Over the years, the role of auditors become increasingly important especially in a capitalist economy as the process of wealth creation and political stability depends heavily upon confidence in processes of accountability and how well the expected roles are being fulfilled. An auditor has the responsibility for the prevention, detection and reporting of fraud, other illegal acts and errors is one of the most controversial issues in auditing. The most frequently debated areas amongst auditors, politicians, media, regulators and the public is where the fraud is coming from and by whom. This disagreement has been especially tinted by the collapse of big corporations like Enron and WorldCom. The unforeseen fall of Enron and WorldCom traumatized the world as both of these companies received clean bills of health from their auditors immediately prior to their for bankruptcy. Type of fraud
Fraud itself comprises a large variety of activities and includes bribery, political corruption, business and employee fraud, consumer theft; network hacking, bankruptcy and divorce fraud, and identity theft. Many find it helpful to separate between internal and external fraud. Internal fraud is usually found by internal auditors. In the Statement of Auditing Standards 99, it’s defines fraud as an intentional act that results in a material misstatement in financial statements. There are two types of fraud considered: misstatements arising from fraudulent financial reporting (e.g. falsification of accounting records) and misstatements arising from misappropriation of assets (e.g. theft of assets or fraudulent expenditures). Examples of fraudulent financial reporting and Misappropriation of assets; * Fraudulent financial reporting. An example of fraudulent financial reporting is a company that ships customers’ goods that have not been ordered and then records the revenue as if it met all the criteria for revenue recognition. In other cases involving new high technology products, company personnel may have provided customers with a side agreement granting right of return for any reason or made payment for the goods contingent on receipt of funding or some other event. In such cases the side agreement typically is not disclosed to the auditor because the underlying transaction would not meet the criteria for revenue recognition under generally accepted accounting principles.
* Misappropriation of assets. Examples of misappropriation of assets are thefts of cash, inventory or securities. Small practitioners specifically asked for guidance in this area because they were more likely to encounter misappropriations than fraudulent financial reporting. Auditors from larger firms were more concerned about fraudulent financial reporting from a materiality standpoint but also thought guidance on misappropriations would be helpful.
The Institute of Internal Auditors (IIA) Definition
The IIA describes fraud as “any illegal acts characterized by deceit, concealment or violation of trust. These acts are not dependent upon the application of threat of violence or of physical force. Frauds are perpetrated by parties and organizations to obtain money, property, or services; to avoid payment or loss of services; or to secure personal or business advantage.” The IIA further clarifies fraud and misconduct.
Deterrence of Fraud
Deterrence of fraud consists of those actions taken to discourage the perpetration of fraud and limit the exposure if fraud does occur. The principal mechanism for deterring fraud is control. The primary responsibility for establishing and maintaining control rests with management. Internal control is a process affected by an organization’s management that is designed to provide reasonable assurance regarding the achievement of objectives in the following categories:
1. Reliability of financial reporting,
2. Compliance with applicable laws and regulations and