A Cognitive Approach to Fraud Detection

Journal of Forensic Accounting, Vol. VII, Issue 1, pp. 65-88, 2006

University of Alberta School of Business Research Paper No. 2013-676

35 Pages Posted: 31 Jul 2006 Last revised: 10 Jun 2013

See all articles by Stefano Grazioli

Stefano Grazioli

University of Virginia

Paul E. Johnson

University of Minnesota, Twin Cities - Carlson School of Management

Karim Jamal

University of Alberta - Department of Accounting, Operations & Information Systems

Date Written: January 3, 2006

Abstract

Fraud detection is usually done by looking for red flags and various other cues of deceit. Research in auditing and psychology has questioned the effectiveness of these methods. Here we summarize work on constructing a new cognitive approach to understanding both success and failure at detecting financial statement fraud (Johnson, Grazioli, Jamal and Berryman 2001; Johnson, Grazioli, Jamal and Zualkernan 1992). We begin by analyzing the information processing problem than an auditor must solve to detect the presence of deceptive financial information. We then describe a theory of the solution to this problem, i.e. a theory of successful fraud detection. The theory is used as a yardstick to evaluate the actual behavior of Big 4 firm audit partners engaged in the review of real cases of financial statement fraud. An analysis of the errors made by these auditors allows us to formulate and test hypotheses on where they succeed, where they fail, and the cognitive processes that underlie both success and failure.

Keywords: Financial statement fraud detection, Cognitive processes, Deception detection, Errors

JEL Classification: M49

Suggested Citation

Grazioli, Stefano and Johnson, Paul E. and Jamal, Karim, A Cognitive Approach to Fraud Detection (January 3, 2006). Journal of Forensic Accounting, Vol. VII, Issue 1, pp. 65-88, 2006, University of Alberta School of Business Research Paper No. 2013-676, Available at SSRN: https://ssrn.com/abstract=920222 or http://dx.doi.org/10.2139/ssrn.920222

Stefano Grazioli

University of Virginia ( email )

1400 University Ave
Charlottesville, VA 22903
United States

Paul E. Johnson

University of Minnesota, Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Karim Jamal (Contact Author)

University of Alberta - Department of Accounting, Operations & Information Systems ( email )

Edmonton, Alberta T6G 2R6
Canada
780-492-5829 (Phone)
780-492-3325 (Fax)

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