Auditor Use of Benchmarks to Identify Fraud Risks: The Case for Industry Data

SUMMARY This article provides a practitioner summary of the research study titled “Auditor use of benchmarks to assess fraud risk: The case for industry data” (Brazel, Jones, and Lian 2024 (BJL)). Auditors perform preliminary analytical procedures to identify risks that financial statements are materially misstated due to fraud. Via a survey of practicing auditors, BJL find that auditors rely heavily on prior year balances and relations within the client’s financial data (e.g., ratios) as benchmarks when developing expectations during planning. Meanwhile, the empirical analyses of BJL reveal that, when identifying fraud risks, benchmarks derived from industry data, nonfinancial measures, and cash flows outperform both prior year balances and relations within the client’s financial data. The industry benchmark was the top performer. The article provides examples to demonstrate an approach that practitioners can use to identify fraud risks via industry data. Data Availability: Contact the authors. JEL Classifications: M40; M41; M42; M48.