The effect of relationship and reward on report of wrongdoing

Failure to detect fraud results in serious consequences for external audito rs. Increasingly, professional guidance and evidence point to the importanc e that communication plays in detecting fraud. The research reported in thi s paper investigated several auditing experts' propositions about communica tion's role in detecting fraud: (1) communication from client personnel is important in detecting fraud; (2) the likelihood of receiving sensitive com munications from client personnel is heavily dependent on the strength of t he relationship between the auditor and the person knowledgeable of any wro ngdoing; and (3) the willingness to communicate is influenced by the knowle dgeable person's understanding of who might be benefited by the wrongful ac t-the perpetrator, the organization to which the perpetrator belongs, or bo th. This last matter is relevant to reporting on management fraud because t he fraud often involves (at least) short-term benefit to the perpetrator, t he company, and the knowledgeable observer. The experts' suggestions and previous research related to communication of wrongdoing resulted in our securing input from 20 highly experienced partne rs. Five partners served as expert consultants prior to execution of a cont rolled experiment which used auditing students. The other 15 participated i n telephone interviews to establish a check on our experts' perceptions. Th e experiment examined two propositions: (1) strength of relationship betwee n an observer of wrongdoing and a potential report recipient affects the li kelihood that the wrongdoing will be reported, and (2) the likelihood of a report on the wrongdoing is impacted by who will benefit from the misdeed. The appropriateness of using a student setting is discussed. The experimental results, which came exclusively from students, indicated t hat stronger relationships between the observer of wrongdoing and the poten tial report recipient resulted in more reports. The results showed no relat ionship between the beneficiary of the wrongdoing and the frequency of repo rts. Partners' experiences and perceptions dearly support the experimental variables' relevance to the external audit environment and the importance o f communication. In particular, their collective experiences and perception s support the proposition that the stronger the relationship between the au ditor and client personnel, the greater the likelihood of receiving a repor t about sensitive matters related to the financial statements.