Mark F. Zimbelman

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.

A cognitive footprint in archival data: Generalizing the dilution effect from laboratory to field settings

Abstract This paper delineates a bridging strategy for generalizing a theoretical proposition about human judgment from laboratory to field settings. This strategy encompasses experimental and archival methods, emphasizing each method’s complementary rather than competitive advantage. Basic experiments that use generic tasks and settings, and novice subjects, contribute empirical tests that maximize internal validity. Given a target area in the “real world” for generalizing the proposition, applied experiments that use tasks and settings with greater mundane realism, and professional subjects from the target area, contribute replicating tests that balance internal and external validity. As a complement to experimentation, archival research adds value by testing observable implications of the proposition in field settings. We relate the bridging strategy to judgment research on the dilution effect (i.e., the presence of nondiagnostic cues, when processed with diagnostic cues, causes judges to under-weigh the diagnostic cues) in psychology and applied areas. Finally, we contribute an archival data analysis that uncovers indirect evidence, or a cognitive footprint, of the dilution effect in a professional judgment setting where social and economic mechanisms potentially discipline systematic error.