A fraud detection model: A must for auditors

Publication Date01 Sep 2002
AuthorMaria Krambia‐Kapardis
SubjectAccounting & finance
A fraud detection model: A must for auditors
Maria Krambia-Kapardis
Received: 11th March, 2002
PricewaterhouseCoopers Chair in Applied Accounting Research, Head of Business Administration,
lntercollege, Nicosia, Cyprus; fax: +357 2 235 5116; e-mail: kapardis.m@intercollege.ac.cy
Maria Krambia-Kapardis is an Associate
Professor in Accounting at Intercollege,
Nicosia, Cyprus as well as Head of the
Business Department. She taught in Aus-
tralia at Victoria Univeristy of Technology
and her PhD dissertation was in the area
of fraud detection by auditors. She also
teaches at the Cyprus Police Academy and
is a member of the Education Committee
of the Institute of Certified Public Accoun-
tants of Cyprus and an Associate Char-
tered Accountant of Australia. Her
research interests cover fraud detection,
profiling of fraud offenders, fraud victimi-
sation studies, public sector auditing and
regulation of the accounting profession.
This paper addresses a fundamental issue in
financial regulation — that of the auditor’s
ability to detect material irregularities. If an
auditor is to detect irregularities he/she must
also be cognisant of fraud aetiology by drawing
on such other disciplines as psychology, crimin-
ology and sociology. The paper first provides a
critique of existing fraud aetiology models and
then describes the ROP Fraud Risk-Assessment
Model constructed by the author in a study of
convicted serious fraud offenders in Australia.
The main concern of the paper is with the eclec-
tic fraud detection model (EFD), of which the
ROP model is a component. The EFD model
is aimed at enhancing the auditor’s fraud detec-
tion ability, it has been constructed by the
author and its utility successfully tested in Aus-
tralia in a survey of auditors. Finally, the
policy implications for auditors of the findings
obtained are also considered.
Irregularities such as fraud that result in a
materially misstated financial report are of
particular interest to auditors since they
have legal responsibilities for detecting and
reporting such irregularities. Material irre-
gularities include management fraud,
employee fraud, error, intentional acts,
other illegal acts and, finally, intentional
but not fraudulent or other illegal misstate-
Fraud can be defined as an act that
involves the use of deception to obtain an
illegal advantage. A number of surveys
have documented the increasing incidence
and cost of fraud against corporations. In
addition to the financial cost incurred by
the victims, the cost of fraud includes the
financial costs arising out of litigation,
against auditors who fail to detect fraud, as
well as damage to the accounting profes-
sion’s credibility.
Fraud for or against a company can take
the form of fraudulent financial reporting,
also known as management fraud, and mis-
appropriation of assets or employee fraud,
also known as defalcation. Due to the
nature of auditing and its inherent limita-
tions, fraud is very difficult to detect for a
number of reasons:
— it may be committed by people who
are familiar with accounting procedures
and can cover it up
Journal of Financial Regulation and Compliance Volume 10 Number 3
Journal of Financial Regulation
and Compliance, Vol. 10, No. 3,
2002, pp. 266–278
#Henry Stewart Publications,
Page 266

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