The impact of audit penalty distributions on the detection and frequency of fraudulent reporting

F. Greg Burton, T. Jeffrey Wilks and Mark F. Zimbelman ()
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F. Greg Burton: Brigham Young University, Marriott School of Management
T. Jeffrey Wilks: Brigham Young University, Marriott School of Management
Mark F. Zimbelman: Brigham Young University, Marriott School of Management

Review of Accounting Studies, 2011, vol. 16, issue 4, No 6, 843-865

Abstract: Abstract We investigate how the distribution of the penalties incurred by auditors for failing to detect fraud influences their effort to detect fraud and auditees’ commission of fraud. We compare a probabilistic, skewed audit penalty to a penalty that automatically imposes the expected penalty of the probabilistic distribution (hereafter, a deterministic penalty). Our experiments show that a deterministic penalty with the same expected value of a probabilistic, skewed penalty increases audit effort to detect fraud and decreases fraudulent reporting by auditees and that these benefits hold in a game involving both auditee and auditor players.

Keywords: Audit penalty; Fraud; Legal regime; Prospect theory (search for similar items in EconPapers)
JEL-codes: G18 K41 M42 (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1007/s11142-011-9152-9

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