DETECTION OF FRAUD (A Study on the Relations of Fraud Detection, Redress and Reporting by Auditors, Protecting against Fraud Detection: the Case of Auditors and the Effect of Auditors Personality) Prepared by:- _________________________________________________________________________ PREFACE The objective of this assignment is to promote critical thinking on to what extent auditors comply with auditing standards once they encounter fraud and auditors’ compliance on managing fraud, the debate on auditors’ negligence when it comes to fraud and the side effects of fraud detection towards personality.
A selection of three articles that were chosen in identifying and subsequently analyse the impact of fraud towards an individual, group or within an organisation. The three articles are:- * Protecting against Detection: The Case of Auditors and Fraud? * Fraud detection, redress and reporting by auditors, * Fraud Risk Assessment and Detection of Fraud: The Moderating Effect of Personality. The objective for this assignment is to aim on the relationship between the auditors’ ability to assess fraud risk and the ability to detect the likelihood of fraud.
Also, this study considers the overall trend of development and the prospects for future changes regarding the auditor’s fraud detection responsibilities. INTRODUCTION Most of the individuals feel that auditors fail to comply with some important elements of fraud standards. Fraud represents a significant and challenging issue throughout the accounting profession practically almost everywhere in the world.
Dramatic financial scandals often takes place as soon after companies received apparent “green light” from their auditors have kept the issue of fraud and the responsibility for its detection closely relate to auditors in particular. Auditors are required by the auditing standards to provide reasonable assurance that the financial statements are free from any misstatements. Inability to accomplish so particularly fraud may expose the auditors to litigation. The detection of fraud is the most important portion of the auditor’s duties.
Therefore, auditors should assiduously cultivate this branch of their activities. (Dicksee, 1990). Whenever there is a sudden alarm and collapse within the company, people tend to assume that the auditors negligently failed to spot something was wrong and the auditors failed to solve the issue. Detection of fraud is no longer the principal audit objective but rather the subsidiary to the determination of the truth and fairness of corporate financial statements.
This development in stated audit objectives is often portrayed as a process of natural, uncontroversial evolution in which professional guidance came to meet changing public expectations and circumstances (Tricker, 1982). The growth in the size of business, the assumption of corporate management of a greater responsibility for fraud detection and a broad acceptance of the increasingly uneconomic nature of audit-based fraud detection are usually identified as the main causes of the changing nature of audit responsibilities (CACA, 1986).
CENTRAL ISSUES & PROBLEMS When it comes to redress, it relates to the auditee taking measures situations where fraud has been detected. Given the existing standards on the role of auditors in fraud situations, the existence performance gap in this context can be due to several factors, including the lack of knowledge or competence on how to act once corporate fraud is detected, lack of care in following protocol or the lack of independence of the auditor possibly because conflicting of interest.
Given the sensitive nature of fraud reporting towards the society’s expectations, compliance with fraud standards is crucial nowadays. 56% from recent surveys said that expectations of auditors rely on the auditor’s duty to detect fraud, while 42% believed that it is the responsibility to search actively for fraud (Steen, 1990). The issue of fraud is very essential for public accountants and auditors because litigation actions may be taken against them should they not be able to detect fraud during the conduct of the audit.
Take for example when Xerox was sanctioned for overstating earnings by US$3 billion, its auditor KPMG was liable for US$22 million in penalties (Ettradge, Sun, Lee & Anandarajan, 2005). The present scenario is an extension whereby study shown that the effect of the auditors’ ability to assess fraud risk on their ability to detect the likelihood of fraud. High fraud risk scenario, the auditors’ ability to assess fraud risk has positive effect on their ability to detect the likelihood of fraud, whereas in a low fraud risk scenario not.
Adding to that study, another factor which is the personality may affect the ability to detect the likelihood of fraud. The study predicts that there might be other factor that affects the auditor’s job performance that is in the ability to detect the likelihood of fraud. LITERATURE REVIEW The present study predicts that personality might have only moderating effect on the fraud detection ability.
The present study illustrates and examines Big-5 factors of personality that are neuroticism, extraversion, conscientiousness, openness to experience and agreeableness because these factors are the basic dimensions of personality and it is predominantly viewed that many personality traits are subsumed under these five categories. This shows that personality does influence job performance and by investigating the moderating affects of the personality factors on the relationship between the auditors’ ability to assess fraud risk and their ability to detect the likelihood of fraud.
Attribution Theory This theory suggests that the level of future expected performance, in a particular task depends mainly on the particular causes to which prior success or failure in the same task is attributed. This theory is appropriate because there is a need to assess the causal attribution of the auditors’ performance, i. e: ability to detect the likelihood of fraud. With this study, the level of the future expected liability to detect the likelihood of fraud is attributed by the auditors’ prior ability to assess the level of fraud risk.
Five-factor Theory 1. Neuroticism as a personality trait * This study shows that auditors who are high on neuroticism will not be able to perform effectively in their job as compared to those who are low on neuroticism, because those with high neuroticism tend to show negative attitudes. With such attitudes demonstrate, the auditors may not be able to appropriately detect the likelihood of fraud. In any fraud situation, high on neuroticism would diminish the relationship between the ability to assess the risk and the ability to detect fraud altogether. . Extraversion as a personality trait * When a person is experiencing positive emotions, it may influence them to perform well in their job. In any risk situation, high on extraversion would have positive influence on the relationship between the auditors’ ability to assess fraud risk. 3. Conscientiousness as a personality trait * Individuals with high level of conscientiousness may be able to perform well in the job because of the characters such as organized and reliable are important facets for carrying out the audit work. 4.
Openness to experience as a personality trait * An auditor is more open to experience; he/she should be more able to detect the likelihood of fraud. Possessing traits such as intellectually curious, behaviorally flexible and nondogmatic in attitude and values can be considered as essential to conduct risk. 5. Agreeableness as a personality trait * Auditor who demonstrates high level of agreeableness in his/her personality such as cooperativeness, trustfulness and adaptability would make them more competent in performing the jobs.
METHODOLOGY The information pertaining to the study on the role of auditors in fraud cases, survey was conducted among audit partners of Dutch firms. The questionnaire contained three questions which were:- 1. Questions relating to the features of the fraud cases auditors had experienced in the period. 2. Questions on the reporting and redress of the fraud cases 3. Questions on the perceived role of auditor in the redress process. The overall respond is satisfactory, especially considering the sensitive nature of the study.
Secondly, in the study of the personality traits, two levels of ability to assess fraud risk and two levels of each dimension of personality factor. The factors of personality are neuroticism, extraversion, conscientiousness, openness to experience and agreeableness. The study also practicing the independent auditors registered in Malaysia, designated as audit partner or audit manager who are attached to the auditing firms in Malaysia. FINDINGS Most auditors who do have experience eliminated fraud believe that fraud detection and process are often significant in order to minimize risk.
Auditors reporting of fraud according to the fraud standards and regulations are defined as below. 1. Reporting to management. – As soon as auditors detect fraud or receive signals that could interpret as such, the auditor needs to report this to management in writing. 2. Reporting to the supervisory Board. – auditing standards explicitly required certain types of fraud to be reported in writing to the supervisory board such as cases of management fraud, cases of material fraud, and cases whereby management refuses to redress the fraud. 3.
The redress process. – when the auditor has detected fraud and management has not yet taken appropriate steps to redress the effects of fraud, the auditor is required to demand that the fraud be redressed, i. e. the consequences of the fraud have to be rectified as far as possible and recurrence needs to be prevented. 4. Auditor resignation. – The auditing standards allowed auditor to resign from the assignment of the fraud but required the auditor to resign if the case of material fraud was not redressed. 5. External reporting of fraud. Finally, the auditing standards state that when material fraud discovered during a statutory audit has not been redressed by the audit client within a reasonable time frame, the auditor is not only required to resign from the engagement, but also to notify the dedicated government agency. Such procedure also plus the expansion of auditor’s fraud detection responsibilities by assuming of willingness to play more active role in assessing and reporting on the adequacy of the company’s system and internal controls.
Matters that should take into consideration when considering the disclosure is justified in the public interest may include: * Fraud irregularities is likely to result in material gain or loss that effect a large number of people, * The extent to which non-disclosure of fraud is likely to enable it to be repeated with impunity, * Whether there is general management ethos within the entity of flouting the law and regulations, * The weight of evidence and the auditor’s assessment of the likelihood that fraud has been committed. CONCLUSION
In attempting to interpret and understand changing audit responsibilities, there would appear to be much to be gained by moving beyond traditional rationalizations of a profession responding directly to public demands. Various changes can be regarded as reflective of the conflicting, political nature of a self-regulated accounting profession and the outcomes dependent on the profession’s pursuit of professional interests and the profession’s attempts to manage the interplay between its own interests and any competing public duties and obligations.
It is right to acknowledge that public expectation that auditors should report suspected fraud was reasonable. It is recommended that auditors should be given greater encouragement to report whatever that is necessary and fit in reporting fraud detection. Additionally, it emphasized the role of internal control in the prevention and detection of fraud and suggested that where there was a legal responsibility for internal control systems, auditors should have a formal duty to report on their adequacy.
Changes in the law would have a statutory duty to report suspected fraud at the same time. It stated that auditors should be left at “liberty to report cases of fraud to the authorities without statutory backing” and that any change in the current position could be accomplished through revising the ethical guidance to auditors on professional conduct. Auditors have the duties to the rest of the community of which they are part and they owe to the community a more compelling duty which must on occasion take first place.
Public expectation must be given full weight in all matters (Accountancy Age, 12 December 1985). In developing auditing guidance concerning to fraud, three considerations have proved dominant: * The relative responsibilities of management and auditors for the prevention and detection of fraud, other illegal acts and irregularities and errors; * The conduct of an audit in order to have a reasonable expectations of detecting significant misstatements; * The action to be taken when errors are discovered.
With respect to the prevention and detection, all proposed guidance has emphasized the paramount responsibility of management, with the auditor’s responsibility being couched consistently in terms of materiality and the truth and fairness of the financial statements. The role of auditors is to properly plan, perform and evaluate his/her audit work so as to have a reasonable expectation of detecting material misstatements in the financial statements, whether they are caused by fraud, irregularities or errors.
LIMITATIONS Auditors in any circumstances have no duty to act as an informer to the extent where it would jeopardise or destroy the trust and confidentiality on which it felt that auditing depended. The use of word “informer” indicates a somewhat dismissive attitude to the possibility of breaking the confidential relationship with the management or public’s expectation.
Considerable resistance among auditors to the ideas that they should accept a general responsibility to detect fraud or extend their reporting responsibilities in the interest of the public. Whether changing audit responsibilities concerning detection of fraud come voluntarily or statutorily, such changes need to be based on greater awareness and continuing public investigation of the operation and capabilities of the audit function is this regard. Otherwise, it would anticipate that the position in the future will be with nfortunate, be little different in the roles and responsibilities of the accountancy profession towards the public interest. REFERENCES 1. Fraud Detection, Redress and Reporting by Auditors by Harold Hassink, Roger Meuwissen and Lauren Bollen. 2. Protecting against Detection: The Case of Auditors and fraud? By Christopher Humphrey and Stuart Turley. 3. Fraud Risk Assessment and Detection of Fraud: The Moderating Effect of Personality by Nahariah Jaffar, Hasnah Haron, Takiah Mohd Iskandar and Arfah Salleh.