This study investigates whether the Auditing Standards Board's (ASB's) Statement on Auditing Standards No. 82 (AICPA [1997]) requiring auditors to separately assess the risk of fraud will lead auditors to spend more time reading fraud cues and design audit plans that are more sensitive to fraud risk. In this paper, fraud means intentionally misstating the financial statements. Auditors' ability to detect fraud has received significant attention from researchers, practitioners, legislators, and policymakers (see, e.g., Albrecht and Willingham [1993], National Commission

Auditing, Auditor-Auditee interactions, Misstatements, Strategic behavior

This study examines whether auditors can effectively use nonfinancial measures (NFMs) to assess the reasonableness of financial performance and, thereby, help detect financial statement fraud (hereafter, fraud). If auditors or other interested parties (e.g., directors, lenders, investors, or regulators) can identify NFMs (e.g., facilities growth) that are correlated with financial measures (e.g., revenue growth), inconsistent patterns between the NFMs and financial measures can be used to detect firms with high fraud risk. We find that the difference between financial and nonfinancial performance is significantly greater for firms that committed fraud than for their nonfraud competitors. We also find that this difference is a significant fraud indicator when included in a model containing variables that have previously been linked to the likelihood of fraud. Overall, our results provide empirical evidence suggesting that NFMs can be effectively used to assess fraud risk.