Using Nonfinancial Measures to Assess Fraud Risk
49 Pages Posted: 28 Feb 2006 Last revised: 20 Jul 2009
Date Written: July 20, 2009
This study examines whether auditors can effectively use nonfinancial measures to assess the reasonableness of financial performance and, thereby, help detect financial statement fraud (hereafter, fraud). If auditors or other interested parties (e.g., directors, lenders, investors, or regulators) can identify nonfinancial measures (e.g., facilities growth) that are correlated with financial measures (e.g., revenue growth), inconsistent patterns between the nonfinancial and financial measures can be used to detect firms with high fraud risk. We find that the difference between financial and nonfinancial performance is significantly greater for firms that committed fraud than for their non-fraud competitors. We also find that this difference is a significant fraud indicator when included in a model containing variables that have previously been linked to the likelihood of fraud. Overall, our results provide empirical evidence suggesting that nonfinancial measures can be effectively used to assess the likelihood of fraud.
Keywords: analytical procedures, earnings management, fraud, nonfinancial measures
JEL Classification: M41, M49, K22
Suggested Citation: Suggested Citation