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Using Nonfinancial Measures to Assess Fraud Risk

Joseph F. Brazel

North Carolina State University - Poole College of Management - Department of Accounting

Keith L. Jones

George Mason University

Mark F. Zimbelman

Brigham Young University

July 20, 2009

This study examines whether auditors can effectively use nonfinancial measures to assess the reasonableness of financial performance and, thereby, help detect financial statement fraud (hereafter, fraud). If auditors or other interested parties (e.g., directors, lenders, investors, or regulators) can identify nonfinancial measures (e.g., facilities growth) that are correlated with financial measures (e.g., revenue growth), inconsistent patterns between the nonfinancial and financial measures can be used to detect firms with high fraud risk. We find that the difference between financial and nonfinancial performance is significantly greater for firms that committed fraud than for their non-fraud competitors. We also find that this difference is a significant fraud indicator when included in a model containing variables that have previously been linked to the likelihood of fraud. Overall, our results provide empirical evidence suggesting that nonfinancial measures can be effectively used to assess the likelihood of fraud.

Number of Pages in PDF File: 49

Keywords: analytical procedures, earnings management, fraud, nonfinancial measures

JEL Classification: M41, M49, K22

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Date posted: February 28, 2006 ; Last revised: July 20, 2009

Suggested Citation

Brazel, Joseph F. and Jones, Keith L. and Zimbelman, Mark F., Using Nonfinancial Measures to Assess Fraud Risk (July 20, 2009). Available at SSRN: http://ssrn.com/abstract=886545 or http://dx.doi.org/10.2139/ssrn.886545

Contact Information

Joseph F. Brazel (Contact Author)
North Carolina State University - Poole College of Management - Department of Accounting ( email )
Campus Box 8113
Nelson Hall
Raleigh, NC 27695
United States
919-513-1772 (Phone)
Keith Lamar Jones
George Mason University ( email )
4400 University Drive
MS 5F4
Fairfax, VA 22030
United States
703-993-4819 (Phone)
703-993-1809 (Fax)
Mark F. Zimbelman
Brigham Young University ( email )
Marriott School of Management 540 N Eldon Tanner Building
Provo, UT 84602
United States
801-422-1227 (Phone)
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References:  78
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