Ashutosh Deshmukh

A rule‐based fuzzy reasoning system for assessing the risk of management fraud

Detecting management fraud and assessing the risk of management fraud are significant issues confronting the auditing profession. Considerable theoretical and empirical research (Loebbecke, Eining, and Willingham, 1989; Bell, Szykowny, and Willingham, 1993; Fanning, Cogger, and Srivastava, 1995; and Hansen, McDonald, Messier, and Bell, 1996) has been accomplished investigating these issues. Building on this research, we demonstrate the construction of a rule-based fuzzy reasoning system to assess the risk of management fraud. The paper illustrates how fuzzy sets can be used intuitively to measure red flags on a categorical or interval scale, how different red flags can be combined using fuzzy rules, and how a single measure of the risk of management fraud can be derived. The knowledge base for this fuzzy reasoning system is developed by using the causal model of management fraud developed by Loebbecke, Eining and Willingham (1989), the empirical investigation of this model by Bell, Szykowny, and Willingham (1993), other researchers’ efforts and the authors’ judgments, using XpertRule software. The fuzzy reasoning system is tested using the fraud data provided by KPMG Peat Marwick. We discuss methods to magnify the knowledge base of this fuzzy reasoning system to make it a viable auditing tool, the costs and benefits of building a fuzzy reasoning system, and further extensions of this research. Copyright

Performance analysis of filtering software using signal detection theory

Software filters are increasingly being touted as a solution to restrict access to inappropriate information in a variety of settings. Families want to protect young children from pornographic sites, corporations are searching for ways to minimize trivial use of the Internet by their employees, and non-profit organizations look to control information access to reflect the value system of their communities. Despite the exponential increase in software filter usage, its effectiveness is not clear. In addition, critics of the approach argue that mandated use of filtering software on public computers like libraries may result in denial of vital information to poorer sections of the society who do not have independent access to the Internet, thereby curbing intellectual freedom and creating inequity in access to information. The purpose of this study is to analytically evaluate the performance of software filters using the Signal Detection Theory (SDT) framework. Two types of software filters are modeled and analyzed--simple software filter (single method) and a sequence of software filters (multiple methods). Analysis shows the Iimited capability of both types of filters, with the multiple-method filter outperforming the simple filter. Results of this study caution proponent of filter-based solution to be realistic with expectations of the benefits of filtering based solutions. Implications of the findings for proper use and design of software filters are discussed.

An Analysis of Efficiency and Effectiveness of Auditing to Detect Management Fraud: A Signal Detection Theory Approach

The purpose of this paper is to apply Signal Detection Theory (SDT) to the problem of detecting management fraud. The use of SDT methodology significantly strengthens our understanding of the relationships among audit technology, base rates of management fraud, costs of Type I and Type II errors, extensions of audit procedures, and risk assessments prior to and during the audit. The analysis indicates that the auditor must accept disproportionate false alarm rates in order to maintain audit effectiveness in the presence of management fraud. This condition becomes even stronger as the costs of Type II errors increase compared to costs of Type I errors. The study provides policy implications for auditor practice and standard?setters.

Healthcare related open source software innovations: diffusion patterns and early adopter influence

The role of information technology in healthcare is receiving great attention owing to its ability to reduce costs, improve quality of healthcare and create distinct advantages for users. Open source software offers a viable alternative for expensive proprietary software for many small and medium organisations. In this paper, we focus on two important questions: a) What are the types of diffusion patterns for healthcare related to open source software? b) What is the influence of early adopters on the rate of diffusion of healthcare related open source software innovations? Our findings suggest that the widely used Bass model explains the diffusion of healthcare open source software innovations. In addition, we find four distinct takeoff patterns in the diffusion curves helping us understand the heterogeneity in the diffusion patterns. Finally, we find strong empirical evidence in support of the influence of early adopters on the diffusion process.

The role of audit technology and extension of audit procedures in strategic auditing

Abstract This article develops game-theoretic hidden action models for examining the role of noisy audit technology and the extension of audit procedures in deterring material irregularities. We model two different types of games: (1) a game in which the auditor makes the acceptlreject decision after the primary audit, by sometimes going contrary to the audit signal, and (2) a game in which the auditor makes the accept/reject decision after the primary audit or after extending the audit. Nash strategies are analyzed, and the equilibrium behavior involves mixed strategies on the part of the auditor and the auditee. The key results of this analyses are: (1) increasing precision in audit effectiveness may result in increasing material irregularities, and (2) the increase in material irregularities can be avoided if the audit technology, that is, audit effectiveness and audit efficiency, exceeds the required critical values.

Company characteristics and compliance with IFRS’s practice statement (management commentary) by listed companies in Bahrain

The purpose of this paper is to examine the factors influencing the voluntary compliance with the IFRS Practice Statement Management Commentary by listed companies in Bahrain in their 2010–2011 annual reports. The statistical analysis shows that there is a moderate tendency to comply with the practice statement. The compliance levels range from 40% to 97% with an average of 72.4%. The profitability, financial leverage, and industry types have positive and significant relationships with the disclosure in management commentary. But the board size affects the disclosures negatively. The compliance pattern suggests that most firms, on average, place greater emphasis on disclosures regarding the internal workings of the firm but less emphasis on the external factors and influences. Overall, the firms have complied with many aspects of the management commentary. We identify two areas – ‘resources, risks and relationships’ and ‘performance measures and indicators’ – where compliance can be improved.

A study of compliance with international auditing standards by auditors in Bahrain

Corporations in Bahrain are required to prepare their financial statements using international financial reporting standards (IFRSs), and the external auditors are required to follow international standards on auditing (ISAs). This study investigates the extent to which external auditors in Bahrain comply with the 32 ISAs, and also the problems encountered by them in complying with these standards. All the audit firms located in the Kingdom of Bahrain were surveyed using a pre-tested questionnaire. The results indicate that although the auditors comply with all the standards, their degree of compliance varies with respect to various standards and also by the size of the audit firms. The Big Four firms had a higher level of compliance with the ISAs. The qualitative responses that explained the difficulties in complying with ISAs are also listed in the paper. These results are also compared with the results of a similar study from Jordan. The ISA compliance levels in Bahrain and Jordan are comparable. The study suggests that for a more-effective compliance with the ISAs, regulatory agencies in Bahrain should be strengthened, and training and continuing education of auditors, especially from non-Big Four firms, should be improved.

Determinants of Audit Fees in Malaysia's Top 100 Listed Companies: An Empirical Study

This paper examines the determinants of audit fees in a sample of top 100 companies listed in Bursa Stock Exchange in Malaysia; market capitalization of these companies is about 85% of the total market capitalization at the end of 2012. The authors collected data from the annual reports of the companies for the year 2012, and analyzed it using a multiple regression model. The authors report that firm size, profitability, and ownership structure are the main determinants of audit fees in Malaysia. Additionally, profitability shows a negative and significant relationship, which is also in line with findings of the most recent studies. The results also indicate that there is no Big 4 premium in audit fees in Malaysia; interestingly, the relationship though insignificant is negative. The adjusted R square is approximately 47% and there were no multicollinearity issues among the variables. The study makes an incremental contribution to the literature on audit fees in the Malaysian context.

An Analysis of Trust, Employee Trustworthiness, Fraud, and Internal Controls

We analyze important strategic relationships among trust, employee trustworthiness, fraud, and internal controls. A game is modeled between a manager and an employee, two rational decision makers. The manager makes control decisions based on the strength of controls and on employee trustworthiness, which are modeled as functions of monetary and psychic costs and benefits of committing and not committing fraud. We propose a rich definition of trustworthiness that incorporates an employee’s propensity to commit fraud and sensitivity to controls. Equilibrium strategies are identified that could be used to determine the best strategy and the optimum strength of controls to use by identifying trustworthy, untrustworthy, and opportunistically trustworthy employees. A relationship of trustworthiness with a probabilistic choice of controls by the manager is established. As the strength of controls increases, the trustworthiness of the employees also increases, but a minimum critical level of trustworthiness is required to make controls effective. A high level of control may be needed to deter fraud. Also, this increase in trustworthiness does not translate to a proportional reduction of controls by the manager. We caution against excessive investments in internal controls. A low strength control with high probability of controls may be a cost effective way to deter fraud. We also explore the interaction of controls strength with the losses to the manager when fraud is committed. We find that control is not always a viable strategy. Optimal payoffs indicate that, unlike simultaneous decision making, under sequential decision making, the manager’s best strategy is to choose controls and auditing an employee. Policy implications and managerial insights of these findings are discussed.