Perceived importance of red flags across fraud types

Abstract

► We examine importance of red flags across fraud type among three professional groups. ► Significant differences in aggregate means exist in part between the groups. ► Internal auditors stress indicators related to adequacy of internal control. ► Economic crime investigators stress management fraud related factors. ► External auditors perceive red flags of both fraud types equally. The purpose of this study is to examine whether internal auditors, external auditors and economic crime investigators perceive the importance of red flags as significantly different across two fraud types: fraudulent financial reporting and misappropriation of assets, as well as across within-subject categories. A total of 471 useable responses were collected using a web-based survey. The findings indicate that significant differences exist on both single and aggregate mean levels among the participant groups. Internal auditors report a higher perceived importance of the red flags related to detecting misappropriation of assets than of those related to fraudulent financial reporting, whereas the opposite is true for economic crime investigators. For external auditors, only small differences in aggregate means between misappropriation of assets and fraudulent financial reporting were found. As the sensitivity to fraud type may affect professional planning, procedures and techniques with regard to fraud prevention, detection and investigation, the results may have both practical and theoretical implications. Further, the focus on both fraud types adds to prior literature on fraud.