Expectation Gap and Corporate Fraud: Is Public Opinion Reconcilable with Auditors’ Duties?
37 Pages Posted: 15 Jan 2013
Date Written: January 15, 2013
Abstract
The objective of this paper is to answer the key question of whether auditors’ view of their fraud detection duties is reconcilable with the public’s view. We perform a content analysis of press articles covering 37 U.S. corporate fraud cases discovered during the period 1992-2005. We compare the auditors’ duties (as described by the auditing standards) with the public opinion represented by these press articles. Consistent with Porter (1993), we identify three types of divergence between public expectations and auditing standards: deficient performance (that we label “Type 1”), deficient standards (“Type 2”) and unreasonable expectations (“Type 3”). The Type 1 gap can be reduced by strengthening auditors’ willingness and ability to apply existing auditing standards on fraud detection. The Type 2 gap can be narrowed by improving the existing auditing standards. The Type 3 gap, however, concerns highly subjective criteria beyond the auditors’ usual sphere of control. The results of our analysis confirm that the expectation gap is unlikely to disappear given that the rational auditor is unable or unwilling to assess the subjective components of fraudulent behavior, and that value judgments, as demonstrated in the media, retain their popularity.
Keywords: expectation gap, corporate fraud, management behavior, Fraud-related professional standards
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Who Blows the Whistle on Corporate Fraud?
By I. J. Alexander Dyck, Adair Morse, ...
-
Who Blows the Whistle on Corporate Fraud?
By I. J. Alexander Dyck, Adair Morse, ...
-
Who Blows the Whistle on Corporate Fraud?
By I. J. Alexander Dyck, Adair Morse, ...
-
Analyst Coverage and Earnings Management
By Frank Yu
-
By Krishna Palepu and Paul M. Healy
-
By Marilyn F. Johnson, Karen K. Nelson, ...
-
Do the Merits Matter Less after the Private Securities Litigation Reform Act?
-
Governance and Intermediation Problems in Capital Markets: Evidence from the Fall of Enron
By Paul M. Healy and Krishna Palepu
-
The Screening Effect of the Private Securities Litigation Reform Act
By Stephen J. Choi, Karen K. Nelson, ...