Finding fraud deception
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Wichita State University Accounting & Audit Conference May, 18, 2011. Finding Fraud & Deception. Presented by: Don Wengler, CPA/CFF, CFE, CVA. Lunch, Murthy, Engle 2009. Useful Research. “Useful research reflects results that are belief changing”.

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Finding Fraud & Deception

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Finding fraud deception

Wichita State University Accounting & Audit Conference

May, 18, 2011

Finding Fraud & Deception

Presented by:

Don Wengler, CPA/CFF, CFE, CVA

Finding fraud deception

Lunch, Murthy, Engle 2009

Useful research

Useful Research

“Useful research reflects results that are belief changing”

Uday Murthy lecture, March 4, 2011

Fraud brainstorming

Fraud Brainstorming

SAS 99: Consideration of Fraud in a Financial Statement (AICPA 2002)

Usually face-to-face audit team discussion

Part of audit planning process

Outcome affects audit procedures performed

Our experiment

Our Experiment

Team Nominal

Team Face-to-Face

Team Content Facilitation

Fraud brainstorming1

Fraud Brainstorming




Not Relevant

To Client

Relevant to


Face to face brainstorming

Face-to-Face Brainstorming

- Coordinate Schedules

- Wait

- Attend

- Remember

- Avoid Cog. Inertia

Computer mediated advantages

Computer-Mediated Advantages

Members can input ideas simultaneously

However, fraud brainstorming is more complex than simple idea generation

Relevant fraud risks must be identified through the interaction regarding:

Specialized auditing knowledge

Industry-specific factors

Client-specific factors

Florida study

Florida Study

Objectives--Relative effectiveness of:

Electronic v. face-to-face

Interactive v. Nominal

With v. without content facilitation

Whether participating in a fraud brainstorming session heightened auditor awareness of fraud risks when present

Florida study1

Florida Study

188 SAS 99 auditing students, teams of 4

Studied a company case study

5 question test assured case facts known

108 electronically/80 face-to-face

Electronic interactive; electronic nominal; face-to-face, with/without facilitation.

Florida study2

Florida Study

Reviewed case again

Made initial fraud risk assessment alone

20 minutes of fraud brainstorming (1221)

5 prompts: Opportunity, pressure, rationalization, revenue recognition, management override of internal controls

Face-to-face 2nd interaction

Florida study measurement

Florida Study: Measurement

The number of relevant fraud factors identified from the case

Change from the pre-brainstorming to post-brainstorming fraud risk assessment from 1% to 100% of estimated probability of material misstatement

Florida study results

Florida Study: Results

Florida study conclusions

Florida Study: Conclusions

Electronic fraud brainstorming is significantly more effective than face-to-face fraud brainstorming

Interactive brainstorming is no more effective than “nominal” brainstorming

Brainstorming effectiveness is significantly higher with content facilitation, than without

Is abe lincoln honest

Is Abe Lincoln Honest?

Finding fraud deception

Larcker & Zakolyukina 2010

Stanford study

Stanford Study

Objective: Construct and test a linguistic model for detecting deceptive CEO and CFO communications in quarterly earnings call communications.

Stanford study1

Stanford Study

Reviewed prior psychological and linguistic research related to deception

Identified words and uses of language that are believed to signal deception

Built a statistical model designed to measure/predict deception in CEO/CFO Q&A communications, based on the words/usage

Stanford study2

Stanford Study

4. Defined deceptive CEO and CFO communications in quarterly earnings call Q&A sessions

Analyzed 16,577 full text Q&A sessions to test the success of the statistical model for predicting deception CEO and CFO communications

Generalized conclusions

Prior psychological linguistics

Prior Psychological/Linguistics

Emotions perspective

Cognitive effort perspective

Control perspective

Lack of embracement perspective

Reference language

Reference Language

Larcker & Zakolyukina 2010

Illustrative data table

Illustrative Data Table

Illustration of positive association

Illustration of Positive Association

Illustration of positive association1

Illustration of Positive Association

Illustration of negative association

Illustration of Negative Association

Illustration of negative association1

Illustration of Negative Association

Illustration of no association

Illustration of No Association

Illustration of no association1

Illustration of No Association

Reference language1

Reference Language

Larcker & Zakolyukina 2010

Positive negative words

Positive/Negative Words

Larcker & Zakolyukina 2010

Positive negative words1

Positive/Negative Words

Larcker & Zakolyukina 2010

Cognitive process

Cognitive Process

Larcker & Zakolyukina 2010

Other cues

Other Cues

Larcker & Zakolyukina 2010

Self constructed word categories

Self-constructed word categories

Reference to general knowledge

Shareholder value

Value creation

Hesitation expressions

Extreme negative emotions

Extreme positive emotions

Stanford study how was deception measured

Stanford Study: How Was Deception Measured?


Form 8-K filings reflecting restatements of earnings (significant in size)

Filings reflecting “material weaknesses”

Auditor changes

Late financial statement filings

Stanford study how was size of the answer uniformly scaled

Stanford Study: How Was Size of the Answer Uniformly Scaled?

Median CEO answer: 1,811 words

Median CFO answer: 987 words

Typical CFO: (10/1,000) X 1,000 = 10

Talkative CFO: (10/3,000) x 1,000 = 3.3

Stan ford study model output

Stan-ford Study: Model Output

Larcker & Zakolyukina 2010

Stanford study model output

Stanford Study: Model Output

Larcker & Zakolyukina 2010

Conclusions deceptive executives

Conclusions: Deceptive Executives

More general knowledge references

Fewer non-extreme positive emotions

Fewer references to shareholder value and value creation

Conclusions deceptive ceos

Conclusions: Deceptive CEOs

Fewer self-references

More 3rd person plural & impersonal pronouns

More extreme positive emotions

Fewer extreme negative emotions

Fewer certainty & hesitation words

Our survey

Our Survey

Finding fraud deception

Joseph F. Fisher

Indiana University

James R. Frederickson

Hong Kong University

Sean A. Peffer

University of Kentucky

Budgeting: An Experimental

Investigation of the Effects

of Negotiation

Budget setting

Budget Setting

Negotiation Process

Unilateral Process

Negotiation matrix

Negotiation Matrix

Budget setting consequences

Budget Setting Consequences

Budgetary Slack/Planning

Subordinate Performance/Motivational



Budgets set through a negotiation process where superiors have final authority are lower than budgets set unilaterally by superiors.

Budgets set through a negotiation process where subordinates have final authority are not significantly different from budgets set unilaterally by subordinates.



Budgets set through a negotiating process ending in agreement contain significantly less slack.

A failed negotiation followed by superiors imposing a budget has a significant detrimental effect on subordinate performance.

Contact information

Contact Information

Don Wengler


Kansas City, MO 64105



Wichita, Kansas


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