Thesis (Ph. D.)--University of Texas at Austin, 2008. / Vita. Includes bibliographical references.

Bankruptcy is a highly significant worldwide problem with high social costs. Traditional bankruptcy risk models have been criticized for falling short with respect to bankruptcy theory building due to either modeling assumptions or model complexity. Genetic programming minimizes the amount of a priori structure that is associated with traditional functional forms and statistical selection procedures, but still produces easily understandable and implementable models. Genetic programming was used to analyze 28 potential bankruptcy variables found to be significant in multiple prior research studies, including 10 fraud risk factors. Data was taken from a sample of 422 bankrupt and non-bankrupt Norwegian companies for the period 1993-1998. Six variables were determined to be significant. A genetic programming model was developed for the six variables from an expanded sample of 1136 bankrupt and non-bankrupt Norwegian companies. The model was 81% accurate on a validation sample, slightly better than prior genetic programming research on US public companies, and statistically significantly better than the 77% accuracy of a traditional logit model developed using the same variables and data. The most significant variable in the final model was the prior auditor opinion, thus validating the information value of the auditor's report. The model provides insight into the complex interaction of bankruptcy related factors, especially the effect of company size. The results suggest that accounting information, including the auditor's evaluation of it, is more important for larger than smaller firms. It also suggests that for small firms the most important information is liquidity and non-accounting information. The genetic programming model relationships developed in this study also support prior bankruptcy research, including the finding that company size decreases bankruptcy risk when profits are positive. It also confirms that very high profit levels are associated with increased bankruptcy risk even for large companies an association that may be reflecting the potential for management to be "Cooking the Books".

To assess fraud risk, auditors collect evidence in a sequential manner by reviewing workpaper documentation, and by collecting corroborating and clarifying information from financial (management) personnel and nonfinancial (operating) personnel. SAS 99 (AICPA, 2002) noted that audit evidence gathered from financial personnel may be susceptible to deception. In addition, prior researchers have found auditors to be poor at detecting deception immediately following deceptive communication. Though the audit process is sequential and iterative, these studies measured auditors– ability to detect deception at a single point and did not provide corroborating evidence after the deceptive communication for auditors to revise their judgments. In this study, I examined auditors’ fraud risk assessments and truthfulness judgments throughout the audit process when there was an attempt at deception by management (financial) personnel. The belief adjustment model provided a framework to examine auditors’ initial judgments, their judgments directly following a deception attempt by financial personnel, and their judgments after receiving corroborating evidence from nonfinancial personnel. Sixty-four experienced auditors electronically completed one of four randomly assigned cases and, within each case, assessed the fraud risk, truthfulness, trustworthiness, and reliability of financial personnel at multiple points for a fictitious client. I manipulated the presence (absence) of fraud and the level of experience of the source of corroborating evidence (operating personnel). I hypothesized that auditors would not be able to differentially evaluate fraud risk and truthfulness judgments of financial personnel between the fraud and no fraud conditions when exposed to workpaper documentation and deceptive client inquiry evidence by management (financial personnel). However, I expected to find that auditors– would update their fraud risk and truthfulness judgments as they reviewed audit evidence from nonfinancial (operating) personnel. The results indicate that auditors in this study are not able to appropriately assess fraud risk and the truthfulness of financial personnel following the review of workpaper and client inquiry evidence. While the client was deceptive in the fraud condition only, auditors did not differentially assess the fraud risk and truthfulness of financial personnel between the fraud and no fraud conditions. After auditors reviewed evidence from nonfinancial personnel, in the presence of fraud, auditors increased their fraud risk and decreased their truthfulness judgments of financial personnel as inconsistent evidence was presented from a corroborating source. Therefore, in the presence of fraud, auditors improved the effectiveness of the audit process by appropriately increasing their fraud risk assessments in light of inconsistent audit evidence from nonfinancial (operating) personnel. Of equal importance, in the absence of fraud, auditors decreased their fraud risk assessments as consistent evidence was presented from a corroborating source. Therefore, auditors increased the efficiency of the audit process by appropriately decreasing their fraud risk assessments after integrating consistent audit evidence from nonfinancial personnel into their judgments. Further, I observed that these auditors revised their fraud risk assessments to a greater extent when audit evidence was provided by a source with a higher level of experience. Though prior research has found auditors to be poor at detecting deception, the results of this study indicate that auditors will increase or decrease their fraud risk assessments and truthfulness judgments based on the consistency of audit evidence gathered from a corroborating source. Therefore, in practice, auditors may be able to detect deception as the audit progresses. / Ph. D.

This dissertation presents the results of three research studies investigating the role trust plays in an auditor's decisions. The first study examines whether auditors develop trust in a client's management after working with the client during prior audit engagements. The results indicate that auditors have higher trust in the client's management after a positive, overall satisfying experience working with the client compared to a negative, overall unsatisfying experience. The first study also investigates whether auditors" trust in a client affects their audit decisions. The results show a negative relationship between auditors" trust and their fraud risk assessment. Specifically, lower levels of trust are associated with higher levels of risk, and vice versa. Together, the results suggest that auditors may indeed develop trust in a client's management and this trust may affect their audit decisions. The second study examines whether Certified Public Accountants’ (CPAs) level of moral reasoning affects their decision to trust a client's management and the extent to which to trust them. The results show that CPAs with relatively higher levels of moral reasoning have less trust in the client's management than CPAs with relatively lower levels of moral reasoning. The findings indicate that an auditor's decision to trust a client's management is, at least in part, an ethical judgment. Also, because the decision is an ethical one, the findings suggest that trust beyond some threshold would be considered unethical. The third study extends the results of the first study by simultaneously examining how an auditor's trust and the financial importance of the client affect the auditor's decision to accept the client's preferred method of recognizing revenue. The results indicate that auditors" trust in the client's management is positively related to their commitment to the goal of supporting the client's preferred reporting methods (goal commitment), which in turn is positively related to the auditors" assessments of the acceptability of the client's methods for reporting purposes. The importance of the client did not affect auditors" goal commitment or their acceptability assessments. The findings suggest that auditors with higher levels of trust may be more likely to accept the client's preferred method of financial reporting. Overall, these results add to our knowledge of audit judgment and decision-making by providing evidence that auditors do indeed develop trust in a client's management; that the decision and extent to trust the client is in part an ethical judgment; and that auditors" trust may affect their audit decisions. This dissertation highlights the important role that an auditor's trust plays in his or her audit decisions. / Ph. D.

ERP system has shaped the way modern organisations design, control, and execute business processes. It has not only paved the way for efficient use of organisational resources but also offered the opportunity to utilise data logged in the system for ensuring internal control. The key contribution of this research is that it has resulted in a method which can practically be employed by internal auditors for measuring internal fraud risk of business organisations with ERP systems, by utilising process mining technique and evidential reasoning in the form of Bayesian theorem, in a much more effective way compared to conventional frequentist method. The other significant contribution is that it has paved the way for combining process mining technique and evidential reasoning in addressing problems prevalent within organisational contexts. This research has contributed in developing IS theories for design and action especially in the area of soft systems methodology as it has relied on business process modelling in addressing the issue of internal fraud risk. The chosen method has contributed in facilitating incorporation of design science method in problem solving. Researchers have focused on applying data mining techniques within organisational contexts for extracting valuable information. Process mining is a comparatively new technique which allows business processes to be analysed based on event logs. Analysis of business processes can be useful for organisations not only for attaining greater efficiency but also for ensuring internal control inside the organisation. Large organisations have various measures in place for ensuring internal control. Measuring the risk of fraud within a business process is an important practice for preventing fraud as accurate measurement of fraud risk provides business experts with the opportunity to comprehend the extent of the problem. Business experts, such as internal auditors, still heavily rely upon conventional methods for measuring internal fraud risk way by of random check of process compliance. Organisations with ERP systems in place can avail themselves of the opportunity to use event logs for extending the scope of assessing process conformance. This has not been put into practice as there is a lack of well researched methods which can allow event logs to be utilised for enhancing internal control. This research can be proved to be useful for practitioners as it has developed a method for measuring internal fraud risk within organisations. This research aimed to utilise process mining technique that allows business experts to exert greater control over business process execution by allowing the internal fraud risk to be measured effectively. A method has been developed for measuring internal fraud risk of business originations with ERP systems by using process mining and Bayesian theorem. In this method, rate of process deviation is calculated by conducting process mining on relevant logs of events and then that process deviation rate is applied in Bayesian theorem along with historic internal fraud risk rate and process deviation rate calculated manually for arriving at a revised internal fraud risk rate. Bayesian theorem has been relied upon for the purpose of developing this new method as it allows evidential reasoning to be incorporated. The method has been developed as a Design Science Research Method (DSRM) artefact by conducting three case-studies. Data has been collected from three case companies, operating in readymade garments manufacturing industry, pharmaceuticals industry, and aviation industry, regarding their procurement process for conducting process mining. The revised internal fraud risk rates were then evaluated by considering the feedback received from respective business experts of each of the case company. The proposed method is beneficial as it has paved the way for practitioners to utilise process mining using a soft system methodology. The developed method is of immense significance as it has contributed in the field of business intelligence and analytics (BI&A) and the big data analytics which have become significantly important to both academics and practitioners over the past couple of decades.

Evidence from research in psychology and auditor judgment has shown that perceptions that form early in a sequential judgment process can influence subsequent judgments. Auditing Standard 12 requires auditors to identify fraud risk factors and assess the risk of fraud as part of the process of assessing overall misstatement risk. While it is expected that fraud risk assessments should have a bearing on overall risk assessments, it is possible that perceptions formed from assessments of fraud risk can negatively affect the evaluation of any evidence reviewed thereafter. Because different classes of transactions may be affected by fraud risk factors in different ways, fraud risk assessments may differ across classes of transactions. These differences may make subsequent auditor judgments susceptible to the contrast effects bias, where subjects overreact to the differences such that the fraud risk assessments influence auditor judgment more than they should. This study examines whether auditors who learn that fraud risk is low for one class of transactions immediately after examining a class of transactions that has high fraud risk, can overreact to the contrast such that they reduce their sensitivity to evidence that suggests increased misstatement risk. The study also examines whether these contrast effects can be mitigated by acquiring information about fraud risk assessments later in the sequence of evidence, after auditors have reviewed and assimilated evidence related to other risks. The study finds that, as predicted, auditor judgments are influenced by contrast effects. Auditors who examined classes of accounts for which fraud risk assessments were different were less sensitive to evidence suggesting increased risk in accounts that had been identified as having low fraud risk. However, contrary to predictions, these contrast effects were not mitigated by evidence order.

The ability of auditors to detect fraud, including intentional material misstatements in earnings, remains key to the credibility of audit firms and confidence in capital markets. The PCAOB concludes from its most recent inspections of public company audits that auditors often fail to assess and respond to risks of material misreporting by management. In a behavioral experiment, this study concludes that auditors can increase sensitivity to management motivation to misreport by actively seeking to transform identified risk factors focused on the organization, into factors focused on top managers, and to evaluate whether these manager-focused risk factors represent incentives for personal gain or pressures to avoid a personal loss on the managers. Currently, auditing standards use incentive and pressure as interchangeable constructs, but auditors in this study assess pressure on managers to avoid a loss as a greater risk than an incentive to managers to attain a gain. Results also demonstrate that auditors will be made more sensitive to fraudulent financial reporting risk when focusing on pressure on top managers, than they will be by engaging in a traditional process of assessing total fraud risk based on the three fraud triangle elements. This study is the first to propose a theoretical explanation for why prior studies reflect auditor insensitivity to organizational level fraud risk factors. This study is also the first to enhance knowledge about auditor risk assessment and decision-making through the application of prospect theory and through disaggregation of one of the three elements of the fraud triangle model, by differentiating between incentive and pressure for misreporting earnings.

The diploma thesis deals with the internal audit, its function and status in a particular organization. The passages look into the development of the profession, relation to the external audit and their comparison, demands on the internal auditor, internal audit structure and the procedure itself. A part of the thesis deals thoroughly with the internal audit in connection with a risk, fraudulent conduct and the importance of the internal control. At the end of the thesis, there are some practical examples of ethics violation in the auditor profession and the view of the current internal audit.

The study examines how an individual's level of fraud detection proficiency (an individual possessing formal fraud education or training, informal fraud training, fraud task-specific experience, and /or fraud-related certifications) impacts their performance on fraud risk assessments and modification of audit plans. Further, it explores which of the fraud detection proficiency dimensions are valuable for auditors in situations of high and low levels of fraud risk and how these characteristics interact with professional skepticism. This, as well as the effectiveness and efficiency of the procedures selected, are addressed using a survey-based scenario where one case is embedded with a financial statement fraud and the other is not. Tobit and ordered logit regression models are used to evaluate a sample of 40 auditors and 10 forensic professionals with varying levels of fraud-related experiences, education, training, and certifications against a benchmark panel. Results demonstrate fraud certifications are effective in fraud risk assessments, are not effective in audit plan modifications, and on average those individuals tend to over-audit. In addition, fraud-related task-specific experience improves audit plan modification effectiveness. Third, including professional skepticism as an interaction is more reflective of the variable's nature, with results supporting interactions with fraud certifications and informal fraud training in the fraud risk assessment model and formal fraud training in the audit plan modifications model. Finally, individuals of higher rank, in addition to those with fraud certifications, are more likely to over-audit, while individuals in the no fraud scenario are more likely to under-audit. This study contributes to the academic literature with regard to a subset of the FJDM proposed by Hammersley (2011) validating professional skepticism as an integral variable in the model, particularly as an interaction variable and with regard to the impacts of fraud certifications and fraud-related task-specific experience. The study also contributes by providing evidence, which indicate lower fraud risk situations are prone to assessing fraud risk less effectively and under-auditing. Finally, this study also contributes a new measure for direct fraud-related experience, which captures more details regarding applicable task-specific experiences. / Ph. D.

Organizations use pre-employment tests to identify individuals characterized as having a propensity (likelihood) to commit theft with the intent to limit at-risk hires, thereby reducing the risk of fraud. Pre-employment tests were originally designed to identify a broad range of deviant behaviors such as previous violations of laws, and violations of social norms and organizational policies (O'Bannon et al., 1989), not as predictive indicators of deviant behavior and theft. In addition, the test most commonly used to identify high fraud risk applicants, the integrity test, has limited support as a valid predictor of theft (MacLane & Walmsley, 2010; Ones et al., 2003; Sackett et al., 1989; Van Iddekinge et al., 2012) within the literature. This study empirically examined the efficacy of pre-employment tests to elicit a predictive profile of white-collar crime by testing the relationship between deviant behaviors, personality traits, and integrity. The data for this study was obtained through questionnaires and pre-employment tests administered within the Federal prison system. The total sample consisted of twenty (N=20) convicted white-collar inmates. Results of this sample were compared to the general population statistics as provided by the pre-employment test providers. In line with the literature, positive relationships were found between low integrity and deviant behaviors. Contrary to past literature, no significant relationships were found between Agreeableness and Integrity or Emotional Stability/Neuroticism and Integrity. A positive relationship was found between high Conscientiousness and Integrity. Of particular note, this study found that the failure rate of the overt-integrity test was 45% and 100% for personality tests in identifying individuals with traits consistent with deviant behaviors. This study contributes to the existing literature on personality, integrity and deviant behaviors by providing insights into the nature of the relationships as they relate to white-collar crime. This study also expands the theory of deviant behaviors with a thorough definition within the literature results, which helps to define the dimension and constructs of deviant behaviors within the workplace as it relates to white-collar crime. Finally, this study specifies practical implications to be considered by management and pre-employment test providers for the purpose of enhancing fraud prevention and reducing deviant behaviors within the organization.