In the U.K. the fraud estimates that were presented from the ‘National Fraud Authority’ indicate that the fraud cost to the economy of the country in the year 2008 was put at thirty billion pounds. It is believed that the private sector incurred losses worth 9.3 billion pounds due to fraud with the enterprises that were larger accounting for more than fifty percent of this (Fraud Advisory Panel, 2010). But still, these figures are just estimates and the fraud levels might be even much higher since most of the fraud still goes on without being detected. Several definitions exist of the term “Fraud”.
The Webster’s Dictionary defines this term as “the international deception to cause a person to give up property or some lawful right” (Fraud, 2012, p.1). The Association of Certified Fraud Examiners gives the dentition of “occupational fraud” as, “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of employing organization’s resources or assets”(ACFE, 2008, p.1).
Moreover, another definition of fraud is given by Omowumi (2010) as “an act of deliberate deception to gain some benefit” (Omowumi, 2010, p.71). Whichever definition might be looked at about fraud, the central message is that fraud involves theft. Fraud is among the most controversial issues that currently affect auditors in the UK. There is a common belief that the UK auditors must ‘find fraud’. However, the auditor’s actual responsibilities, in a way, are different from this, although these may be argued to have evolved from being a mere ‘watchdog’. The purpose of this paper is to evaluate the current responsibilities of UK auditors in respect of fraud and to examine how the duties of these auditors have changed over time.
Duties of the Auditors about Fraud
It is suggested that the duties of the auditor in fraud detection and reporting may be evaluated by referring to four phases. These phases include the pre-1920s phase, the phase between the 1920s and 1960s, the 1960s and 1980s and the last phase comes in the 1980s onwards (Sherer and Turley, 1997). In the course of the pre-1920 phase, the principal goals of an audit were error and fraud detection (Attwood and de Paula, 1982). However, it is pointed out that, recognition was made, in the case of the General Bank and In re London, that it would be a burdensome task for the auditor to uncover all the fraud that would be committed in a company. This view was supplemented by the comments made by Lopes L.J that the duty of an auditor is not to serve as a detective, “he is a watchdog, not bloodhound” (Attwood and de Paula, 1982, p.20).
It is reported that in the course of more than the last fifty years, fraud detection was “avowed less and less by auditing profession, to the extent that by the 1960s, the profession denied all but an incidental responsibility for the detection of fraud” (Sherer and Turley, 1997, p.33). There has been a suggestion of several reasons for this defensive shift of the role of the auditor. However, among the most well-liked reasons is the belief which is held that the profession desired to reduce the responsibility of the auditor to detect fraud, and completely bring down the level of the liability they had in the court cases that involved fraud (Humphrey, Turley and Moizer, 1993).
The other reasons that were presented encompassed the practicalities of going through every transaction in the big growing business organizations. This contributes to extensive “invocation of internal control systems by management, with whom the profession still insisted, the responsibility for fraud prevention and detection laid” (Wallis, 1999, p.2). The role of the auditor moved from going through every transaction to carrying out the assessment of an organization’s internal controls and making use of sample testing techniques to make sure that the controls are in order (Romney, 2002; Thompson-PPC, 2004).
By the time this period came to an end, the auditing profession “was coming under much animadversion for its refusal to suffer responsibility for fraud detection, from both within and outside of the profession” (Wallis, 1999, p.2). Based on the public opinion, it was found out that the attitude of this “responsibility not assumed” was not sustainable. Thus, it is reported that in the year 1961, the acknowledgment was made by the ICAEW that the auditors had a duty to have the awareness that fraud does exist, “although an audit is not primarily or specifically designed…to disclose falsifications” (ICAEW, 2000, p.35).
Such a pattern of growing recognition of responsibility went on through the 1980s. Acknowledgment was made by Tweedie (1987) that “the auditor is already becoming more involved in the fight against fraud” (p.21). However, this researcher also points out that the auditor does not have the responsibility “of discovering fraud beyond that implied by his existing responsibilities which do not require him to explicitly search for it” (Tweedie, 1987). There is the emancipation of the auditor from this customer privacy responsibility by the Financial Service Act 1986 and Banking Act 1987, and now possessed the right of reporting suspected fraud incidents to the third parties, even though this was possibly harmful to the customer. In addition, “the auditor is expected to pursue his inquiries until he has uncovered the truth” (Tweedie, p.22).
In the year 1985, an ICAEW working party was against whatever form of augmenting the role of auditors on the ground of the increased workload, cost, and practicality. This working party instead advocated for a law that is supposed to require the big business organizations to offer adequate internal control systems that are reliable. Despite not accepting this suggestion, it is pointed out that, the concept has had a great influence on the legislation of financial services (Power, 1997). The view of the profession would seem to be supported by the Companies Act 1985 which clearly states that the ultimate responsibility for the accounts “will always remain with the director” (Dunn, 1989, p.30).
It is reported that the present-day authority on U.K duties is found in the SAS (1995) which points out that “it is not the auditor’s function to prevent fraud and error, rather, it is the responsibility of the directors” (ICAEW, 1999, p.17). But on the other hand, it goes ahead to state that the “auditors plan, perform, and evaluate their work to have a reasonable expectation of detecting material misstatements …. arising from fraud” (ICAEW, 1999, p.18).
A disclaimer follows this that “an audit cannot be expected to detect all errors or instances of fraudulent or dishonest conduct” (ICAEW, 1999, p.19). Therefore, even as making attempts to ensure satisfying public demand, the auditing profession will not be looked at as caving in to public pressure and will also not extend the liability of the auditor more than essential (Kurtz, 2001).
Even as the legal requirements for fraud detection have not gone through great change within the last few years, the duties of the auditor for fraud reporting have changed. It is required by SAS 110 (1995) that auditors are supposed to carry out suitably modified procedures in case they have a suspicion that there is a fraud that might have a material effect on the financial statements, and in turn carry out documentation of their findings (ICAEW, p.29). In addition, SAS makes requests and requires that the auditors make declaration of their findings to the organization’s management in the soonest reasonable time possible in case they have a suspicion of fraud or detect fraud, even though “the effect on the financial statements is likely to be immaterial” (ICAEW, 1999, p.41).
However, in case the senior managers of the company that is under consideration are implicated, there is required of the auditor to pass this information to the audit committee. For instance, in some particular circumstances, when there is uncertainty regarding whom to report to, in such a case the auditor, may look for ways to obtain legal advice. Furthermore, in case the organization does not engage in voluntarily reporting such findings to the relevant authority, then the auditors are supposed to undertake this duty themselves without the organization’s command. In general, terms, whenever there is fraud and the auditors are not able to tell that the financial statements portray a “true and fair view of the state of financial affairs of the organization, then they must issue qualified report” (Wallis, 1999, p.4).
Omowumi (2010) points out that the auditor must “plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud” (Omowumi, 2010, p.73). Due to the audit-proof nature as well as fraud trait, the auditor is in a position to get logical, but not complete, guarantee that there is the detection of substantial misstatements (Omowumi, 2010; Akinwolemiwa, 2009).
Over time, fraud detection has been considered to be the main reason why auditing is carried out (Zack [a], 2002). However, no apparent definition of the role of the auditor has been given right from the start. An analysis of the past development of the responsibility of the auditors in fraud detection and reporting over years was carried out by Porter (1997). The research he undertook to present a suggestion that there is an assessment of auditing performance and change in auditing concept through several phases. According to Stirbu, et al (2009), the study of Porter study indicates that the fundamental goal of auditing in the course of the pre-1920’s was to expose fraud (Stirbu, et al, 2009, p.56).
However, it is also emphasized that by the 1930s, the fundamental objective of auditing had changed to verifying the accounts (Stirbu, et al, 2009). There is a high likelihood that this shifting of the basic objective might have been caused by the increase in the volume and the size of the transactions of the firms which, as a result, made it to be not probable that the auditors could engage in evaluating the entire transactions. At that time, the auditing line of work commenced on maintaining that the duties of detecting fraud were in the senior management’s hands. Furthermore, management is also supposed to have undertaken the implementation of appropriate internal control systems to make sure that fraud is prevented in the companies (Stirbu, et al, 2009, Oyinlola, 2010).
According to Stirbu, et al, 2009, during the 1960s, there was general dissatisfaction among the public and the media that the auditors were not ready to take up the responsibilities of detecting fraud. The audit helpfulness was persistently called into question as, in general terms, did not succeed in exposing fraud (Stirbu, et al, 2009). However, even if there was criticism, the auditors went on bringing down the level of the importance of the role they played in fraud detection by making an emphasis that the responsibility was in the hands of the management (Stirbu, et al, 2009). Later, Stirbu, et al, 2009 point out that, during the 1980s, with technology being brought to a higher new level, the complexity and the number of frauds started to pose difficulties and problems for various business organizations.
Even though determination has been carried out of the case law that in particular situations auditors have the responsibility of fraud detection, attempts have been made by the courts to make sure that duties of the auditors are maintained within logical limits. (Stirbu, et al, 2009). But on the other hand, Boynton, Johnson & Kell (2005) present the claim that starting from the time of the “fall of Enron”, there has been refurbishing of the auditing standards to stress again the auditors’ duty in fraud detection. These researchers’ affirmation is made based on ISA 315 and ISA 240 (Peltz. & Bart, 2009).
According to ISA 315, this calls for the auditors to engage in assessing the efficiency of “an entity’s risk management framework in preventing misstatements, whether through fraud or otherwise, in the course of audit” (Stirbu, et al, 2009, p.57). Boynton et al (2005) point out that, in earlier times, this requirement was not there. They go ahead to make it clear that such an assessment was required in the past just at a time they chose to depend on that framework and to make sure that the audit investigation extent is reduced (Boynton et al).
Furthermore, the staff members who were involved in an audit are required to ensure they communicate their findings among themselves so that they can evade situations in which the staff members, operating independently on their sections of the audit, have not been in a position to have an appreciation of the meaning of unmistakably small irregularities which, if they accumulate, assume a more frightening logic (Wells, 1997; Zack [b], 2002).
Moreover, Boynton et al (2005) maintain that auditors should be more realistic in their search for fraud in the course of carrying out an audit based on ISA 240. The responsibilities of the auditors currently encompass having consideration of opportunities as well as enticements offered to likely fraud committers, and also rationalizations that fraudulent activity is acceptable. There are also expectations of the auditors to investigate more closely into motivating factors that lead to issues like coming about of mistakes in accounting estimates, abnormal transactions which tend not to have the business rationale, and unwillingness to correct “unimportant” errors found out by the audit (Burke and Guy, 2002; Stirbu, et al, 2009).
Omowumi (2010) points out that, though the public goes on to expect the auditors to engage in exposing fraud, they do not have a specific duty of detecting fraud since great reliance is put on the management to give documentation and information; the minute frauds are difficult to be detected by the auditors, and mostly in case small frauds are being made by more than a single key staff member in the business organization.
Omowumi (2010) further points out that the ‘International standard’ maintains that the term of office of the auditor may require him or her to take cognizance and ensure issues that come to his attention in carrying out his tasks are reported. These issues should relate to conformity with “legislative or regulatory requirement, adequacy of accounting and control system, the viability of economic activities, programs and projects” (Omowumi, 2010, p.73).
In the current times, an observation has come up where an emphasis is made that, the auditors have to play a more considerable and direct role in setting up good governance, this implies having an expectation of them to cross the setup boundaries of legitimate audit functions, “it would be stretching the string too far, without gaining anything positive and substantial” (Omowumi, 2010, p.73). This implies that the only option that is there is to make the auditors have a feeling of being more cautious and compliant and therefore, “becoming more effective, at the same time confining themselves to “their term of reference” (Omowumi, 2010, p.73).
Fraud has been a very big problem in the U.K. and it has been believed that the auditors have the responsibility of detecting it. The duties of the auditor about fraud have evolved. In the current times, detection of fraud and reporting needs to be done jointly within the company and management should be involved. In case the auditors come across even small frauds, they need to report these to avoid more such problems in the future.
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