Good Value from Shared Values: A fraud and risk perspective

Corporate scandals in the last decade have led to renewed focus by auditors and regulators on fraud, risk assessments, and governance reforms. Hernandez (2007) documents auditor perceived associations between risk indications or concerns on dimensions of management ethics and compensation, performance, governance and fraud across auditor risk assessments performed during the continuance stage of an audit at a ‘Big Four’ firm (from 2002 to 2004). Running three separate sets of ordinal regressions, this study notes that assessed risk of fraud, perceived corporate performance risks, and corporate governance risks are independently associated with each other, as well as positively affected by management ethics and integrity concerns perceived by auditors and the pressure and balance of financial and non-financial goal-setting targets in management compensation contracts. This suggests that managers and entities focused by ethics, values, and sustainable goals (lower integrity concerns, less profits pressure) may present themselves with lower audit risk and benefit investors, reducing contracting and agency risks, which may be by simultaneously associated with fraud, governance, and overall entity performance risks. I extend this result into a theoretical model where the entity and its customers, suppliers, regulators, and other stakeholders (‘Five Forces’) share corporate values, lowering audit (and entity contracting) risks, resulting in higher entity value. RELEVANCE FOR PRACTICE Auditors appear to consider management integrity concerns and the balance of financial and non-financial goal-setting in management compensation contracts as important elements affecting the risks of fraud, performance, and governance. This study highlights the important benefits that can be achieved in broader governance and audit settings from focusing on manager (and corporate) ethics and values. José R Hernandez, PhD Good Value from Shared Values: A fraud and risk perspective investigation is bound to have severe measurement limitations, with only the most remote possibility to reliably capture or observe such issues and concerns. Auditors, however, are trained in understanding, evaluating, and addressing risks in the performance of a financial statement audit and have incentives to do so effectively (Zimbelman and Waller, 1999). The auditor risk assessments will be reviewed as a proxy for variables that may capture concerns and issues that audit partners observe or perceive at their clients. More specifically, results from auditor risk assessments performed during the continuance evaluation stage of an audit, approved by audit partners at a ‘Big Four’ accountancy firm in the Netherlands between the years 2002 through 2004 will be discussed. Research concepts and propositions will be presented that may further our understanding on matters of integrity, corporate governance, sustainability, and corporate misconduct. The central proposition provided here is that relationships between auditor-observed risk factors may provide important insights that may be helpful in further understanding organizational conditions of heightened concern from an integrity, sustainability, performance, and corporate governance perspective. Specifically, an attempt will be made to identify and evaluate a common set of risk factors that auditors observe or perceive to have an influence in corporate misconduct, governance, and volatile past performance. Accordingly, a link with current developments in the fields of ethics and compliance is proposed which includes a potential ‘Five Forces’ model depicting how ‘good value’ may accrue to various stakeholders from a subscription by various constituents to a set of ‘corporate values’ and principles. This study reflect on results from my dissertation which consisted of an in-depth analysis of auditor risk factors documented during the client acceptance and continuance stage of an audit (Hernandez, 2007). The focus of the