Characteristics of Accounting Fraud: Study of Company Profitability

Accounting fraud is a malpractice used to alter financial statement data or account balances. The inaccuracies caused by fraud, when caught, can be detrimental to the company, hurt the reputations of accounting firms, and cause investors to lose faith in the market. External auditors are independent of the company and work to give reasonable assurance that the financial statements are free of errors. Within accounting research, the quality of an audit is often quantified by how many errors will be found within the statements after an opinion is offered. Once errors are found, the company must file a restatement in order to maintain an unqualified audit opinion, which is an auditor\u27s judgment that the financials adhere to GAAP and are fairly presented. This study examines the relationship between audit quality and a set of independent factors, including the size of the external accounting firm, earnings before interest and tax, meeting analyst expectations, and internal control levels. We use financial restatement as a proxy for audit quality, which is measured as the number of restatements a company has made in the past year. Our sample consists of public companies in the United States that had financial restatements in 2017-2019. Financial statement fraud is not usually found by the auditor, it is turned in by an insider or whistleblower. Using this data, the SEC, AICPA, and PCAOB can create more relevant guidelines for auditors in order to catch fraud better