Fraud is still one of the most controversial issues in the auditing profession. In the UK, auditors have to encounter various forms of fraud every day. There is a widely held perception in the UK that auditors must “find fraud” (Godfrey & Chambers 2007). Nonetheless, the actual responsibilities of auditors could be regarded as having emanated from their role as “watchdogs” (Smith 2002). The current paper is an attempt to examine the current duties of auditors in the UK as far as the issue of fraud is concerned. In addition, the paper shall also endeavor to evaluate how the responsibilities of auditors may have changed over time.
Just as there are various guises of ‘fraud’, so too are there various definitions of ‘fraud (Nguyen 2008). However, for purposes of completing this paper, the writer has deemed it necessary to use the definition of fraud as provided for by SAS 100 (1995).
According to the definition of fraud by the aforementioned source, fraud entails the use of deception to gain an illegal or unjust advantage. In addition, fraud could also entail deliberate misrepresentation of the financial statement of an organization by an individual (s) (Goldwasser 2001, p. 19).
The changing responsibilities of auditors with time
To gain a better insight into the current duties of auditors in the UK in as far as fraud is concerned, there is need to first examine the changing responsibilities of auditors with time Foust and Henry (2002) opine that the best way to examine how the duties of auditors have evolved with time regarding the issue of reporting fraud can best be explored concerning forum stages. These stages include the stage before the 1920s as well as the stage between the 1920s and 1960s. The other two phases worth of consideration are between the 1960s and 1980s and finally, after the 1980s.
If we dwell on the period before the 1920s, we find that fraud detection and prevention used to be among the key goals of an audit (McEnroe 1994, p. 132). During this time, there was a steep decline in fraud detection to the point that it was deemed as ‘responsibility not assumed’. At the same time, there was also a rise in the scale of conducting business transactions to the extent that it was considered uneconomical to undertake an audit of business accounts (Turley 1997). However, some opponents still felt that the resulting change was due in part to efforts made by the auditing profession (Humphrey, Turley& Moizer 1993).
On the other hand, some of the scholars at this time acknowledged that expecting an auditor to expose every act of fraud within an organization would be unrealistic (Doyle, Hughes & Glaister, 2009, p. 183; Gray & Manson2007). Different scholars have provided varying reasons as to why the auditing profession appeared to have shifted its responsibility in the detection of fraud (Singleton et al 2006; Xiao, Yikuan & Zhihua 2006). One of the leading beliefs is that the auditing profession was intent on reducing the responsibility of the auditor as far as the activity of fraud detection is concerned. At the same time, the profession also intended to reduce the duties of the auditor in fraud detection so that eventually, they would be in a better position to eradicate potential liability when handling fraud cases at a court of law (Turley 1997).
Other motives have been suggested, such as the practicalities of having to examine every transaction conducted by large organizations. This move saw many organizations implement various internal control systems (Gorves 2012; Salehi & Azary 2008). Therefore, there was a shift in the role of the auditor whereby they stopped examining every transaction within an organization and instead, concentrated on checking the internal controls of the organization (Specht & Sandlin 2004).
At the end of the 1960s, there was a lot of friction in the auditing profession from within and without because it had failed to assume the duty of detecting fraud (Weiss 2008). The lack of assuming responsibility was found to be unsustainable by public opinion. Therefore, in 1961, the ICAEW affirmed that it was the duty of auditors to recognize the existence of fraud, even as it may not be their designation to reveal falsifications (Weiss 2008). At the same time, public opinion failed to recognize the discovery of fraud as just a minor component of the auditing procedure.
The 1980s were characterized by a tremendous rise in the recognition of the crucial role played by auditors in the detection and prevention of fraud. Some scholars even affirmed that auditors were getting more involved in fraud prevention (Glater 2002). Nonetheless, these authors were completely mindful of the fact that no rule-bound an auditor to ensure that he/she explicitly searched for incidences of fraud within an organization (Goldwasser 2001).
By this time, the auditing profession was already well established in terms of detecting and reporting errors and fraud. At the same time, different professional bodies created working parties to examine the role of auditors in fraud reporting. The profession ceded some powers about the responsibilities of the auditor in reporting fraud, although it did not want to be drawn into an extended debate as far as the detection responsibilities are concerned.
It is important to note that the 1985 Companies Act does not claim that detection of fraud is one of the duties of auditors. As such, the auditor’s responsibility in detecting corporate fraud is connected to his/her duty to establish fairness and truth on the sufficiency of accounting records and financial statements as well as explanations/information received (‘The future of auditing standard setting’ 1995). This appears to somewhat define the duties of an auditor in detecting fraud narrowly and digresses markedly from the general responsibility to detect organizational fraud which has been indicated by numerous surveys to be an expectation of the society on auditors.
Nonetheless, we can still opine that major fraud could potentially impact on fairness and truth of the financial statements of a company. Up to this point, the client confidentiality obligation somewhat prevented auditors from reporting suspected cases of fraud in an organization. However, the 1986 Financial Service Act and the 1987 Banking Act ensured that the auditor had the right to report such suspected cases of fraud to third parties (Specht & Sandlin 2003). This was the case even if doing so would have jeopardized the working relationship that an auditor had with his/her client. In any case, the expectation is that while executing his/her duties the auditor should always endeavor to explore all avenues until he/she can uncover the concealed truth.
Nevertheless, there was an opposition to the augmentation of the role of an auditor on grounds of cost, increased workload, and practicality (Humphrey et al 1993; Dewing & Russell 2001, p. 98). There was a lot of opposition to this particular suggestion but it has greatly influenced the legislation of financial services, especially the 1992 Cadbury Committee.
The 1985 Companies Act appeared to support the view of professions and it indicated clearly that the directors of an organization are ultimately responsible for ensuring that the accounts of an organization are in order (Bu-Peow Green & Simnett 2001). SAS 110 (1995) contains the current duties of auditors in the UK. According to this document, the role of auditors is not to prevent error and fraud. Instead, this should be the duty of the directors. On the other hand, the document further claims that in the organization, execution and assessing their work, auditors do this so that they are better able to detect material misstatements that could come about due to fraud (Nguyen 2008).
In addition, the SAS 110 (1995) document has noted that auditors are not always in a position to detect every case of fraud at a firm (Scott & Pitman 2004, p. 43). Nonetheless, paragraph 27 of the SAS 110 (1995) report has stated categorically that in planning and executing the auditing activity, auditors do so in a professional manner. Therefore, in their quest to quench the public demand, the auditing profession should not be weighed down by public pressure. In addition, the auditing profession should not be seen to extend the liability of an auditor beyond expectation.
Current responsibilities of auditors
Although there have not been a lot of changes over the past couple of years as far as the legal requirement for fraud detection is concerned, on the other hand, there is a need to appreciate the fact that the responsibilities of auditors in reporting fraud have changed. According to the requirements of SAS 110 (1995), auditors are normally called upon to undertake the right modified or extra precautions should they suspect the occurrence of a fraud capable of interfering with the financial statements of an organization. In addition, auditors are also called upon to ensure that such findings are documented (Nguyen 2008).
Moreover, the SAS 110 (1995) report notes that the auditors must ensure that the management of the firm gets to know the findings of fraud detection findings as soon as possible. This should be the case even where such suspected fraud is not likely to interfere with the financial statements of an organization.
On the other hand, in case the senior managers or directors of the firm have been adversely mentioned in the fraud, it is the duty of the auditor to let the audit committee know about this. In case auditors are not sure whom they ought to report to, it is always advisable that they seek legal assistance (Boyle 1995). Furthermore, in a situation whereby the firm in question fails to voluntarily report the findings of a fraud investigation activity, the auditors must do so.
By and large, the existence of fraud at an organization makes it hard for the auditors to declare that the financial statements of the firm are indeed a ‘true and fair reflection of the firm’s financial affairs, in which case auditors must issue a qualified report. In case an auditor has been charged with the responsibility of detecting and reporting found in an organization that is involved in overseas activities, such a provision has been catered for by paragraph 65 of the SAS 110 (1995) report which requires that the investigation be carried out in line with the requirements of SAS 110.
There is a need to appreciate the fact that SAS 110 complies with and incorporates all material components of International Accounting Standard 240 in the detection and reporting of error and fraud. This is of global importance. The issue of client confidentiality in the UK papers to somewhat different in comparison with such other countries as Canada, the United States, New Zealand, and Australia, where considerations of public interests are considered secondary to confidentiality (Doyle et al 2009). The only time that this confidentiality could be breached is under certain prescribed circumstances.
Conversely, the UK is strictly guided by the SAC 110 (1995) when it comes to the issue of detecting and reporting fraud. In this case, auditors are called upon to report any incidents of fraud to suitable authorities (Singleton et al 2006). However, the rules are a bit strict in Australia in that the auditor will normally be called upon to indicate in their audit report that they were not able to get hold of all the data needed to dispel claims that there was an incident of fraud at an organization.
As the above statement indicates, the responsibilities of auditors may differ markedly from one part of the globe to another but still, there appear to be significant differences in auditors’’ responsibilities from different parts of the world as well.
The main difference has to do with reporting of fraud, and more so when this has to be done to a third party. Although there are many reasons as to why such differences might have occurred, nonetheless one of the most accurate and simplest reasons has to do with the level of importance attached to fraud in a given country (Romero & Norris 2002). For example, during the 1980s, a lot of publicity was given to fraud cases and as a result, this helped to enhance public awareness on the issue of fraud (Berenson 2002). Consequently, members of the public placed a lot of attachment to suspected fraud detection activity.
In the United States, the auditing profession was put to task in the 1970s and 80s for its inability to decide on several anticipated gap issues. There were also several corporate scandals in Australia in the 1980s and as a result, auditors were required to report the occurrence of fraud cases by statute. In Canada and New Zealand, the auditing profession does not appear to have undergone intense scrutiny in comparison with the other countries and for this reason, the two countries lack the legal mandate to report the occurrence of fraud (Gray & Manson 2007).
Based on the foregoing arguments, there is a need therefore to explore the duties of an auditor when it comes to the issue of detecting fraud. In this case, the expectation gap remains a key problem. In other words, a gap remains between the expectations of those using the financial statements since different people end up using the accounts of a company and that each of these individuals has their agendas and level of education. This further complicates the problem.
In this day and age of information technology, it is now possible to detect fraud using more sophisticated audit techniques. Also, auditors can now use mathematical phenomena and statistical sampling to detect fraud. However, it is always important to fully exercise the judgment of an experienced auditor since, unlike a computer, humans can ‘reason’ and ‘think’. Nevertheless, because of the nature of an audit, it sometimes becomes very difficult for an auditor to detect every occurrence of fraud in an organization. The directors and management of a firm spend many years at the organization but auditors are only available for a limited time in a year.
Therefore, reason, the directors and the management at the firm can even conspire to hide acts of fraud. Therefore, it would seem unreasonable to expect an auditor to unearth all incidences of fraud at the firm. We also need to note that the role of an auditor has changed with time and whereas there should be higher standards to gauge the efficiency of auditors in executing their duties, at the same time, we also need to acknowledge that they can only do so much. As such, the management should also assume the role of the ‘watchdog’.
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