Jo Horton, Professor of Accounting and Pro-Dean External Relations at Warwick Business School, outlines ground-breaking research aimed at detecting corporate fraud years before it becomes public. Drawing on large-scale data, criminology insights, and novel analytical techniques, she explains how early warning signals can help investors, auditors, and boards intervene sooner. The work highlights the social cost of fraud and argues for a stronger role for universities in prevention, not just detection. This presentation took place at the WBS-CoBS Global Alumni Meet Up in London, January 2026.

Predicting Fraud before it Happens: How early signals can change corporate accountability by Jo Horton. From an interview with Prof. Adrian Zicari, ESSEC Business School. Editing by Tom Gamble.

As an academic, I strongly believe that universities are a social good. Part of our responsibility is to investigate complex societal problems and explore how research can help change behaviour — particularly in areas such as fraud, where the consequences for individuals, organisations, and society are significant.

At Warwick Business School, we are building a Fraud and Risk Centre through philanthropic support. The aim is to have a real impact on business fraud by developing tools that help prevent it. Where prevention is not possible, our goal is to improve how fraud is identified, assessed, and addressed. The Centre brings together early-career faculty members and PhD students working on related areas, including whistleblowing, auditing, and governance. This interdisciplinary approach allows us to look at fraud not just as an accounting problem, but as an organisational, behavioural, and governance challenge.

One of the projects we are most excited about is a model that forecasts the likelihood that a firm will commit fraud — even before it has happened. In simple terms, this is about answering a question such as: Wouldn’t it have been valuable to know that Enron or Wirecard were on a path toward fraud before it became public? That is precisely what this model is designed to do.

The Social Cost of Fraud

The motivation for this work is clear. Fraud imposes enormous social and economic costs. The World Bank estimates that fraud costs the global economy around $5 trillion. In accounting fraud alone, more than 1,000 firms across over 130 countries were involved in just the past year, with average losses of around $1.6–1.7 million per case. However, despite increasing enforcement and higher fines, fraud has not slowed. Indeed, regulators themselves have acknowledged that penalties alone are not an effective deterrent. In recent years, fines and penalties have increased substantially, yet fraud continues at scale.

A deeper structural problem is that, in many cases, those who commit fraud still benefit financially — even when they are caught. Research shows that a significant proportion of executives involved in fraud emerge with substantial personal financial gains. This creates a powerful incentive problem: if fraud remains a net benefit, then deterrence will always be limited. Our objective is to help shift this dynamic — to turn fraud from a net benefit into a net cost. That requires earlier intervention, before firms become fully committed to a fraudulent path.

From Detection to Prevention

Using data on all US listed firms since 1962, we trained our model on historical data and then tested its predictive power out of sample. Since 2006, the model correctly identifies around 88% of firms that will go on to commit fraud, often up to four years before it happens. This creates an opportunity for boards, auditors, investors, and regulators to act earlier — when there is still time to ask hard questions, challenge assumptions, and potentially change course.

Most existing models — in academia and in practice — focus on detecting fraud in the year it occurs. By that point, however, the damage has already been done. Detection is important, but it is fundamentally reactive. Our approach is different. We aim to identify firms that are at high risk of committing fraud several years in advance — much like bankruptcy risk models identify firms at risk of default. The goal is to create a meaningful window for intervention.

The “Slippery Slope” to Fraud

The core insight behind the model comes from criminology. Fraud is rarely the result of a single, sudden decision. Most executives do not wake up one morning and decide to commit fraud. Instead, fraud typically emerges through a long “slippery slope.” Small accounting choices and minor rule changes gradually accumulate. Performance pressures increase. Accounting flexibility is used to manage results. Over time, firms rely more heavily on judgement calls and aggressive assumptions. Eventually, they run out of legitimate flexibility and cross the line into misrepresentation.

In many cases, fraud is the end point of this gradual escalation — not the beginning.

As such, our research focuses on capturing this process early. We are not trying to predict the exact method of fraud. Instead, we aim to detect whether a firm is on a risky trajectory.

Using Benford’s Law to Detect Early Signals

To do this, we use a statistical principle known as Benford’s Law. Naturally occurring financial data follow predictable numerical patterns. When financial reporting increasingly deviates from these patterns, it often reflects growing human intervention. Our model tracks these deviations quarter by quarter. In firms that later commit fraud, we observe a steady increase in human intervention well before fraud is publicly revealed. This pattern is much less pronounced in firms that do not go on to commit fraud.

As a result, this allows us to identify early warning signals — not by finding a specific accounting trick, but by detecting an escalating pattern of intervention that is consistent with a firm moving down the slippery slope.

Importantly, this approach does not depend on a particular accounting standard or country context. It focuses on behaviour embedded in the data, making it potentially applicable across different regulatory environments.

Implications for Governance and Accountability

The broader aim of this work is not punishment, but prevention. By making these risks visible earlier, we can support better governance and stronger accountability. Indeed, for boards and non-executive directors, this provides an additional tool to ask informed questions. For auditors, it offers an independent signal that may warrant deeper scrutiny. For investors, it creates the possibility of better risk pricing and more informed engagement.

In practice, we have already seen cases where early warning signals helped directors challenge management and investigate issues before they became public. These examples suggest that earlier transparency can make a real difference.

A Broader Role for Universities

This is also why we believe universities have a critical role to play. Our mission is not to commercialize this work for profit, but to contribute to the public good.

Universities are uniquely positioned to take a long-term view, to develop independent tools, and to focus on prevention rather than short-term commercial returns. In areas such as fraud — where the social costs are high and incentives are often misaligned — this independence matters.

Conclusion

Fraud is not just a technical accounting problem. It is a governance, behavioural, and societal issue with far-reaching consequences. By shifting the focus from late-stage detection to early-stage prevention, we can change how organisations, boards, and markets respond to risk.

Our work shows that it is possible to identify warning signs years in advance. The challenge now is to translate these insights into everyday governance practice — so that firms can be held accountable earlier, risks can be addressed sooner, and the enormous social costs of fraud can be reduced. If we can help make fraud harder to commit and easier to challenge, then universities will have fulfilled an important part of their role as a social good.

With kind thanks to the Warwick Business School organising team and the Council on Business & Society coordinators: Katherine Higton, Sarah Pymm, Jo Horton, Ashley Roberts, Frederik Dahlmann, Amanda Bentley, Nav Aujla, Esme Roddy, Claire Hancocks, Jo Lea, Camilla Jonsson, Dhanya Krishna Kumar, Zheng Fang, Tang Ziqi, Anna Zhao, Adrian Zicari, Tom Gamble, Mohamed Fakhori, Hari Chandana Chinni, Mélissa Guillou. And with kind acknowledgements to the amazing Alumni from CoBS member schools Warwick Business School, IIM Bangalore, IE Business School, Smith School of Business, Trinity Business School, Stellenbosch Business School, and ESSEC Business School.

Useful links:

• Link up with Prof. Jo Horton on LinkedIn
• Read a related article: Financial Fraud: Hiding in Broad Daylight 
• Visit the CoBS website Alumni page and download the accompanying booklet to this interview featuring key takeaways, food for thought sections and discussion prompts for use in the classroom.
• Discover Warwick Business School
• Apply for an MBA at Warwick Business School.

Learn more about the Council on Business & Society

The Council on Business & Society (CoBS), visionary in its conception and purpose, was created in 2011, and is dedicated to promoting responsible leadership and tackling issues at the crossroads of business, society, and planet including the dimensions of sustainability, diversity, social impact, social enterprise, employee wellbeing, ethical finance, ethical leadership and the place responsible business has to play in contributing to the common good.  

• Follow the CoBS on LinkedIn
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Member schools of the Council on Business & Society.

• ESSEC Business School, France, Singapore, Morocco
• FGV-EAESP, Brazil
• School of Management Fudan University, China
• IE Business School, Spain
• Indian Institute of Management Bangalore, India
• Keio Business School, Japan
• Monash Business School, Australia, Malaysia, Indonesia
• Olin Business School, USA
• Smith School of Business, Queen’s University, Canada
• Stellenbosch Business School, South Africa
• Trinity Business School, Trinity College Dublin, Ireland
• Warwick Business School, United Kingdom.