Financial Statement Misstatements Research Articles

Penerapan Sistem Informasi Akuntansi dan Pengendalian Internal dalam Mengurangi Salah Saji Laporan Keuangan

The issuance of an opinion on financial statements must be based on the belief that the financial reporting is fairly presented, meaning it is free from material misstatement. At Daarut Tauhiid Foundation, a phenomenon occurred where the financial statements for the years 2018-2020 received a qualified opinion (WDP) due to differences in the beginning and ending net asset balances caused by errors in Excel formulas. Primary data were collected from 54 respondents, including employees involved in the preparation of financial statements, those who have access to the accounting information system, and those engaged in internal control activities. Data processing revealed that the significance of the accounting information system variable was 0.04, the internal control variable was 0.002, and both variables together yielded a result of 0.000, indicating that the accounting information system and internal control simultaneously reduce financial statement misstatements. Ultimately, this study shows that internal control simultaneously reduces financial statement misstatements by 53.4%.

ANALISIS PENGARUH PRESSURE DAN OPPORTUNITY UNTUK MENDETEKSI TERJADINYA KECURANGAN LAPORAN KEUANGAN

Financial statement analysis is the process to identify company’s information based on company’s condition. However, in recent years there have been accounting scandals or what is commonly referred to as financial statement fraud, which is a deliberate omission that results in material misstatements in financial statements. The purpose of this study was to determine the effect of pressure and opportunity to detect fraud in the financial statements. The sample of this study were 14 companies with purposive sampling technique from 47 mining companies listed on IDX 2017-2020. Secondary data in this study is accessed through www.idx.co.id and each company's website. The analytical technique used in this study uses multiple linear analysis. The results of the analysis show that ineffective monitoring has a positive effect on financial statement fraud, while external pressure and auditor opinion have no effect on financial statement fraud.

ОСОБЛИВОСТІ РОЗКРИТТЯ ІНФОРМАЦІЇ У ФІНАНСОВІЙ ЗВІТНОСТІ ЗА МІЖНАРОДНИМИ СТАНДАРТАМИ

In Ukraine, quite a few enterprises prepare reports in accordance with international standards: large enterprises, public joint stock companies, insurance companies, private pension funds, and others. The article provides statistical data on the number of enterprises that are required to prepare reports in accordance with international standards by type and year. The main motivation for the decision to switch to international financial reporting is the need to attract foreign investment in the company's operations. The most expensive assets of such enterprises are usually fixed assets, which are available at each enterprise and, accordingly, depreciated. The start date of depreciation under national and international standards is different. The proposed sequence of actions in recalculating the amount of accrued depreciation of fixed assets as of the date of transition to international standards will allow to reliably assess their carrying amount. The paper describes the peculiarities of preparing notes to the financial statements in accordance with international standards. It is established that the financial statements prepared in accordance with international standards are significantly expanded in relation to the financial statements of Ukrainian enterprises prepared in accordance with NAR(S). The main indicators in the notes to the financial statements prepared in accordance with IFRS of many companies are similar. However, some companies highlight specific features related to their core business. Each analysed company, in addition to the accounting policy, discloses in detail in the notes those accounting items that best characterise its business activities. It was found that some of the analysed companies in their accounting policies for fixed assets do not comply with the minimum terms of their use provided for by the Tax Code of Ukraine, which leads to misstatement of financial statements. From year to year, the number of Ukrainian companies preparing financial statements in accordance with international standards is increasing due to legal requirements or business motives: entering the foreign market, searching for and attracting foreign investors, establishing joint ventures, etc. Financial statements prepared in accordance with IFRS allow for a broader presentation of information about the company's activities, in particular, by using a taxonomy and expanded presentation of information about the company's activities in the notes.

Transparency and Accountability Concerns in the Nigerian Public Sector

For many years, accountability and transparency have been of significant concern due to financial statement misstatements, fraud, and corruption in the public sector. Despite government policies and legislative acts aimed at addressing these issues, according to (Ezeajughu, 2021) such as the establishment of the Nigerian Constitution in 1999 and subsequent amendments, including the Budget Monitoring and Price Intelligence Unit (BMPIU), the Economic and Financial Crimes Commission (EFCC) Act 2002, the Independent Corrupt Practices and Other Related Offences (ICPC) Act (2000), the Advance Fee Fraud and Other Related Offences Act (1995), and the Financial Malpractices in Banks Act (1994), headlines still highlight ongoing corruption in the public service, thereby raising concerns on the twin issues of accountability and transparency in the Nigerian public service. It is in this regard that this paper examined the concerns of the Nigerian public regarding accountability and transparency. Using secondary data from Transparency International (TI), this paper argued that the level of transparency and accountability in the Nigerian public sector continues to wane, accentuating the rising level of corruption and corruptive tendencies in the Nigerian public sector. To reverse this trend, it is recommended, amongst other things, that the judicial system, framework, and architecture be rejigged and radially reformed through the creation of specialized courts that will speedily dispense justice.

연결재무제표 중심의 회계정보 공시가 특수관계자 거래에 미친 영향

[Purpose] Since the adoption of IFRS, accounting information has been disclosed consolidated financial statements as primary statements, and the importance of consolidated profits has increased. However, since internal transactions are eliminated from consolidated profits, the practice of companies using related party transactions as a means of adjusting consolidated profits is expected to have decreased. Accordingly, this study examines whether related party transactions have been decreased after consolidated financial statements are primary financial statements.
 [Methodology] This study sampled 8,461 company-years of listed companies that disclosed consolidated financial statements for five years before and after 2011. A regression analysis was performed using the proportion of related party transactions (RELATED) as the dependent variable and the dummy variable (MAIN) indicating whether the consolidated financial statements are primary financial statements as the explanatory variable.
 [Findings] This study was found that related party transactions were decreased significantly after the disclosure of consolidated financial statements as primary statements. These results remained the same when the sample period was adjusted to minimize the impact of the Fair Trade Act, etc. on related party transactions, or only companies that disclosed all consolidated financial statements throughout the sample period were targeted. In other words, the disclosure of consolidated financial statements as primary statements played a role in reducing related party transactions.
 [Implications] The results of this study have the implication of verifying that consolidated financial statements not only have the effect of eliminating financial statement misstatements caused by internal transactions, but also actually play a role in reducing related party transactions.

Principles based accounting standards, audit fees and going concern: evidence using advanced machine learning

PurposeThe current study uses an advanced machine learning method and aims to investigate whether auditors perceive financial statements that are principles-based as less risky. More specifically, this study aims to explore the association between principles-based accounting standards and audit pricing and between principles-based accounting standards and the likelihood of receiving a going concern opinion.Design/methodology/approachThe study uses an advanced machine-learning method to understand the role of principles-based accounting standards in predicting audit fees and going concern opinion. The study also uses multiple regression models defining audit fees and the probability of receiving going concern opinion. The analyses are complemented by additional tests such as economic significance, firm fixed effects, propensity score matching, entropy balancing, change analysis, yearly regression results and controlling for managerial risk-taking incentives and governance variables.FindingsThe paper provides empirical evidence that auditors charge less audit fees to clients whose financial statements are more principles-based. The finding suggests that auditors perceive financial statements that are principles-based less risky. The study also provides evidence that the probability of receiving a going-concern opinion reduces as firms rely more on principles-based standards. The finding further suggests that auditors discount the financial numbers supplied by the managers using rules-based standards. The study also reveals that the degree of reliance by a US firm on principles-based accounting standards has a negative impact on accounting conservatism, the risk of financial statement misstatement, accruals and the difficulty in predicting future earnings. This suggests potential mechanisms through which principles-based accounting standards influence auditors’ risk assessments.Research limitations/implicationsThe authors recognize the limitation of this study regarding the sample period. Prior studies compare rules vs principles-based standards by focusing on the differences between US generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS) or pre- and post-IFRS adoption, which raises questions about differences in cross-country settings and institutional environment and other confounding factors such as transition costs. This study addresses these issues by comparing rules vs principles-based standards within the US GAAP setting. However, this limits the sample period to the year 2006 because the measure of the relative extent to which a US firm is reliant upon principles-based standards is available until 2006.Practical implicationsThe study has major public policy suggestions as it responds to the call by Jay Clayton and Mary Jo White, the former Chairs of the US Securities and Exchange Commission (SEC), to pursue high-quality, globally accepted accounting standards to ensure that investors continue to receive clear and reliable financial information globally. The study also recognizes the notable public policy implications, particularly in light of the current Chair of the International Accounting Standards Board (IASB) Andreas Barckow’s recent public statement, which emphasizes the importance of principles-based standards and their ability to address sustainability concerns, including emerging risks such as climate change.Originality/valueThe study has major public policy suggestions because it demonstrates the value of principles-based standards. The study responds to the call by Jay Clayton and Mary Jo White, the former Chairs of the US SEC, to pursue high-quality, globally accepted accounting standards to ensure that investors continue to receive clear and reliable financial information as business transactions and investor needs continue to evolve globally. The study also recognizes the notable public policy implications, particularly in light of the current Chair of the IASB Andreas Barckow’s recent public statement, which emphasizes the importance of principles-based standards and their ability to address sustainability concerns, including emerging risks like climate change. The study fills the gap in the literature that auditors perceive principles-based financial statements as less risky and further expands the literature by providing empirical evidence that the likelihood of receiving a going concern opinion is increasing in the degree of rules-based standards.

THE INFLUENCE OF MORALITY, INTERNAL CONTROL ON FRAUD OF FINANCIAL REPORTS

Financial statement fraud can occur in companies, involving management in the form of misstatements in financial statements. This condition if left unchecked will be detrimental to investors and creditors. This study aims to determine the effect of morality, internal control on financial statement fraud at PT ABC and PT XYZ. This type of research is quantitative research using primary data distributed through questionnaires. Sampling was carried out using a purposive sampling technique. The sample consists of 31 respondents. Respondents work in the finance department at PT ABC and PT XYZ. The research was conducted in 2022. The questionnaire was processed using the SPSS version 25 program. The analysis was carried out using multiple linear regression, after previously testing the validity and reliability. The results of the study show that morality has a negative and significant effect on fraudulent financial reporting at PT ABC and PT XYZ companies, as well as internal control has a negative and significant effect on financial reporting failure at PT ABC and PT XYZ companies. This research is expected to provide input for companies in controlling fraudulent financial statements by taking into account these factors.

The Auditor’s Responsibility for Noncompliance with Laws and Regulations: A Case of Unauthorized Account Activity at Wells Fargo

ABSTRACT In September 2016, the Consumer Financial Protection Bureau (CFPB) announced an enforcement action against Wells Fargo related to improper sales practices. Following investigations revealing widespread abuse by thousands of employees (e.g., opening deposit and credit accounts without customer consent), Wells Fargo paid civil monetary penalties of $185 million and other substantial punitive fees and fines. This case study uses this real-world example to explore the influence of materiality on the scope of an audit, the auditor’s responsibility for detection and communication of noncompliance with laws and regulations (NOCLAR), and the auditor’s consideration of the control environment in the evaluation of internal controls over financial reporting (ICFR). After completing the case, learners are able to discuss relevant professional standards and recognize the impact of materiality considerations on decisions about financial statement misstatements, NOCLAR, and internal control deficiencies. JEL Classifications: M41; M42.

Executive compensation horizon incentives, performance targets, and auditor risk assessment

Shorter compensation duration can induce executives to act myopically and manage earnings to boost short-term firm performance. Such earnings management activities increase financial statement misstatement risk and, therefore, audit risk. Using audit fees as a proxy for auditors’ risk assessments, we investigate whether auditors consider executives’ compensation horizon incentives in assessing audit risk. We find that shorter executive compensation duration is associated with higher audit fees. However, auditors also consider other elements of the executive compensation contract when assessing audit risk. Specifically, we find that when executive compensation includes performance-vesting grants, auditors pay less attention to compensation duration and perceive companies that meet or just beat performance targets as riskier (and thus charge them higher fees). Overall, our findings suggest that auditors adopt a nuanced approach to the audit risks posed by executive compensation contracts.

Audit Partners’ Role in Material Misstatement Resolution: Survey and Interview Evidence

ABSTRACTAuditors are expected to identify and resolve material misstatements (MMs) in management's financial statements. However, beyond the audit opinion, the audit process is opaque. To address this, we independently survey 462 audit partners and interview 24 audit partners, CFOs, and audit committee members on how partners assess and address MM risk, resolve MMs, and the consequences of MMs. Partners identify MMs in approximately 9% (15%) of public (private) engagements and use qualitative factors to waive apparent MMs. Loan covenant and going‐concern issues increase MM risk more than earnings benchmark issues. Partners point to a variety of both auditor and client factors as threats to audit effectiveness. Partners often rely on rapport with management and involve the national office and audit committee in resolving MMs. Partner incentives around restatements are context specific. Our results provide new insights into the auditor's role in financial reporting that are relevant to academics, practitioners, and regulators.

The Effect of Reporting Key Audit Matters on Audit Fees and Financial Reporting Quality: Evidence from Hong Kong

ABSTRACT In 2015, the Hong Kong Institute of Certified Public Accountants issued a standard requiring auditors to communicate key audit matters (KAMs) in the audit report. This standard provides an opportunity to examine the effect of KAMs on audit fees and financial reporting quality. Using public companies listed on the Main Board of the Hong Kong Stock Exchange as the treatment group and the companies listed on the Shanghai and Shenzhen Main Board Stock Exchanges as the control group, pre-post and difference-in-differences analyses show that the KAMs standard resulted in improved financial reporting quality but also higher audit fees. Further analyses show that, although the increase in audit fees was related to the risk of material financial statement mis-statements and audit firm business risk, the improvement in financial reporting, which occurred for companies with low financial reporting quality, resulted from the “threat to management of disclosure in KAMs.”

The Impact of Domain-Specific Internal Audit Education on Financial Reporting Quality and External Audit Efficiency

SYNOPSIS We investigate how the geographic distribution of domain-specific internal audit education impacts financial reporting quality and audit efficiency in the U.S. Using universities with Centers for Internal Auditing Excellence as proxies for robust internal audit education, we find that companies headquartered in close proximity to these programs have fewer material weaknesses in internal controls over financial reporting, fewer financial statement misstatements, and shorter audit lags, and sometimes pay lower audit fees compared with a matched sample of companies not in close proximity to these programs. These findings have implications for practitioners responsible for the staffing and quality of their internal audit functions, the Institute of Internal Auditors in its education-collaboration initiatives, and higher-learning institutions responsible for educating future audit practitioners. These findings also contribute to the academic debate on the value of internal audit and determinants of internal audit function quality. Data Availability: Data are available from sources cited in the text.

Factors of fraud triangle affecting the likelihood of material misstatements in financial statements: An empirical study

This study aims to identify and examine the three components of the fraud triangle theory that affect the likelihood of material misstatements in financial statements. With a sample of 150 listed companies from two stock exchanges in Vietnam, Ho Chi Minh City (HOSE) and Hanoi Stock Exchange (HNX) in 2019, this study uses multinomial logistic regression analysis to examine the relationship among factors. This study shows the impact of using the elements of the fraud triangle theory in forecasting the likelihood of material misstatement (Cressey, 1953; Romney et al., 1980). The results indicate that the following factors affect the possibility of material misstatements in financial statements of companies: debt ratio, return on assets, independence of the board members, selection of an audit firm, auditor change in comparison with the previous year, and historical financial statements with material misstatements. These findings of the study can be utilized to develop strategies to help identify companies that are likely to have material misstatements in their financial statements.

ОСНОВНЫЕ ЗАДАЧИ И ПРИОРИТЕТНЫЕ НАПРАВЛЕНИЯ РАЗВИТИЯ АУДИТОРСКОЙ ДЕЯТЕЛЬНОСТИ

The article analyzes the state of the audit services market in Russia and discusses the main tasks of the development of auditing activities. It is noted that there is a need to expand auditing activities within the framework of the Eurasian Economic Union based on the use of international auditing standards. This is necessary to create a single market for audit services on the territory of the EAEU. At the same time, in modern conditions, many small and medium-sized businesses, non-public joint-stock companies have been removed from mandatory audit. At the same time, the introduction of the new FSB will require the compilers of the reporting knowledge of international accounting standards and professional judgment in the formation of accounting indicators for 2022. Therefore, the task of auditors is still to confirm the accounting statements, as well as to verify compliance of financial and economic activities with the basic laws, accounting standards, checking the completeness and legality of business transactions. Audit is also necessary to prevent falsification of accounting statements using various schemes in order to improve and worsen it, thereby misleading regulatory authorities, as well as owners, investors, banks, etc. Often, organizations show unreliable accounts receivable and accounts payable, do not conduct an actual inventory or do not create a reserve for doubtful debts, a reserve for inventory impairment. It is the auditors who can monitor the conduct of a genuine inventory, make inquiries to counterparties and identify the actual state of affairs in the organization. Thus, an effective and efficient internal control system is required to reduce the risks of misstatement of financial statements and prevention of a particular type of fraud or unfair actions, which can only be assessed by experienced auditors. The article also notes the need not only to audit the correctness of the preparation and confirmation of accounting (financial) statements, but also to audit the effectiveness of the use of funds and the compliance of costs with the established goals of the company

DETEKSI KECURANGAN LAPORAN KEUANGAN DI MASA PANDEMI COVID-19 DENGAN MODEL BENEISH M-SCORE DAN MODEL F-SCORE

The purpose of this study is to detect fraudulent financial statements committed by companies. This detection is carried out by 2 (two) methods, namely the Beneish M-Score method and the F-Score model. The Beneish M-Score model is a predictive model of financial statement fraud, the ratios contained in it have been proven to have the ability to predict financial statement fraud (Beneish, 1999). The F-Score is a measure used as a tool to detect material misstatements in financial statements (Pardosi, 2015). Data analysis of go-public companies in Indonesia listed in 2019 and 2020 was obtained from Osiris. The results of the study concluded that the average value of financial statement fraud decreased during the covid-19 pandemic, with an average decline of 74%. Paired t-test results are also shown in the sig value. (2-tailed) that the F-Score and M-Score calculations show a number greater than 0.05 which means that there is no significant difference in the F-Score and M-Score values ​​before and during the COVID-19 pandemic. It was concluded that the COVID-19 pandemic did not affect financial statement fraud in Indonesia.

Identification of Material Misstatement and Specific Risk Factors in an Audit of Financial Statements

Recently, due to the changing geopolitical situation, economic instability and vulnerability, practicing auditors are facing new challenges that affect the identification and assessment of risks of material misstatement of financial statements. The purpose of the research is to identify the main factors affecting the risk of material misstatement and specific risks (fraud, accounting estimates, and going concern) that auditors should consider when deciding on the level of the risk of material misstatement of financial statements. To achieve the goal, two tasks were set: to compile lists of factors affecting the risk of material misstatement and specific risks; conduct a questionnaire survey to confirm the compiled lists. The following research methods were used during the research: content analysis and systematization of scientific and normative literature, comparison, logical analysis, questionnaire survey and summarization. As a result of the research, lists of the main factors determining the risk of material misstatement and specific risks were compiled, the completeness of which was confirmed during a questionnaire survey of auditors and auditor assistants working in Lithuanian audit companies. The results of the research show the necessary need for a more thorough assessment of specific risks. Compiled lists of factors determining the risk of material misstatement and specific risks can be useful for auditors of audit companies to assess the risk of material misstatement of financial statements.

Peranan Tata Kelola Perusahaan dalam Pencegahan Saji Ulang Laporan Keuangan Perusahaan Manufaktur yang Terdaftar di BEI Periode 2017-2021

This study aimed to identify the mechanisms of corporate governance can affect misstatement of financial statements, in particular after the implementation of IFRS in financial accounting standards in Indonesia. Especially in manufacturing companies listed in Indonesia Stock Exchange 2017-2021 period. Sampling technique used in this study aimed is purposive sampling with the number of samples used as many as 70 companies. The variables used in this study is the proportion of the Board of the Independent Commissioner (Commissioner), Ownership Structure Institutional (INTSOWN), structure of ownership (BLOCK), Corporate Audit (AUDIT), Company Size (SIZE) and Leverage (LEV) as independent variables, and restatements (RSTM) as the dependent variable. The analytical method used in this research is the logistic regression models. The results of this study indicate that the independent variable The proportion of Independent Commissioners (KOMISARIS) X1, Company Scale (SIZE) X5 and Leverage (LEV) X6 have a significant effect on the dependent variable Restatement (RSTM). While the independent variables Institutional Ownership Structure (INTSOWN) X2, Share Ownership Structure (BLOCK) X3 and Audit Company (AUDIT) X4 have no significant effect on the dependent variable Restatement (RSTM).

Application of Qualitative Characteristics to Evaluate Misstatements in Financial Statements: Evidence from Factual Audit Data

The auditor should use qualitative characteristics, which describe the essence of misstatement, while assessing identified misstatements. Final decision depends on the professional judgment made by the auditor, however, auditors may make erroneous decisions or be biased. Previous theoretical research highlighted problems with the application of qualitative characteristics. However, factual audit data is confidential and usually not available for researchers to examine, therefore previous research mostly relied on surveys or experiments and there is little evidence on how auditors behave during real audits (rather than simulations). One audit company agreed to provide us with factual data for this research. The aim of the research is to examine the application of primary qualitative characteristics based on factual audit data. During the research, the audits performed in one Lithuanian audit company for the financial years 2019–2020 were examined as well as summarized official (publicly available) data about audit companies in Lithuania and audits performed by them for 2018–2020 financial years were examined. Firstly, most important primary qualitative characteristics, as well as secondary commonly used characteristics, were singled out. Our further investigation, based on received 2019–2020 factual audit data revealed that some auditors still do not apply primary qualitative characteristics in all cases. Even though we investigated one company and we cannot directly extrapolate results for the whole audit market, but our results are in line with the official and publicly available information about audit companies in Lithuania. Thus, we conclude that our results partly reflect truthful view of factual behavior of audit companies in Lithuania. These results also confirm theoretical research that qualitative characteristics are not sufficiently appreciated.

THE CHALLENGES IN AUDITING FINANCIAL STATEMENTS AT FAIR VALUE CONCEPT (FVC) IN DEVELOPING ECONOMIES: THE CASE OF REPUBLIC OF SERBIA

Some balance sheet items are the result of judgments, including fair value estimates, so the relevant evidence is very complicated to collect by auditors, thus the risk of misstatements in financial statements is inevitably greater. The research objective of this paper is to: a) highlight the problems encountered by auditors from developing countries when auditing FV accounting estimates; b) identify the challenges that auditors from Serbia face in auditing FV accounting estimates; c) consider the possibility of adequately responding to these audit challenges in Serbia. The research confirmed that the problems of auditors in Serbia in the audit of FV estimates are generated by inefficient capital markets, and that they are primarily in the field of FV assessment which are connected to the impossibility of applying the market model and higher volatility of FV financial statements, as well as those in the field of auditing techniques used in providing assurance on the objectivity of FV assessments in various business activities, which requires additional training of auditors. Thus, the research confirmed the similarity of the problems in Serbia with the problems in the auditing FV estimates in developing countries.

External auditors’ trust and perceived quality of interactions

The external auditor cooperates and communicates with the audit committee of a company to ensure effective external audit, including detection of material misstatements in financial statements. Trust is an important element to facilitate information exchange and cooperation. This exploratory research examines the impacts of external auditors’ trust in audit committee members’ competence, integrity and goodwill on perceived quality of their interactions. Through questionnaire survey, the data were collected from audit managers, senior managers, directors and partners in Hong Kong with a response rate of 27.2 percent. Partial least square structural equation modeling and principal component analysis were employed to test the proposed model. The results reveal that the external auditor’s competence trust and integrity trust in the audit committee members are two strong motivators, which improve their interactions with the audit committee. The findings also confirm that perceived quality of interactions during pre-engagement investigation mediates the impacts of competence trust and integrity trust on perceived quality during audit performance stage. The implication of the study is that audit committee members should display high levels of competence and integrity for better interactions with external auditors. These findings provide inspirations for board of directors, executives and policymakers to implement policies that enhance trust among actors to improve audit quality.