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A new analysis of the benchmarks that auditors use to identify financial statement fraud risk finds that the most commonly used benchmarks are less effective at identifying fraud than benchmarks that are less commonly used.

The paper, "Auditor Use of Benchmarks to Assess Fraud Risk: The Case for Industry Data," is published in the Journal of Forensic Accounting Research.

"We wanted to look not only at the benchmarks that standards say auditors can use, but the benchmarks that auditors are actually using in practice, to see which of these benchmarks is most effective," says Joe Brazel, co-author of a paper on the work and Jenkins Distinguished Professor of Accounting in North Carolina State University's Poole College of Management.

"And our findings suggest that auditors may want to increase their use of a benchmark that compares a company's revenue growth to the revenue growth of their industry sector," Brazel says. "That benchmark is not one of the most commonly used, but we found that it is most indicative of fraud risk."

At issue are benchmarks, which are tools that financial statement auditors use as indicators that fraud may have taken place. There are two organizations that set professional standards governing which benchmarks could be used when auditing public companies and privately held companies.

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