International Journal of Business and Management Vol. 6, No. 7; July 2011 ISSN 1833-3850 E-ISSN 1833-8119 40 Fraud Risk Assessment and Detection of Fraud: The Moderating Effect of Personality Nahariah Jaffar (Corresponding author) Faculty of Management, Multimedia University Jalan Multimedia, 63100 Cyberjaya, Selangor, Malaysia Tel: 60-3-8312-5678 E-mail: [email protected] Hasnah Haron School of Management, Universiti Sains Malaysia 11800 Penang, Malaysia E-mail: [email protected] Takiah Mohd Iskandar School of Accounting, Faculty of Economics and Business Management Universiti Kebangsaan Malaysia 43600 Bandar Baru Bangi, Selangor, Malaysia E-mail: [email protected] Arfah Salleh Graduate School of Management, Universiti Putra Malaysia 43400 UPM Serdang, Selangor, Malaysia E-mail: [email protected] Received: January 21, 2011 Accepted: February 11, 2011 doi:10.5539/ijbm.v6n7p40 Abstract External auditors are required by the auditing standards to provide reasonable assurance that the financial statements are free from material misstatements. Inability of the external auditors to detect material misstatements, particularly fraud, may expose the external auditors to litigation. The present study aims to examine the moderating effect of personality factors (that are neuroticism, extraversion, conscientiousness, openness to experience and agreeableness) on the relationship between the external auditors’ ability to assess fraud risk and their ability to detect the likelihood of fraud. The present study utilizes an experimental approach by sending case materials to audit partners or audit managers attached to auditing firms operating in Malaysia. The result, however, shows that none of the personality factors has moderating effect on the relationship between the external auditors’ ability to assess fraud risk and their ability to detect the likelihood of fraud. Keywords: Fraud, Fraud risk assessment, Personality factor, Fraud detection, External auditors’ ability 1. Introduction The issue of fraud is very important for public accountants because litigation actions may be taken against them should they not able to detect fraud during the conduct of the audit (Feroz, Park & Pastena, 1991 and Palmrose, 1987). Palmrose (1987) describes that business failures and management fraud cause legal actions to be brought against auditors and the settlement of such actions. For instance, when Xerox was sanctioned for overstating earnings by US$3 billion, its auditor KPMG was liable for US$22 million in penalties (Ettredge, Sun, Lee & Anandarajan, 2005). In Malaysia, fraudulent activities were also found to be occurred in its public companies for example the former case of Bumiputra Malaysia Finance (BMF) and the recent case of Transmile Bhd. Although fraud may not be well documented in Malaysia, this issue could not be taken lightly because what happened in other countries, for instance in the United States is the case of Enron, could happen elsewhere.
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