financial reporting. We consider a comparison of key financial measures and NFMs to be transparent when the relevant information is presented in close proximity and formatted to provide an easy comparison of the individual measures. We manipulate the presence of an NFM red flag and the transparency of the comparison of financial measures and NFMs. We find that when the NFM red flag is present (i.e., higher fraud risk) and transparent, investors choose lower investment levels. However, without increased transparency, as is typical in the current reporting environment, we observe that investors are more likely to increase their investment levels in firms with elevated fraud risk. Additionally, we observe that the effect of transparency on investment levels is driven by investors with greater investing experience.

Using Nonfinancial Measures to Improve Fraud Risk Assessments

2012 ◽  
Vol 6 (1) ◽  
pp. C28-C34 ◽  
Author(s):  
Daniel Ames ◽  
Joseph F. Brazel ◽  
Keith L. Jones ◽  
Jay S. Rich ◽  
Mark F. Zimbelman
Keyword(s):  
Customer Satisfaction ◽  
Financial Statement ◽  
Risk Assessments ◽  
Teaching Tool ◽  
Financial Measures ◽  
Fraud Risk ◽  
Hard Time ◽  
Nonfinancial Measures ◽  
The Relationship ◽  
Fraud Risk Assessments

SUMMARY Nonfinancial measures (e.g., number of employees, square feet of operations, independent customer satisfaction, number of customer accounts) can be helpful in assessing the risk of revenue frauds. Companies committing such frauds may have a hard time falsifying nonfinancial measures, especially those produced independently (e.g., customer satisfaction). Auditors can benefit from examining relationships between nonfinancial measures and financial measures to validate financial statement data. A recent study, “Using Nonfinancial Measures to Assess Fraud Risk” (Brazel et al. 2009), provides empirical evidence concerning the relationship between various nonfinancial measures and revenue frauds. This article may be useful as a reference for auditors, or as a teaching tool in the classroom, as it reviews and summarizes Brazel et al.'s (2009) study and provides specific actual examples.

Do Auditors and Audit Committees Lower Fraud Risk by Constraining Inconsistencies between Financial and Nonfinancial Measures?

2018 ◽  
Vol 38 (1) ◽  
pp. 103-122 ◽  
Author(s):  
Joseph F. Brazel ◽  
Jaime J. Schmidt
Keyword(s):  
Audit Committee ◽  
Audit Committees ◽  
Revenue Growth ◽  
Fraud Risk ◽  
Nonfinancial Measures ◽  
Industry Expert ◽  
Jel Classifications ◽  
Industry Expertise

SUMMARY Prior research finds that companies committing fraud exhibit large inconsistencies between reported revenue growth and growth in revenue-related nonfinancial measures (e.g., number of stores, employees, patents). However, prior research also suggests that auditors, on average, are not adept at identifying and constraining these differences. This study investigates whether certain auditors and audit committees are able to lower fraud risk by constraining inconsistencies between financial and related nonfinancial measures (NFMs). For a sample of companies across a variety of industries, we find that auditors with greater industry expertise and tenure and audit committee chairs with greater tenure are less likely to be associated with companies that exhibit large inconsistencies between their reported revenue growth and related NFMs. Surprisingly, we observe that audit committees with industry expert chairs are more likely to be associated with large inconsistencies (higher fraud risk) than audit committees without industry expert chairs. JEL Classifications: M4.

Auditors' Reactions to Inconsistencies between Financial and Nonfinancial Measures: The Interactive Effects of Fraud Risk Assessment and a Decision Prompt

2013 ◽  
Vol 26 (1) ◽  
pp. 131-156 ◽  
Author(s):  
Joseph F. Brazel ◽  
Keith L. Jones ◽  
Douglas F. Prawitt
Keyword(s):  
Audit Quality ◽  
Information Source ◽  
Data Availability ◽  
Interactive Effects ◽  
External Auditors ◽  
Fraud Risk ◽  
Nonfinancial Measures ◽  
Production Space ◽  
The Face ◽  
Red Flag

ABSTRACT Nonfinancial measures (NFMs), such as employee headcount and production space, are operational measures that are not included on the face of the financial statements but are often disclosed elsewhere in the annual report or 10-K (e.g., in Management's Discussion and Analysis). Professional standards, auditing texts, and prior research suggest that external auditors can use NFMs to verify their clients' reported financial information and, in turn, improve audit quality. In an initial experiment where auditors develop an expectation for a client's sales balance, they generally fail to identify a seeded inconsistency between the client's sales and related NFMs. In our second experiment, where we introduce an NFM prompt and manipulate fraud risk as high and low, auditors are more likely to react to the inconsistency (i.e., rely more on inconsistent NFMs/develop expectations that reflect the client's current year decline in NFMs) when they are specifically prompted to consider the implications of NFMs and fraud risk is high (versus low). Our results suggest the following: (1) a minority of auditors use NFMs as an information source for testing and do not increase their reliance on NFMs when the NFMs point to a fraud red flag; (2) the presence of high fraud risk alone is insufficient to increase auditor consideration of inconsistent NFMs; (3) auditors are able to react appropriately to an inconsistency if they are effectively prompted; and (4) the influence of a prompt on auditor reliance on NFMs and account balance expectations is stronger when fraud risk is assessed as high. Data Availability: Data are available upon request.

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