Using precedents in a case-based reasoning system for pre-engagement client screening

It is reported that management fraud accounts for nearly half of the litigation cases against auditors for audit failure involving bankrupt clients or clients in severe financial distress. One strategy that auditors can use to reduce losses due to litigation is to be more selective about the client engagements that they accept or retain. Prior research has examined management fraud and financial distress as two separate problems. We suggest that management fraud and financial distress are so inter-related that they must be considered together as part of an integrated approach to the pre-engagement client screening process. We discuss how the use of precedent cases, or war stories, indexed in a case-based reasoning system can be used to aid the auditor in deciding whether to accept or retain clients.