Understanding investor perceptions of financial statement fraud and their use of red flags: evidence from the field

Understanding investor perceptions of financial statement fraud and their use of red flags:... We surveyed 194 experienced, nonprofessional investors to examine the relations between their perceptions of the frequency of financial reporting fraud, their use of financial statement information, the importance they place on conducting their own fraud risk assessments, and their use of fraud red flags. We find that investors’ perceptions of the frequency of fraud and their use of financial statement information positively influence the importance they place on conducting their own fraud risk assessments. Investors who place importance on assessing fraud risk make greater use of fraud red flags to avoid fraudulent investments. Red flags commonly relied upon include SEC investigations, pending litigation, violations of debt covenants, and high management turnover. Investors rely less on company size and age, the need for external financing, and the use of a non-Big 4 auditor. We also find evidence of positive associations between the use of specific red flags and investors’ portfolio returns. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Understanding investor perceptions of financial statement fraud and their use of red flags: evidence from the field

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Publisher
Springer US
Copyright
Copyright © 2015 by Springer Science+Business Media New York
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance & Economics
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1007/s11142-015-9326-y
Publisher site
See Article on Publisher Site

Abstract

We surveyed 194 experienced, nonprofessional investors to examine the relations between their perceptions of the frequency of financial reporting fraud, their use of financial statement information, the importance they place on conducting their own fraud risk assessments, and their use of fraud red flags. We find that investors’ perceptions of the frequency of fraud and their use of financial statement information positively influence the importance they place on conducting their own fraud risk assessments. Investors who place importance on assessing fraud risk make greater use of fraud red flags to avoid fraudulent investments. Red flags commonly relied upon include SEC investigations, pending litigation, violations of debt covenants, and high management turnover. Investors rely less on company size and age, the need for external financing, and the use of a non-Big 4 auditor. We also find evidence of positive associations between the use of specific red flags and investors’ portfolio returns.

Journal

Review of Accounting StudiesSpringer Journals

Published: Jun 30, 2015

References

  • Gender differences in risk aversion and ambiguity aversion
    Borghans, L; Golsteyn, BHH; Heckman, JJ; Meijers, J
  • Using nonfinancial measures to assess fraud risk
    Brazel, JF; Jones, KL; Zimbelman, M

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