Paul Coram

Internal Audit, Alternative Internal Audit Structures and the Level of Misappropriation of Assets Fraud

In recent years, the importance of good corporate governance has received significant public and regulatory attention. A crucial part of an entitys corporate governance is its internal audit function. At the same time, there has been significant public concern about the level of fraud within organizations. The purpose of this study is to assess whether organizations with an internal audit function are more likely to detect and self-report fraud than those without. In this study, we use a unique self-reported measure of misappropriation of assets fraud for the first time. The fraud data are from the 2004 KPMG Fraud Survey, which reported fraud from 491 organizations in the private and public sector across Australia and New Zealand. The internal audit data are from a separate mail survey sent to the respondents of the KPMG Fraud Survey. We find that organizations with an internal audit function are more likely than those without such a function to detect and self-report fraud. Furthermore, organizations that rely solely on outsourcing for their internal audit function are less likely to detect and self-report fraud than those that undertake at least part of their internal audit function themselves. These findings suggest that internal audit adds value through improving the control and monitoring environment within organizations to detect and self-report fraud. These results also suggest that keeping the internal audit function within the organization is more effective than completely outsourcing that function.

The Effect of Investor Sophistication on the Influence of Nonfinancial Performance Indicators on Investors’ Judgments

This paper presents an experiment that examines how enhanced disclosure of nonfinancial performance indicators affects the stock-price estimates of nonprofessional and professional investors. Participants were provided with a case study containing excerpts from a hypothetical companys annual report. The experiment was a 2 (nonprofessional and professional) × 3 (positive nonfinancial performance indicators, negative nonfinancial performance indicators, and financial information only) between-subjects design. Consistent with conservatism, the nonprofessional investors underreacted in their stock-price estimates to the positive nonfinancial disclosures, compared with professional investors with task-specific knowledge. The results from this study suggest that the value of enhanced disclosure of this type may not flow equally to all users of financial reports, if conservatism, and lack of task-specific knowledge, adversely affect their decision-making. Copyright (c) The Author. Journal compilation (c) 2009 AFAANZ.

Active Learning in Accounting: A Case Study in Preaching to the Unconverted

In recent years there has been a decrease in the proportion of commerce students taking an accounting major in Australia (Institute of Chartered Accountants in Australia, 2001), resulting in a greater proportion of first year accounting classes comprising non‐accounting majors. At our institution we felt that an approach based on “active learning” strategies as suggested by the Albrecht and Sack Report (2000) was appropriate for non‐accounting majors. This was primarily to instil a greater enthusiasm for and interest in accounting than had been evident from our experience with these students in the past. In the course evaluations the non‐accounting majors were positive about their learning experiences. In reviewing the students’ assessment performance we found that the non‐accounting majors actually performed better than the accounting majors in one of the five assessment components – the final exam. These findings suggest that the active learning approach may be beneficial to all accounting students.

Earnings Management: The Role of Economics and Ethics on Managers' Decision Making

A significant amount of earnings management (EM) research has treated managers’ EM decision processes as a “black box”. The objective of this study is to begin to open the black box though examining the relative importance of economic factors as well as ethical considerations in managers’ EM decisions. We performed a survey of 225 CFOs and CEOs of listed companies. They were provided with a case study where the firm’s earnings were projected to be below market expectations and they were asked whether their firm in the same situation would manage earnings via accounting adjustments versus real operational adjustments and then they were asked about a number of economic factors and ethical considerations related to this decision. We find the predominant factors in the initial decision to manage earnings is whether the EM is ethically questionable and the economic consequences to stakeholders – rather than manager self-interest. We also find ethics is substantially more important in the choice of EM method than the relative economic costs of the two methods. The stronger the CFOs’ and CEOs’ belief that the use of accounting (real operational) adjustments is ethically questionable the more likely their firms would use real operational (accounting) to manage earnings. Finally, we find a significant portion of the explanatory power of ethics in EM decisions is due to CFOs’ and CEOs’ perceiving the decision to be lying for both the initial decision to manage earnings and also for the choice of method to manage earnings.