Detecting Framing Effects in Financial Statements

Posted: 23 Aug 1998 Last revised: 11 Jun 2013

See all articles by Paul E. Johnson

Paul E. Johnson

University of Minnesota, Twin Cities - Carlson School of Management

Karim Jamal

University of Alberta - Department of Accounting, Operations & Information Systems

R. Glen Berryman

University of Minnesota - Twin Cities - Carlson School of Management

Date Written: 1996

Abstract

In this study, we address the question of what kinds of cognitive representations auditors use in a situation of potential financial statement fraud. We divide the problem of detecting fraud into two parts: detecting the frame management has constructed to mask the fraud, and detecting the fraud. We examine two ways proposed by Kahneman and Tversky (1986) for detecting a frame: (1) use of multiple representations that provide alternative interpretations of data in the financial statements; and (2) use of a procedure that transforms financial statement data into a standard representation. Twenty-four audit partners served as participants in the study. Each partner conducted a simulation of a concurring partner review. All auditors reviewed four cases in which management had created a misleading description of the company (a frame) and a financial statement fraud The results support Kahneman and Tversky's proposal that frames can be detected by transforming a problem into a standard representation. Auditors who used a standard representation successfully detected management's frame, aggregated the items, and detected fraud on all four cases. Auditors who used a standard representation followed a procedure specified by generally accepted auditing standards (HB: 5130, SAS 47) for aggregating items. Auditors who used multiple representations detected management's frame on all four cases. However, these auditors did not use the aggregation procedure specified by auditing standards and failed to detect the fraud on all four cases.

JEL Classification: M49

Suggested Citation

Johnson, Paul E. and Jamal, Karim and Berryman, R. Glen, Detecting Framing Effects in Financial Statements (1996). Contemporary Accounting Research, Vol. 12, No. 1, Fall 1996. Available at SSRN: https://ssrn.com/abstract=2502

Paul E. Johnson

University of Minnesota, Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Karim Jamal (Contact Author)

University of Alberta - Department of Accounting, Operations & Information Systems ( email )

Edmonton, Alberta T6G 2R6
Canada
780-492-5829 (Phone)
780-492-3325 (Fax)

R. Glen Berryman

University of Minnesota - Twin Cities - Carlson School of Management ( email )

321 19th Avenue South
645 Management and Economics
Minneapolis, MN 55455
United States
612-624-7573 (Phone)

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