New Study Finds Audit “Signals” Can Deter Fraud Before It Happens

LOGAN, Utah — Financial reporting fraud costs companies millions of dollars every year. A study published in Contemporary Accounting Research suggests that auditors can help stop fraud before it even begins, simply by sending clear signals about how they plan to approach an audit.

The study, Preventing Fraudulent Financial Reporting with Reputational Signals of Strategic Auditors, was co-authored by Chezham (Chez) L. Sealy of the University of Alabama and Chad A. Simon of Utah State University’s Jon M. Huntsman School of Business.

The research shows that when managers know auditors are thinking strategically, anticipating management’s incentives or even staying two steps ahead, they perceive a greater risk of being caught and are less likely to commit fraud. In contrast, when auditors are seen as simply repeating last year’s audit steps, managers view fraud as less risky.

The findings also show that if fraud does occur, managers expect to put in more effort to hide it when facing strategic auditors. This means fraud is both less likely to happen and harder to carry out.

The authors note that these results highlight the power of reputational signals: communicating an auditor’s approach can influence management behavior before any audit testing even begins. By signaling that they are taking a strategic approach, auditors can help deter fraud without adding significant cost or extra procedures.

The research highlights how reputational signals can be especially valuable when new audit partners rotate onto a client engagement, or when management has little prior experience with an audit team.

Citation:
Sealy, C. L., & Simon, C. A. (2025). Preventing fraudulent financial reporting with reputational signals of strategic auditors. Contemporary Accounting Research. https://doi.org/10.1111/1911-3846.13012