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 Early Detection of Fraud: Evidence from Restatements. Advances in Accounting Behavioral Research and Churyk et al 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 semi- colons, 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 non- restating 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.

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.