Forensic Accounting and Fraud Examination, 2nd Edition

8Fraud Detection: Red Flags and Targeted Risk Assessment

The Fraud Prompt—Simple and Effective

In a paper titled, “Improving Experienced Auditors’ Detection of Deception in CEO Narratives” (published in the Journal of Accounting Research), researchers, Mark Peecher and Jessen L. Hobson, found that experienced auditors’ judgments about deception are less accurate for companies later linked to fraud, regulator investigation, or class-action litigation, unless they are first instructed to look for signs of guilt in the CEO’s voice. According to a University of Illinois press release, “most people have trouble figuring out when someone is deceiving them,” said Peecher, the Deloitte Professor of Accountancy and associate dean of faculty at the College of Business. “The good news here is that very experienced auditors, who are hired because they’re supposed to be watchdogs for society, actually have the capacity to discern when upper management is being deceptive.”¹

Further the article noted:

The researchers compiled 124 judgments from 31 very experienced auditors from multiple accounting firms. Each participant provided deception judgments for four publicly traded companies, using excerpted CEO responses to analyst questions during quarterly conference calls. Software randomly drew excerpts from a population of five fraud and five non fraud companies, with the expectation that participating auditors would spot fraud accurately 50 percent of the time by chance alone. For each company, ...