Early Detection of Fraud:
Evidence From Restatements
Natalie T. Churyk, PhD, CPA
Caterpillar Professor of Accountancy
B. Douglas Clinton, PhD, CPA
Alta Via Professor of Accountancy
Chih-Chen Lee, PhD, CPA
Strachan Professor of Accountancy
*Authors listed in alphabetical order
Acknowledgment
• We would like to thank the Institute of
Management Accountants and its
reviewers for providing us with a grant for
the original project.
Introduction/Motivation
• Frauds occurred in WorldCom,
Enron, HealthSouth, and Xerox.
• The accounting profession has
suffered a loss of credibility due to
these scandals.
• In a recent report by KPMG
(October 2009), two-thirds of
corporate executives expect fraud
to rise in their organizations, and
32% stated that internal control
needs to be improved.
Introduction/Motivation
• What makes this study different from prior studies is
the analysis of our sample. Past studies focus on
financial information (usually too late when the
numbers show any irregularities); our study focuses on
non-financial information.
• We use a methodology known as content analysis
that allows for cue examination to assist in fraud
detection.
– Churyk, et al. 2009.
Early Detection of Fraud: Evidence from
Restatements. Advances in Accounting Behavioral Research and Churyk et
al. 2008. Can We Detect Fraud Earlier? Strategic Finance.)
Prior Research
• Our prior research confirms the management
discussion and analysis reports for companies that
are required by the SEC (per AAERs) to restate
their financial statements will, on average, be
wordy; contain more negative emotion words;
contain less positive emotion words, less use of
words like “such”, less use of colons and semicolons, and less words indicating certainty than
those of similar companies that are not required by
the SEC to restate their financial statements.
Class Case
• We ask students to compare
restating companies identified by
SEC Accounting and Auditing
Enforcement Release to nonrestating companies matched on
industry and size (revenue) prior
to the fraud.
Case Requirements
• Access SEC website to obtain companies’
annual reports
– Students can find company and professor can help
find matching firm or professor can provide both firms.
• Isolate the Management Discussion &
Analysis
• Use Microsoft Word to measure cues.
• Brainstorm on what other cues may be
useful as fraud indicators.
Case Requirements
• To gain the interest of the
students, we have them
examine the cues that
one can use Microsoft
word to find:
– Word count
– Semi-colon
– “such”
Results
.
Word Count
14000
12000
10000
8000
Fraud Word Count
Match Word Count
6000
4000
2000
0
Cutter & Buck and Match
eBT International and Match
Gemstar and Match
Results
Use of Such
45
40
35
30
25
Fraud use of "such"
Match use of "such"
20
15
10
5
0
Cutter & Buck and Match
eBT International and Match
Gemstar and Match
Results
Semi-Colon
18
16
14
12
10
Fraud Semi-colon
Match Semi-colon
8
6
4
2
0
Cutter & Buck and Match
eBT International and Match
Gemstar and Match
Conclusions
• Ties to AICPA Core
Competencies
–
–
–
–
Critical thinking
Use of technology
Research
Regulatory
environment
Conclusions
• This case can be used in any
level class; principles, junior –
senior, or graduate.
• Students become excited when
they realize they can locate
differences between firms with
easy tools such as Microsoft
Word.
• Expose students to alternative
fraud indicators other than
financial indicators.