Effective methods for detecting fraudulent financial reporting: practical insights from Big 4 auditors

Journal article


Kassem, R. and Omoteso, K. 2023. Effective methods for detecting fraudulent financial reporting: practical insights from Big 4 auditors. pp. 1-43. https://doi.org/10.1108/JAL-03-2023-0055
AuthorsKassem, R. and Omoteso, K.
Abstract

Purpose
Using a qualitative grounded theory approach, this study explores the methods experienced external auditors use to detect fraudulent financial reporting (FFR) during standard audits.

Design/methodology/approach
Semi-structured interviews were conducted with 24 experienced external auditors to explore the methods they used to detect FFR successfully during standard external audits.

Findings
The authors find 58 methods used for FFR detection, out of which the following methods are frequently used and help in detecting more than one type of FFR: (1) specific analytical procedures, (2) positive confirmation, (3) understanding of the client's business and industry, (4) the inspection of specific documents, (5) a detailed analysis of the audit client's anti-fraud controls and (6) investigating tip-offs from suppliers, employees and customers.

Research limitations/implications
Based on the grounded theory approach, the authors theorise that auditors must return to the basics and focus on specific audit procedures highlighted in this study for effective fraud detection.

Practical implications
The study provides practical guidance, including 58 methods used in audit practice to detect FFR. This knowledge can improve auditors' skills in detecting material misstatements due to fraud. Besides, analytical procedures and positive confirmation helped external auditors in this study detect all forms of FFR, yet they are overlooked in the external audit practice. Therefore, audit firms should emphasise the significance of these audit procedures in their professional audit training programmes. Audit regulators should advise auditors to consider positive confirmation instead of negative confirmation in financial audits to increase the likelihood of FFR detection. Moreover, audit standards (ISA 240 and SAS 99) should explicitly require auditors to conduct a detailed analysis of the client's anti-fraud controls.

Originality/value
This is the first study to identify actual, effective methods used by external auditors in detecting FFR during the ordinary course of an audit.

KeywordsFraudulent Financial Reporting; External Auditors; Fraud Detection; Fraud Risk Assessment; Grounded Theory
Year2023
Journal citationpp. 1-43
PublisherEmerald Publishing Limited
ISSN0737-4607
Digital Object Identifier (DOI)https://doi.org/10.1108/JAL-03-2023-0055
Web address (URL)https://www.emerald.com/insight/content/doi/10.1108/JAL-03-2023-0055/full/html
Accepted author manuscript
License
File Access Level
Open
Output statusPublished
Publication dates
Online15 Sep 2023
Publication process dates
Deposited12 Oct 2023
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https://repository.derby.ac.uk/item/q215w/effective-methods-for-detecting-fraudulent-financial-reporting-practical-insights-from-big-4-auditors

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