
Do Auditors and Audit Committees Lower Fraud Risk by Constraining Inconsistencies between Financial and Nonfinancial Measures?
Author(s) -
Joseph F. Brazel
Publication year - 2018
Publication title -
current issues in auditing
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.274
H-Index - 11
ISSN - 1936-1270
DOI - 10.2308/ciia-52258
Subject(s) - audit , accounting , business , revenue , audit committee , joint audit , audit risk , audit evidence , chief audit executive , internal audit , actuarial science
SUMMARY 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). Prior research also suggests that auditors, on average, are not adept at identifying and constraining these differences. This article summarizes a recent study by Brazel and Schmidt (2018) that examines whether certain auditors and audit committees are able to lower fraud risk by constraining inconsistencies between financial and related nonfinancial measures (NFMs). This practitioner summary first summarizes the motivation for the study, then discusses the methods used, explains the results, and concludes with a discussion of the study's implications. Brazel and Schmidt (2018) 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 (higher fraud risk). Surprisingly, they observe that audit committees with industry expert chairs are more likely to be associated with large inconsistencies than audit committees without industry expert chairs. Overall, Brazel and Schmidt (2018) conclude that the audit process can constrain fraud risk, but not all forms of audit committee expertise may be beneficial.