Do Auditors and Audit Committees Lower Fraud Risk by Constraining Inconsistencies Between Financial and Nonfinancial Measures?

Auditing: A Journal of Practice and Theory, Volume 38 (1): 103-122, February 2019

Posted: 19 Dec 2019

See all articles by Joseph F. Brazel

Joseph F. Brazel

North Carolina State University - Poole College of Management - Department of Accounting

Jaime J. Schmidt

University of Texas at Austin

Date Written: December 2, 2019

Abstract

Prior research finds that companies committing fraud exhibit large inconsistencies between reported revenue growth and growth in revenue-related nonfinancial measures (e.g., number of stores, employees, patents). However, prior research also suggests that auditors, on average, are not adept at identifying and constraining these differences. This study investigates whether certain auditors and audit committees are able to lower fraud risk by constraining inconsistencies between financial and related nonfinancial measures (NFMs). For a sample of companies across a variety of industries, we find that auditors with greater industry expertise and tenure and audit committee chairs with greater tenure are less likely to be associated with companies that exhibit large inconsistencies between their reported revenue growth and related NFMs. Surprisingly, we observe that audit committees with industry expert chairs are more likely to be associated with large inconsistencies (higher fraud risk) than audit committees without industry expert chairs.

Keywords: audit, audit committee, fraud risk, non-financial measures

JEL Classification: M4

Suggested Citation

Brazel, Joseph F. and Schmidt, Jaime J., Do Auditors and Audit Committees Lower Fraud Risk by Constraining Inconsistencies Between Financial and Nonfinancial Measures? (December 2, 2019). Auditing: A Journal of Practice and Theory, Volume 38 (1): 103-122, February 2019, Available at SSRN: https://ssrn.com/abstract=3497028

Joseph F. Brazel (Contact Author)

North Carolina State University - Poole College of Management - Department of Accounting ( email )

Campus Box 8113
Nelson Hall
Raleigh, NC 27695
United States
919-513-1772 (Phone)

Jaime J. Schmidt

University of Texas at Austin ( email )

Austin, TX 78712
United States

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