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No 1105:
Media Bias and the Persistence of the Expectation Gap: An Analysis of Press Articles on Corporate Fraud

Cédric Lesage, Hervé Stolowy, Jeffrey Cohen and Yuan Ding

Abstract: Prior research has documented the continued existence of an expectation gap, defined as the divergence between the public’s and the profession’s conceptions of auditor’s duties, despite the auditing profession’s attempt to adopt standards and practices to close this gap. In this paper, we consider one potential explanation for the persistence of the expectation gap: the role of media bias in shaping public opinion and views. We analyze press articles covering 40 U.S. corporate fraud cases discovered between 1992 and 2011. We compare the auditor’s duties, described by the auditing standards, with the description of the fraud cases as found in the press articles. We draw upon prior research to identify three sources of the expectation gap: deficient performance, deficient standards, and unreasonable expectations. The results of our analysis provide evidence that: (1) The performance gap can be reduced by strengthening auditor’s willingness and ability to apply existing auditing standards concerning fraud detection; (2) The standards gap can be narrowed by improving existing auditing standards; (3) Unreasonable expectations, however, involve elements beyond the profession’s sphere of control. As a result, the expectation gap is unlikely to disappear given the media’s tendency to bias, with an overemphasis of unreasonable expectations in their coverage of frauds and press articles tending to reinforce the view that the auditor should take more responsibility for detecting fraud, irrespective of whether this is feasible at a reasonable cost. In addition to the primary role of the press in perpetuating the expectation gap, a second reason for continuation of the expectation gap is that the rational auditor will have difficulty in assessing subjective components of fraudulent behavior.

Keywords: Expectation gap; Media bias; Corporate fraud; Management behavior; Press; Fraud-related professional standards; (follow links to similar papers)

JEL-Codes: M40; (follow links to similar papers)

47 pages, September 3, 2015

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