Fraud Detection and Financial Reporting and Audit Delay
I formulate a model to emphasize the fraud detection role of auditors in the financial market, providing a theoretical framework to examine the likelihood of and market reaction to a financial reporting and audit delay. The model has an auditor considering whether to perform extended audit procedures after observing a red flag generated from regular audit procedures. An audit delay is represented by the event of extending audit procedures and manifested as a financial reporting delay observed by the market. I find that the equilibrium likelihood of a delay decreases when the reliability of regular and extended audit procedures improves and/or when the ex ante probability of fraud reduces. My result on the market reaction to a delay suggests that while a negative average reaction is intuitive and has been documented, the reaction can be positive for an individual firm. I derive a closed-form condition indicating when a positive reaction is possible. Specifically, a delay can be good news to the market when the ex ante probability of fraud, the imprecision of a red flag, and the effectiveness of extended audit procedures for detecting fraud are all high. The result is new in the literature. I also discuss the model's empirical implications with suggestions for regression equation specifications.
|Date of creation:||20 Sep 2010|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://mpra.ub.uni-muenchen.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- McLelland, Andrew J. & Giroux, Gary, 2000. "An empirical analysis of auditor report timing by large municipalities," Journal of Accounting and Public Policy, Elsevier, vol. 19(3), pages 263-281.
- Navin Kartik, 2008.
"Strategic Communication with Lying Costs,"
2008 Meeting Papers
350, Society for Economic Dynamics.
- Andrei Shleifer & Daniel Wolfenson, 2000.
"Investor Protection and Equity Markets,"
NBER Working Papers
7974, National Bureau of Economic Research, Inc.
- Andrei Shleifer & Daniel Wolfenson, 2000. "Investor Protection and Equity Markets," Harvard Institute of Economic Research Working Papers 1906, Harvard - Institute of Economic Research.
- Graham Loomes, 2005. "Modelling the Stochastic Component of Behaviour in Experiments: Some Issues for the Interpretation of Data," Experimental Economics, Springer, vol. 8(4), pages 301-323, December.
- Johnson, Laurence E. & Davies, Stephen P. & Freeman, Robert J., 2002. "The effect of seasonal variations in auditor workload on local government audit fees and audit delay," Journal of Accounting and Public Policy, Elsevier, vol. 21(4-5), pages 395-422.
- Wilcox, Nathaniel, 2007.
"Stochastically more risk averse: A contextual theory of stochastic discrete choice under risk,"
11851, University Library of Munich, Germany.
- Wilcox, Nathaniel T., 2011. "'Stochastically more risk averse:' A contextual theory of stochastic discrete choice under risk," Journal of Econometrics, Elsevier, vol. 162(1), pages 89-104, May.
- Sengupta, Partha, 2004. "Disclosure timing: Determinants of quarterly earnings release dates," Journal of Accounting and Public Policy, Elsevier, vol. 23(6), pages 457-482.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:27857. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht)
If references are entirely missing, you can add them using this form.