The Role Of External Auditors In Detecting Corporate Fraud Accounting Essay

The bureau Of External Auditors In Detecting Corporate imposture Accounting raiseINTRODUCTIONThis introductory chapter intend to inform the reader on the multiples cases that give be tackled in this base. So by and by describing the cardinal issues, this chapter de opus so coer the rationale of the inquiry, the aims and object lenss as soundly as the limitations encountered, which either go away be fully explored. Eventually a tooshievas of the structure of the research pull up s ca-cas uniformwise be conducted to conclude this beginning part.Description of the issueExternal attendees responsibilities and char modus operandiers earn al shipway been highlighted by several questions such(prenominal) as Where were the attendees (Yuhao Li, 2010) in main pecuniary scandals as the Enron af uninfected in 2001, the WorldCom in 2002 and P weaponalat in taly in 2003. As these entities verbalize were very wealthy and do goodable, when abruptly they were decl ard bankruptcy subsequent to the dis natural bounce backingy of several irregularities and impostor. Alleyne and Howard (2005) argue that these phase of incorporated disasters ar frequent and ar affect the responsibility as well as the license of analyzeors in honoring corporate charade.why did non the tenders catch it this is the first question that becomes pas sentence a corporate visitation. That is why, in relation with the above question and according to Millichamp and Talor (2008), there is a difference called Perception Gap between the cosmos and the canvasing profession concerning the tariff of an he arer regarding the postiche and errors staining. Therefore the scrutiniseor duty can be seen as the unconditional examination and evinceion of opinion over the pecuniary commands produced by the entities. It must be done by an appointed attendant in compliance with the applicable statutory obligation (Millichamp and Talor, 2008).Yuhao Li (2010) in the cas e analysis of the Enron scandal and each(prenominal) others authors such as Koh H. C. and philander E-S (1998) the Expection Gap in Auditing, acknowledged that the public and stakeholders hold diverse beliefs al virtually the attendees duty and usage but alike ab show up the message tell in the companies audit reports. So manifestly the public misperceptions are principally the study liability issues that auditing profession is facing. So given these concerns, the tabu(p)side auditors role and duty are being misunderstood by the main part of the public collectable to the recurrence and the diversity of corporate postiche. thus this base butt ends to address the numerous issues associate to the role and the duty of an auditor in particular concerning blind.Rationale of the researchIn the monetary and auditing place setting, several belles-lettres and researches exist on the crucial role and duty of external auditor in obstructing and detecting corporate ta rradiddle. close to authors, who stand for investors and those having interest in none, toughly consider that a corporate failure is resulting from either remissness or even often from a lack of knowledge from auditors. So in other words, most business failure is payable to an audit failure (Dixon, Woodhead and Sohliman, 2006). Multiples studies similar to the research express above are safekeeping the public belief unchanged, thinking that auditors are mainly responsible for around(prenominal) corporate financial scandals. consequently, further research over this concern is take in hostel to take aim an efficient approach to reply over this issue. Also this research give be charge on the alone role and duty of the external auditors, which is different from previous opus on both external and ingrained auditors. The paper provide overly emphasize on fraud as element of the expectation gap. This allow for change separate point of suppose from corporations angle and from individuals angle. Therefore the research aims to bring additional contribution to a well-known ground in the study counties with outstanding stocks exchanges such as the get together Kingdom.1.4.Aims and objectivesThis study testament target to bring a clear and defined overview of the role of the external auditors in the auditing affect in particular their responsibilities regarding the corporate frauds. hence the research provide be carried out and go away be foc utilise on the role and the liabilities of the auditor in fraud detection. In the mean condemnation fraud supposition lead be explained and perioded to help to emend understand the events of fraud, the ways usually drilld and as well as the different potentiality perpetrators.During all the study long, any(prenominal) responds will be brought to m each questions underpinning this paper. Those questions whitethorn vary from related questions to the traditional role of auditors to their role and li abilities into corporate fraud. Thus the substantive questions underpinning this study areThe importance and effectiveness of auditing.The role of the auditor in particular in an financial environment changesThe origin, overview, size and type of corporate fraudWhat further measures should be taken by auditors to stop up detecting corporate fraudShould auditing move from the archival approach (auditing offset at the end of history time period) to a permanent auditing where auditing will be processed while corporate is operate.What changes should be made to ensure the dexterity of auditing.However, by studying these questions, this paper will discuss on the basic principle issues on auditing especially auditors role in detecting fraud, but will also bring a presend tenseation of the auditing theory and practice which are, most of the time misunderstood. Therefore one of the key objectives of this study will be to show whether or not that auditors responsibility were engaged in impuissance to detect the frauds in the past financial scandals.Limitations and constraintsThis study has encountered some limitations and constraints. and soce the research will be fencely focusing on the resole external auditors as third party appointed to report to shareholders. This p rebootence is receivable to the fact that in this research, it was imperative to maintain a secession between auditors and managers so that the auditor cannot be friend or sexual relation to any owner. It is also crucial that he is not holding any stock in the entity or any monetary stake in any other of their subsidiaries or holdings.Also the fraud idea apply in the research has been defined as the act of deceit that results from conjuring trick of a material fact with knowledge of falsify of the representation or with lack of reasonable ground for belief in its truth (Association of hire Certified Accountants, 1986, P12). The factor Time also remained as constraint as such researc h requires much longer time for data collecting, curious and data analysis invention. As well as the time, the study has go finished constraint over the search of literature because most papers write does not support the auditor duty or role due to the fact that they are subsequent to financial scandals.However the utilisation of this paper is to review the different opinions concerning the role and the independence or auditors and the effectiveness of auditing to detect frauds and errors.1.6. Structure of the researchThis research on the role of the auditor in detecting corporate fraud will be conceptioned by a second chapter called scene in which, different financial crisis such as Enron and Parmalat will be analysed. A third chapter will present different literature review concerning, the role and reliance of external auditors at the light of past scandals as well as the nature and different kind of fraud. An consideration will also be given to the independence of audito rs and their related auditing bodies.The fourth part, which is the description of the methodology, used to brand out this study, will also include the justification of the employed method as well as its limitations and divers constraints confronted when conducting the research. A fifth part will wherefore summarise the research considering, then interpret the numerous collected data. then(prenominal) eventually the sixth part of the paper will address a final stage of the study and the results found from it. In this section, a general synopsis will be required including further research guidance and recommendations.1.7. outlineThe research will underpin on the different questions stated in the introduction of this research. Therefore in the second chapter (context), an analysis of the environment through which the research has to be related is essential.Chapter 2 ContextThe fact of carrying out an audit remains vital and important for all companies, especially for public list ed companies. It is essential for companies that audits are carried out for several reasons. First of all it ensures stakeholders that come with is being the right way run on their behalf, respectful of beau monde policies and complying with the justice but also that the investors silver is in safe hands.The concept of auditing has been passing developed over the past decades, raising some reflections on auditing as a discipline rather than just a simple practice. Thus some questions have quickly been raised on the role of the auditors. So to better understand the role of the auditors as well as the auditing process in spite of appearance a corporate, it is important to adopt a critical approach, as part of the issue surrounding the role of the auditors, starts by a misunderstand of the nature and the role of the auditor. (Soltani, B., 2007).To describe the main issues around the role of the external auditors in detecting corporate fraud, it will be useful to refer to questi ons such as do auditors spend more than time to cover their backs than giving helpful culture to investors or where were the auditors? , Critical and general questions that arise after financial scandals such as Enron in 2001 in the United States of America or the Parmalat affair in Italy. Indeed these kinds of corporate failure are repeated and have exposed some issues regarding the responsibility of the auditors in detecting corporate fraud (Hilton, A., 2010).The cost of fraud is increasingly affecting many businesses all around the world. Everybody is affected as a dupe of fraud because of the high products costs and also because of low corporate profits. So in order to put an end or to reduce this practice, auditors (internal and external) are operating to help to enforce performableness and to set up self-assurance in financial coverage.Therefore this introductory stage aims to inform the readers on the issues that will be addressed in this paper. The paper will also cove r, the aims and objectives of the research, the used research methodology, the scope and limitation of the study and the literature review with the proposed chapters.2 LITTERATURE REVIEW2.1Overview on AuditingFirst of all, audit will be defined as an exercise designed to enable an auditor to posit an opinion whether the financial statements are prepared, in all material respects, in unison with an applicable financial reporting framework (the instal of lease Accountants in England and Wales, 2008, P.6).So an auditor is the qualified person who gives a conclusion whether the financial statement of a company shows a received and fair view.It is important to know that it exists the audit threshold, which is specific to each country or frugal expanse, for example in the United Kingdom, all companies according to the base of undertake Accountants in England and Wales (2008) are required to be audited except some very small companies and since 2004 exemption were extended to all companies which fulfil the following criteria-The business must be qualified as small company under the 2006 companies act-The businesss turnover must be less than 5.6 billion-The companys gross assets (non real assets and current assets) must not exceed 2.8 million.Essentially after the industrial revolution (1750-1850), the guidance of companies moved from owners or sole traders to managers to start it more professional, because that where the need for auditors comes from in order to have independent auditors from heed to report to owners.In the United Kingdom the primary feather purpose is to detect frauds and the errors. However the general objectives of all audit engagement will include the following targets according to Soltani B. (2007)A check up and rating to find out whether the financial statements and the footnotes have been prepared in accordance of the specified criteriaA global military rank of the effectiveness of the internal match systems used for the finan cial reporting during the past story periodAn evaluation of the possibility of fraud that could occur within the organisationAnd finally it will be essential to evaluate the probability that the organization will carry on as a going concern.Also the main purpose of the audit consists in helping to enforce accountability and promote authority in financial reporting. Auditing as well represent a germane(predicate) way for shareholders and stakeholders to help ensure that managers and directors are acting in companys scoop interest, because directors are mainly responsible for managing the affairs of the company on behalf of the shareholders (Wells, J. T., 2004).2.2History of the auditor role concerning fraudAuditing has gone forward in the capital market economy especially during the past century while its traditional and original purpose was to ensure that honest and accurate accounting have been held in the affairs of state, government services or others public bodies. With th e time the concept of auditing has enlarged essentially with the economic and industrial developments, since then auditing concepts have expand bringing more than practical aspect to its previous one. Thus a review of auditors objectives evolution in the time will be essential to appreciate all the controversy made round the auditors liabilities (Soltani, B., 2007).2.3Auditors and fraud account statement2.3.1Prior to 1500Long time in the past, the auditing function was used, for example merchants were helped by some auditors to support them in their business accounting. As that kind of audit was design to control and to verify the duty of agents in perpetration of the trade, so the audit primary function was to prevent and to detect frauds (Turley and Cooper, 1991).2.3.2Between 1500 and 1850With the expansion of the industrial revolution, auditing also have been developed due to the fact that even a that period there were a separation between investors or owners and the persons in charge of running the businesses. Few changes were made for this period and overall the objectives of auditing remained the same as the practice was based on verifying the business transactions to unveil false operations.So this stage has settled standards for accounting practice that will be denotative later in the British company act 1862 (Turley and Cooper, 1991).2.3.3Between 1850 and 1905Due to the expansion of businesses and the separation of ownership and control, it became obvious to find a proper control system rather than a check up of companys records by owners. Also with the establishment of the Society of Accountants in Edinburgh in 1854, which became the Institute of Chartered Accountants of Scotland, it has been recognised that it is important to be trained and to have relevant skills for such control function (Turley and Cooper, 1991).2.3.4Between 1905 and 1946At this period the role of the auditors has evolved due to more complexity in business. So auditors duty c hanged toward their capacity to express their confidence and credibility over financial statement rather than certifying documents and therefore making them clear even though they were not (Turley and Cooper, 1991).2.3.5Between 1948 and 1980During this period the audit objectives have moved from the simple fraud and errors detection to an expression of an secure opinion over the adopted financial reporting and financial information. Since then auditors will be in charge of verifying recorded information and whether they have been correctly made, they also had to check if transactions in books are in accordance with disclosed information before they finally expressed their opinion whether the accounts have been prepared regarding a True and Fair view (Turley and Cooper, 1991).2.3.6Current situationDuring the years after1980, many financial scandals previously stated have put the effectiveness and the responsibility of the auditors in cause. However the role of the auditors did not c hange deeply when the fact showed that extension have been brought to the auditors duty. Also to honour their practice, the financial services had imposed a duty to report all frauds suspected or detected. Consequently to changes, the Auditing Practices Board has issued the statement of auditing standards 110 related to fraud and error (The Institute of Chartered Accountants In England and Wales, 2008)2.4DESCRIPTION AND VARIETIES OF FRAUDAn auditor is in charge to draw conclusion whether a companys financial statements are free from material misstatement that could be due to fraud. Thus the International Standards on Auditing set out auditors responsibility regarding fraud through the ISA240 which will take account of evaluating risks of material misstatement and will also learn finding out the sensitivity of the financial statements to material misstatement caused by fraud (the Institute of Chartered accountants in England and Wales, 2008).Fraud is a word which is often use to c over a wide range of illegal acts, then according to OGara J. D., (2004) Fraud is the intentional and illegal act of deception or of manipulating accounts. It can be operated for the benefit or to the detriment of the corporate and by persons inside or outside the organization. Its also essential to reference that fraud is a deliberate cheating for the satisfaction of an individual or group. However in this paper we will only be concerned by fraud that may be detected by auditors. Actually, we will classify fraud through two dimension which are whether the perpetuated fraud is for or against the organization and secondly to find out the class of the culpable or perpetrator.Regarding the type of fraud it could either beCorruption or misappropriation within the business which case is a fraud against the business.Fraud concerning the financial reporting which is considered as a fraud for the organization as well as the money laundering.External fraud against the organization (for e xample false checks or credit rating card fraud), (OGara, 2004).And for the perpetrator it could either be focusing, employee or non-employee. However management frauds are most of the time completely different from employees, as management will be using positional power rather than winning advantage of internal control weaknesses. Most of the time financial reporting fraud occurs at the top of an organization and is run up by senior management the operating management is more likely to consecrate bribery and corruption as fraud rather than the others types, whilst administrative managers will go for asset-misappropriation.For many others reasons, management fraud is under detected, and also when its detected most frequently it remains not prosecuted, that why for internal auditors the primary responsibility will be recognition and detection (OGara, J.D., 2004).As stated above, external and internal auditor remain different, thus that is why management frauds against the busines s are extremely difficult to detect for internal auditors and it s requires further perspectives than just normal accounting. So detecting management fraud remains the greatest challenge for those internal auditors because of its high impact on the business often even more significant than the other types as it is usually an off the books fraud (OGara, 2004).2.4.1FRAUD AGAINST THE ORGANIZATION3.1.1Management fraudAs mentioned earlier, the area of most management fraud against the organization, generally conflict of interest, is under reported, because it is the most embarrassing for a corporation. According to John D. OGara (2004) Management fraud could also involve non management individuals, and we will states below some common feature film to those fraudsMainly relational fraud, which could be for example to divert corporate profit rather than doing transactions, which could be detected by auditors.The average management fraud loss is 8 times the average employee- fraud loss (ex cluding financial statement fraud)The impact of the fraud is significant and essentially not apparent in the records (income statement or statement of financial position of the corporate) due to the fact that they are off the books.Also the perpetrator is a higher(prenominal) in the corporation so making him a trusted employee.ofttimes other persons could facilitate management fraud for example some partner specially in bidding situation.Also for most of the time, fraudulent misappropriations relegate through fraudulent middlemen companies which are usually created for the sole purpose of fraud without any legitimate business purpose. In some cases the middlemen company is easy identifiable because of the volume of businesses or for its real position between suppliers and customers (Wells, J. T., 2004). slightly symptoms making the fraud detectableSome symptoms can help to find out the ongoing fraud situation in corporations such asClear appearance of some anomalies in the profi t and loss accounts, such as diverted profits.Generally when there is fraud at the top, we could also see fraud further down just like victuals chain.There are spiritstyle manifestations of the fraud in most cases because individuals are engaged in fraud to make their personal businessThe use of substantial middlemen companies, inserted between the corporation and its suppliers or its customers that are no economic benefit to the corporation.The changes that can affect corporation margin and which are not supported by external or inherent economic conditions. enigmatical bankruptcies or significant gaps between market and contract prices.It is important to mention that a high volume of personal and confidential mail sent to managers or senior managers could also pull auditors attention (OGara, J., D., 2004).2.4.2FRAUD FOR THE ORGANISATION probative fraudulent financial reporting used to be done and whats surprise is that it does not specially result from a breakdown in the interna l accounting control system, but it just comes as a stay that senior management uses positional leverage to overpower their corporate accounting control system. And it has been demonstrated that usually more corporate fraud begins at the top and one issue for the internal audit is the corporate accountability rather than the corporate accounting (OGara, J.D., 2004)So, many questions arise to find out what is the role that internal auditor should play? The internal auditors should be an arm of corporate governance rather than a group of controllers or accountants (Wells, J.T., 2004).Some symptoms of financial reporting fraudConsiderable off the book businesses or transactions with related entities especially when disclosure rule is not properly respected.Unsupported journal entries particularly around period end that can have effect on the income statement or changes in the statement of financial position such as provisions, depreciation or memorandum valuation.A lack of transparen cy of financial statements or changes in accounting principles to a favourable basis in order to make more benefit or to hide corporate profitsVolatile operating margins mixed with controversial margins which do not match with the corporate results from operations (OGara, J. D., 2004)2.4.3Role of the auditor in investigating and detectingIn this part it is important to make a clear difference between recognition and detection and between detection and investigating.So chronologically fraud recognition happens first because at that step auditor becomes aware of fraud possibility then followed by detection when he determines the probability of fraud (OGara, J.D., 2004).Usually it is better when fraud recognition happens earlier so auditors could have more time to run deep investigation s through corporate financial statement.Investigations constitute a separate stage from detection in the fraud chain as they will be concerned by verify inventories and checking bank reconciliations, al so confirming receivablesWhen detected, pay attention to fraud life circle to find out the duration and the mechanismDetermine the true identity or any middlemen company and also make himself accessible for employees that could bring more information than expectedUsing corporate resources cautiously and discreetly to obtain informationInterviewing employees, but in this situation the order does matter because it is advised to keep prime suspect for to end and not to let them know about any prior information from others employees discourse (OGara, J.D., 2004).After investigating stage when fraud is found then it will be time to report it in accordance of the Auditing standards.Also an auditor should have these qualities stated below according to the Institute of Chartered Accountants in England and Wales (2008, P75)AccountabilityIntegrityObjectivity and independenceCompetenceRigour ideaClear, complete and effective communicationAssociationProviding valueFraud is a major cost for co rporation, that why auditors are operating to uncover typical fraud that could affect corporations. And also auditors are really close to corporations than any other adviser to try to help them and to eliminate fraud.However auditing also has certain limitations that affect it on its way to investigate and track fraud.3.METHODOLOGY3.1OverviewThe main purpose of this part is to expose the methodology used to realise this research. It will also detail the different steps including the scope and limitation of the paper.3.2Methodology usedThe methodology employed in this paper can be carve up in two parts. In the first, it will be question to detail the effective role of the auditor as well as an business relationship of fraud and its different types. The second part will include a review of the responsibilities of auditors based on the previous financial scandals such as BCCI, WorldCom or Enron in the United States of America.However this research will involve both a primary and a se condary researchThe objective is to properly define the responsibilities and liabilities of the auditor in a primary research. Then in a secondary one, due to numerous researches dealing with the topic, it will be essential then to compare the current role and liabilities of the auditors with the stated behaviours of the auditors which were related to the past financial scandals.Also a full news report will be given regarding the fraud to better understand the scope of the research.3.3Justification of the methodology usedThis part is intended to justify the choice of the current research methodology, so it crucial to say that this study has been established to answer some questions such asAre auditing crucial in the in the corporate capital markets?Can auditors effectively detect or prevent all frauds, what further changes could be suggested?These questions are discussed in a context of extensive changes in the capital market as well as the subsequent complexity brought into the co rporate financial reportings.3.4Scope and LimitationsThis part gives an overview of the issues encountered during the research. So first, it is important to mention that the use of both primary and secondary data brings some problems. Thus the secondary data were essentially used due to the time and material constraints. However, if not properly interpreted, such data usage may cause error.Also this paper will be mainly focusing on the role of external auditors in fraud detection concerning the major financial scandals in Europe particularly in the United Kingdom. notwithstanding also due to the importance of some scandal like Enron in the United States of America, this study will include analysis based on such case.As well the scope of this research might be different to another paper in term of period, as a research made after Enron or Parmalat case might be different from a research made before.3.5Research TimetableRESEARCH ACTIVITYJANFEB cossetAPRILMAYJUNJULAUGSEPTOCTTopic choic e and defining research areaLiterature search and critical analysesProposal submissionConducting and transcribing interviewsAnalysing and discussing resultsWrite upDissertation submission4.CONCLUSIONThis paper highlights the effective role and function of auditing in a difficult context such as financial scandals like Enron, BCCI or Parmalat. Also it is crucial to define the borders of auditors role in fraud detection as well as the scope of the auditing process within the corporate.However this studys final words and recommendations will be based on further research and the next findings.