A Cognitive Approach to Fraud Detection
University of Virginia
Paul E. Johnson
University of Minnesota, Twin Cities - Carlson School of Management
University of Alberta - Department of Accounting, Operations & Information Systems
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
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.
Number of Pages in PDF File: 35
Keywords: Financial statement fraud detection, Cognitive processes, Deception detection, Errors
JEL Classification: M49
Date posted: July 31, 2006 ; Last revised: June 10, 2013
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