Expectation Gap and Corporate Fraud: Is Public Opinion Reconcilable with Auditors’ Duties? Expectation gap is unlikely to disappear given that auditor is unable or unwilling to assess the subjective components of fraudulent behavior

June 12, 2013 Leave a comment

Expectation Gap and Corporate Fraud: Is Public Opinion Reconcilable with Auditors’ Duties?

Jeffrey R. Cohen Boston College – Department of Accounting

Yuan Ding China Europe International Business School (CEIBS)

Cédric Lesage HEC School of Management, Paris

Hervé Stolowy HEC Paris – Accounting and Management Control Department

January 15, 2013
CAAA Annual Conference 2013 

Abstract:      
The objective of this paper is to answer the key question of whether auditors’ view of their fraud detection duties is reconcilable with the public’s view. We perform a content analysis of press articles covering 37 U.S. corporate fraud cases discovered during the period 1992-2005. We compare the auditors’ duties (as described by the auditing standards) with the public opinion represented by these press articles. Consistent with Porter (1993), we identify three types of divergence between public expectations and auditing standards: deficient performance (that we label “Type 1”), deficient standards (“Type 2”) and unreasonable expectations (“Type 3”). The Type 1 gap can be reduced by strengthening auditors’ willingness and ability to apply existing auditing standards on fraud detection. The Type 2 gap can be narrowed by improving the existing auditing standards. The Type 3 gap, however, concerns highly subjective criteria beyond the auditors’ usual sphere of control. The results of our analysis confirm that the expectation gap is unlikely to disappear given that the rational auditor is unable or unwilling to assess the subjective components of fraudulent behavior, and that value judgments, as demonstrated in the media, retain their popularity.

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Unknown's avatarAbout bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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