Earnings Management and Financial Reporting Fraud: Can External Auditors Spot the Difference?

Abstract

The aim of this paper is to increase external auditors’ knowledge about earnings management and help them spot the difference between earnings management and financial reporting fraud. A thorough literature review was undertaken to achieve the paper’s aim. The secondary data used in this paper was obtained from different databases like Ebscohost, Business Search Premier, Academic Search Premier, Emerlad, Sciencedirect, and Jstor. The current paper suggests a new approach and way of thinking for external auditors that might help them in spotting the difference between earnings management and fraud. This new approach calls for the importance of considering management’s motives which is the main driver for all fraudulent activities. A set of recommendations for external auditors, researchers, and standards’ setters are provided in this paper. External auditors have to view external auditing in terms of the audit of motivations. Standards’ setters should provide external auditors with more guidelines regarding the audit of management’s motives. More research is still needed in management’s motives and integrity.

Keywords: financial reporting fraud, earnings management, fraud detection, occupational fraud

JEL Classification: M40, M41