An examination of the effect of inquiry and auditor type on reporting intentions for fraud

Employee tips are the most common form of initial fraud detection, suggesting that employees frequently are aware of fraud before others professionally charged to detect fraud, such as internal and external auditors. Given the seriousness of fraud to a range of stakeholders, it is important to increase our understanding of the willingness of employees who learn about fraud to report this information to auditors. We conduct an experimental study describing a hypothetical situation involving an employee's discovery of a fraudulent act by his supervisor. Given the hypothetical situation, participants, assuming they were facing the situation, provide their intentions to report fraud to an auditor. The study examines several issues related to participants' intentions to report fraud to auditors. First, we predict and find that participants' reporting intentions to an inquiring auditor are stronger than their reporting intentions to a noninquiring auditor. Second, we predict and find that participants' reporting intentions to an internal auditor are stronger than their reporting intentions to an external auditor. Third, based on contrast coding results, we predict and find that inquiry and auditor type interact to influence reporting intentions. Fourth, we find that reporting intentions for two different types of fraudulent acts, misappropriation of assets and fraudulent financial reporting, do not significantly differ, nor does the type of fraudulent act interact with whether the auditor engages in inquiry or the report recipient (e.g., internal versus external auditor). Supplemental analysis provides additional information on the extent to which beliefs differ between the two types of fraudulent acts.