Fraudulent Financial Reporting: Do Red Flags Really Help?

International Journal of Academic Research: Economics and Engineering, Vol.4, December 2010

11 Pages Posted: 25 Aug 2014

See all articles by Rasha Kassem

Rasha Kassem

University of Northampton; Loughborough University

Mohamed A. Hegazy

Department of Accounting, The American University in Cairo

Date Written: December 1, 2010

Abstract

Purpose– Aims to determine whether red flags can be helpful for external auditors in detecting fraudulent financial reporting. The research explores whether external auditors demographic factors affect external auditors’ perception about the ability of red flags to detect fraudulent financial reporting in Egypt.

Design/methodology/approach– Data was collected using a questionnaire that was pretested by a pilot study. A questionnaire was then distributed to a sample of 100 external auditors working in different audit firms in Egypt and having different years of experience. The sample of external auditors was randomly selected.

Findings – According to external auditors’ opinion, red flags are helpful in detecting fraud. Our research didn’t support the effect of external auditors’ experience and type of audit office on auditors’ perception about red flags ability to detect fraudulent financial reporting.

Research Limitations– two external auditors from the big 4 international audit firms filled in the questionnaire, thus our results can’t be generalized to all audit firms in Egypt. There can also be other red flags in the literature that aren’t mentioned in the research study.

Originality/value- Our research included a list of specific red flags for fraudulent financial reporting that were highly accepted by the sample of external auditors in our study. These specific red flags can be used in conjunction with SAS 99 red flags to enhance external auditors’ ability in detecting fraudulent financial reporting. The research also ranked all red flags for fraudulent financial reporting according to their relative importance based on external auditor opinion which can help auditors to focus their efforts more on high quality red flags during brainstorming sessions which will in turn facilitate fraud detection. Future research should be more directed toward listing other red flags for fraudulent financial reporting in the literature and should test them using other methods like experiments or interviews. The list of red flags presented in our research can for a good base for future research.

Keywords: fraud, fraud detection, fraudulent financial reporting, red flags, auditing standards

JEL Classification: APS

Suggested Citation

Kassem, Rasha and Hegazy, Mohamed A., Fraudulent Financial Reporting: Do Red Flags Really Help? (December 1, 2010). International Journal of Academic Research: Economics and Engineering, Vol.4, December 2010. Available at SSRN: https://ssrn.com/abstract=2011332

Rasha Kassem (Contact Author)

University of Northampton ( email )

Boughton Green Road
Park Campus Northampton Business School
Northampton, Northamptonshire NN2 7AL
United Kingdom
+44 (0)1604 893326 (Phone)
+44 (0)1604 893537 (Fax)

HOME PAGE: http://www.northampton.ac.uk

Loughborough University ( email )

Ashby Road
Nottingham NG1 4BU
Great Britain

Mohamed A. Hegazy

Department of Accounting, The American University in Cairo ( email )

6 Boulos Hanna Street
Dokki
Cairo
Egypt
0020101699301 (Phone)
0020237600215 (Fax)

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