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Copyright of Contemporary Accounting Research is the property of Canadian Academic Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

In this study, we address the question of what kinds of cognitive representations auditors use in a situation of potential financial statement fraud. We divide the problem of detecting fraud into two parts: detecting the frame management has constructed to mask the fraud, and detecting the fraud. We examine two ways proposed by Kahneman and Tversky (1986) for detecting a frame: (1) use of multiple representations that provide alternative interpretations of data in the financial statements; and (2) use of a procedure that transforms financial statement data into a standard representation. Twenty-four audit partners served as participants in the study. Each partner conducted a simulation of a concurring partner review. All auditors reviewed four cases in which management had created a misleading description of the company (a frame) and a financial statement fraud. The results support Kahneman and Tversky's proposal that frames can be detected by transforming a problem into a Standard representation. Auditors who used a standard representation successfully detected management's frame, aggregated the items, and detected fraud in all four cases. Auditors who used a standard representation followed a procedure specified by generally accepted auditing standards (Canadian Institute of Chartered Accountants 1988, American Institute of Certified Public Accountants 1984) for aggregating items. Auditors who used multiple representations detected management's frame on all four cases. These auditors, however, did not use the aggregation procedure specified by auditing standards and failed to detect the fraud on all four cases. [ABSTRACT FROM AUTHOR]

Discusses a study which investigated the process by which one group of individuals solves the problem of detecting deceptions created by other agents. Problem of fraud detection; Theory of detecting deception in financial information; Why auditors fail at detecting the deceptions created by management.