The paper provides a cost-based explanation for decision makers' reluctance to use fraud prediction models …, particularly as these models have nearly doubled their success at identifying fraud (true positive rates) when compared to the … initial models in Beneish (1997, 1999). We estimate the costs of fraud prediction errors from the perspective of auditors …

We test the predictability of investment fraud using a panel of mandatory disclosures filed with the SEC. We find that … predict fraud. Avoiding the 5% of firms with the highest ex ante predicted fraud risk would allow an investor to avoid 29% of … fraud cases and over 40% of the total dollar losses from fraud. We find no evidence that investors receive compensation for …