Joseph F. Brazel

Electronic vs. Face-to-Face Review: The Effects of Alternative Forms of Review on Auditors' Performance

A system and method for permitting three-dimensional navigation through a virtual reality environment using camera-based gesture inputs of a system user. The system comprises a computer-readable memory, a video camera for generating video signals indicative of the gestures of the system user and an interaction area surrounding the system user, and a video image display. The video image display is positioned in front of the system user. The system further comprises a microprocessor for processing the video signals, in accordance with a program stored in the computer-readable memory, to determine the three-dimensional positions of the body and principle body parts of the system user. The microprocessor constructs three-dimensional images of the system user and interaction area on the video image display based upon the three-dimensional positions of the body and principle body parts of the system user. The video image display shows three-dimensional graphical objects within the virtual reality environment, and movement by the system user permits apparent movement of the three-dimensional objects displayed on the video image display so that the system user appears to move throughout the virtual reality environment.

Using Nonfinancial Measures to Assess Fraud Risk

For several decades, the audit profession has attempted to find efficient and effective methods of improving auditors’ fraud risk assessments so as to enhance audit quality and reduce auditor liability. This study examines whether auditors can effectively use nonfinancial measures to assess the reasonableness of financial performance and, thereby, help detect financial statement fraud (hereafter, fraud). If auditors or other interested parties (e.g., directors, lenders, investors or regulators) can identify nonfinancial measures (e.g., facilities growth) that are correlated with financial measures (e.g., revenue growth), inconsistent patterns between the nonfinancial and financial measures can be used to detect firms with high fraud risk. We find that the difference between nonfinancial measures and financial performance is significantly greater for fraud firms than for their non-fraud competitors. We also find that this difference is a significant fraud indicator when included in a model containing variables that have previously been linked to the likelihood of fraud. Overall, our results provide empirical evidence suggesting that nonfinancial measures can be effectively used to assess the likelihood of fraud.

The Effect of ERP System Implementations on the Management of Earnings and Earnings Release Dates

ERP systems have become the system of choice for the majority of publicly traded companies and have radically changed the way accounting information is processed, prepared, audited, and disseminated. In this study, we examine whether ERP system implementations have affected the extent to which firms manage earnings amounts and release dates. We find, for a sample of ERP adopters, that implementations led to increases in the absolute value of discretionary accruals (i.e., greater earnings management). We also find a positive relationship between the extent of ERP module adoption and the extent of earnings management. With respect to earnings release dates, firms with incentives to increase the timeliness of their release dates experienced a decrease in reporting lag after implementing ERP systems. These results should be of interest to financial statement preparers initially adopting or implementing new versions of ERP applications, auditors serving clients with ERP systems, and regulators overseeing the financial markets and consolidation in the ERP industry.

Auditors’ Use of Brainstorming in the Consideration of Fraud: Reports from the Field

Audit standards require auditors to conduct brainstorming sessions on every audit so they can discuss the potential for fraud and how to respond to the risk of fraud. The Public Company Accounting Oversight Board (PCAOB) has raised concerns about the effectiveness of auditors’ responses to fraud risks and has noted variations in the quality of brainstorming sessions. We develop a measure of brainstorming quality to examine whether and how it affects the relationships among fraud risk factors, fraud risk assessments, and auditors’ responses to fraud risks. We test our measure using data from a field survey of auditors’ actual brainstorming sessions and fraud-related judgments for 179 audit engagements. We find considerable variation in the perceived quality of brainstorming sessions conducted in practice. We find some evidence that the quality of brainstorming sessions moderates the relations between fraud risk factors and fraud risk assessments. We also find that brainstorming quality positively moderates the relations between fraud risk assessments and the nature, staffing, timing, and extent of fraud-related audit procedures. Our results suggest that the benefits of brainstorming do not apply uniformly, because low quality sessions likely incur the costs of such interactions without the attendant benefits. By documenting best practices from high quality brainstorming sessions, our evidence can inform auditors in practice on how to improve their fraud decision-making processes.

The Role of Non-Financial Measures in Management Forecasts

This study examines how the interplay between financial and non-financial measures affects management forecasting behavior. Building on the knowledge that NFMs are typically aligned with actual earnings and are likely incorporated into earnings forecasts, we investigate if the level of divergence between changes in NFMs and contemporaneous changes in earnings influences management forecasting behavior. We hand-collect company-specific NFMs (e.g., number of retail outlets, square footage of facilities, patents) disclosed in 10-K filings and describe how a greater divergence between NFMs and earnings (i.e., NFM changes substantially outpacing earnings growth, or vice versa) renders NFMs less useful for forecasting. As such, in more divergent settings, we observe that management is less likely to issue guidance. Consistent with our theory, for managers that do provide guidance in more divergent settings, management forecast errors increase. Last, we provide evidence that external stakeholders can use the level of divergence between NFMs and earnings to predict future management forecasting behavior. Our evidence demonstrates that NFMs and their relation with financial information play an important role in explaining management forecasting behavior.