School of Management Professor to Study Financial Fraud

Posted: October 11, 2007 at 1:00 am, Last Updated: November 30, -0001 at 12:00 am

By Jennifer Edgerly

Keith Jones, assistant professor of accounting in Mason’s School of Management, and colleague Joe Brazel of North Carolina State University have been awarded a $330,000 grant from the FINRA Investor Education Foundation.

The grant will help them to research the use of nonfinancial measures (NFMs) as indicators of fraudulent financial reporting by publicly traded companies.

Due to a growing concern over the rise of financial statement fraud, internal and external stakeholders are pressuring firms to improve the transparency of their financial reporting by disclosing more NFMs in their annual reports.

During the next year and a half, Jones and Brazel will conduct research aimed at testing whether NFMs are a valid benchmark for evaluating the validity of financial information and analyzing the potential for fraud. Some of the NFMs that will be considered include total number of employees, retail outlets, facilities, customers, products and patents.

“Even though financial statements are reviewed by external auditing firms, companies that are determined to misreport their financials can often fool the auditors by making the process followed to arrive at certain numbers undecipherable,” says Jones. “We expect to find, and our preliminary results support, that firms that commit fraud are more likely to have NFMs that are inconsistent with their financial data.”

Jones and Brazel hope to answer three key questions while conducting their research:

  • What is the feasibility of using NFMs to detect fraud?

  • Should investors use NFMs to make investment decisions?

  • Are auditors currently, or should they be, using NFMs to detect fraud?

The researchers also plan to create a web site that will allow investors to search a company’s annual report and identify NFMs that can be used to measure consistency with reported financial results.

Jones and Brazel will conduct their research by gathering archived data on firms that have committed fraud in the past and comparing the results to firms that have not committed fraud. They will also perform two experiments using retail investors and auditors as subjects. They expect their findings will be available in June 2009.

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