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The impact of audit penalty distributions on the detection and frequency of fraudulent reporting

Author

Listed:
  • F. Greg Burton

    (Brigham Young University, Marriott School of Management)

  • T. Jeffrey Wilks

    (Brigham Young University, Marriott School of Management)

  • Mark F. Zimbelman

    (Brigham Young University, Marriott School of Management)

Abstract

We investigate how the distribution of the penalties incurred by auditors for failing to detect fraud influences their effort to detect fraud and auditees’ commission of fraud. We compare a probabilistic, skewed audit penalty to a penalty that automatically imposes the expected penalty of the probabilistic distribution (hereafter, a deterministic penalty). Our experiments show that a deterministic penalty with the same expected value of a probabilistic, skewed penalty increases audit effort to detect fraud and decreases fraudulent reporting by auditees and that these benefits hold in a game involving both auditee and auditor players.

Suggested Citation

  • F. Greg Burton & T. Jeffrey Wilks & Mark F. Zimbelman, 2011. "The impact of audit penalty distributions on the detection and frequency of fraudulent reporting," Review of Accounting Studies, Springer, vol. 16(4), pages 843-865, December.
    • Handle: RePEc:spr:reaccs:v:16:y:2011:i:4:d:10.1007_s11142-011-9152-9
    DOI: 10.1007/s11142-011-9152-9
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    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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