While audits are not typically planned to eliminate every occurrence of fraud, auditors do have the responsibility to identify substantial misstatements in the financial statements of the company caused by fraud.
The past decade in the USA, has been characterised by economic crises, stock exchange speculations, financial instability, lack of trust in capital markets, financial scandals and the bankruptcy of famous companies, have resulted in economic downfall and have thrown the spotlight on the evaluation of factors responsible for the same. Of these factors, financial fraud is a major factor considered to be a disastrous phenomenon, hard to stick to secure touchlines. The US history has been witness to some of the world’s biggest accounting frauds. Of these, the Waste Management Scandal (1998), the Enron Scandal (2001), and Worldcom Scandal (2002) are the most prominent ones. Hence the determination of factors causing fraud has become a critical desideratum to prevent and eliminate such instances (Mironiuc, Robu & Robu, 2012).
A fraud audit is a disparate engagement from a financial audit conducted as per the GAAP principles. In a fraud audit, there is usually an accusation of fraud or a fraud has already been detected; the accountant is summoned to obtain facts or to serve as a professional witness in relation to the regulatory proceedings pertaining to the fraud. The accountant is not required to provide his perspective on the overall financial statements (Singleton& Singleton, 2010).
Fraud auditing involves a thorough analysis of financial statements, while one looks for the juncture where the financial statements or numbers do not match. Fraud auditing is basically carried out to spot fraudulent transactions or prevent them from happening, but not to determine how they were developed in the first place. It is a general mistake done by people – thinking that investigation and audit are similar. A fraud auditor essentially traces each transaction that an organisation has performed, searching for one which is fraudulent. On the other hand, a regular auditor only examines the data for accuracy and compliance (Lenard & Alam, 2010).Fraud auditing entails a dedicated methodology and approach to detect fraud. The auditor is searching for a proof of fraud. The main intention is to validate or invalidate that a fraud is present.
In simple terms, fraud auditing is concerned with discerning, preventing and rectifying fraudulent activities. Although complete elimination of a fraud is the goal, it not feasible in the real sense. The notion of reasonableness is applied here and this notion usually pertains to the fraud related fields of financial auditing. Accounts based frauds are normally accompanied by the counterfeiting, destruction, alteration or modification of accounting evidence. However, accounting records may either be accidentally or purposefully destroyed, modified or altered, by omission or human error (Vona, 2011). The primary goal of a fraud auditor is to identify whether an inconsistency in the records is due to human error. If this is the case, then there may be no real fraud at all. However, if the inconsistency is not due to human error or accident then the further investigation must follow.
Fraud auditors are bound by professional duty to discern fraud in their field of work. Fraud auditing is, in fact, a process to be incorporated into a company’s culture so that integrity and transparency can take grounds. If auditing is performed on a steady basis, then even those individuals who are enticed to commit frauds can be deterred.
A future defined by unparalleled informational and organisational density across both public and private sector in the US, and where the community will ask for more transparency, will require a team of individuals skilled at eliminating opacity for the common good. Trust is what is sold by the auditors. They analyse the propriety, accuracy and adequacy of companies’ work. Fraud audits and financial audits are conducted for the company owners and are publically presented to give assurance to the wider public and market. It is the personal scepticism of the auditors that enables the stakeholders and the society at large to be assured that they are being provided with a fair and true account of the concerned firm (Mainardi, 2011). Fraud audit helps identify where a fraud is happening or prevents it from occurring thereby saving the company millions and also saving the shareholders’ money.
Companies ought to practice corporate social responsibility because they owe a duty toward the society they operate in. They have to deliver some socially desirable ends to the community and distribute political, social or economic benefits to communities from whom they derive their strength. Auditing as an activity concerned with disclosures and compliance ensures that the organisations are fulfilling their corporate social responsibility and ensuring that no wrongdoings are committed by the companies (Buddery, Frank & Martinoff, 2014).
Audit for the present century in America is more of a confidence building process between the audited firm and its stakeholders. As audit is a means of assuring a company’s accountability, the auditors make the audit excellent in its inclusiveness and openness. The audit report rather than being a trust generating product, the entire audit process can become a trust generating practice within which the auditor makes use of his position as a relied intermediary to negotiate continuous learning across every dimension of the firm and its varied stakeholders (Mainardi, 2011).
Independence is a basic pillar of auditing. There is an evident association between conflict of interests and independence. While speaking of conflict of interest, it is being referred to those situations wherein the auditor has a personal or private interest adequate to impact the objective performance of his duties as a company’s auditor. The American Institute of Certified Public Accountants’ (AICPA) policy on independence requires auditors to not be relatives to and maintain any sort of monetary interest in their client. Nonetheless, it is apparent that the auditing firm’s ambitions to increase the number of high-paying customers lend them a substantial interest in the financial success of the clients. Auditing companies have a high stake in both retaining their patrons and their financial soundness (Kaptein, 2012). It is very easy to claim that the fraud auditor’s reliance on payment from and gratefulness to the client restricts independence and objectivity.
Besides the huge fees obtained for auditing, other financial ties also put a pressure on the auditor’s capacity to function independently. For the past many years, in the USA, there has been significant debate on the degree to which accounting companies must be permitted to simultaneously keep contracts for both consulting services and auditing (MAS). Its challengers have contended that the permission of this type of relationship needlessly escalates the already large financial reliance of the auditor on his client.
Another ethical issue is related to intimidation. Big and powerful organisations at times put their political ability and power to bargain with officials. When an auditor is conducting regular or fraud audit, he is expected to go easy with the organisation due to the pressure of such power. If the auditor does not have management’s support then it becomes difficult for him to resist such intimidation which results in eventual submission. Some firms even deny access to certain parts of their premises to conceal unsafe and fraudulent practices (Snyder, 2011). If an auditor surrenders to such restricted access, then an audit cannot be regarded as complete in its true sense.
Hence, it can be concluded that Ethical issues in auditing are mostly related to an auditor’s training independence which should be mitigated for the common good.
Buddery, P., Frank, S. & Martinoff, M. (2014). A vision for audit and a better society. [pdf]. Available through: <https://www.thersa.org/globalassets/pdfs/reports/rsa_enlightening_professions_10_2_14_.pdf>. [Accessed on 13th September 2016].
Kaptein, P. S. (2012). Ethics Management: Auditing and Developing the Ethical Content of Organizations. Springer Science & Business Media.
Lenard, M. J. & Alam, P. (2010). A Historical Perspective on Fraud Detection: From Bankruptcy Models to Most Effective Indicators of Fraud in Recent Incidents.Journal of Forensing& Investigative Accounting, 1(1), 1-27.
Mainardi, L. R. (2011). Harnessing the Power of Continuous Auditing: Developing and Implementing a Practical Methodology. John Wiley & Sons.
Mironiuc, M., Robu, B. I. & Robu, A. M. (2012). The Fraud Auditing: Empirical Study Concerning the Identification of the Financial Dimensions of Fraud. Journal of Accounting and Auditing Research and Practice, 2.
Singleton, T. W. & Singleton, A. J. (2010). Fraud Auditing and Forensic Accounting. New Jersey: John Wiley & Sons.
Snyder, W. H. (2011). Client confidentiality and Fraud. [Online]. Available through: <http://www.fraud-magazine.com/article.aspx?id=4294968847>. [Accessed on 13th September 2016].
Vona, W. L. (2011). The Fraud Audit: Responding to the Risk of Fraud in Core Business Systems. John Wiley & Sons.
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