Auditors Responsibility in the Era of Corporate Fraud

Topics: Auditing, Audit, Internal control Pages: 11 (3875 words) Published: August 28, 2013
A Corporate Fraud is defined as a set of Activities undertaken by a company or set of individuals that are done in a dishonest or illegal manner, and are designed to give an advantage to the perpetrating company or the individual. Corporate fraud schemes go beyond the scope of an employee's stated position, and are marked by their complexity and economic impact on the business, other employees and outside parties. Corporate Frauds are becoming very inherent in the present era. A selected range of individuals are illegally benefitting from such corporate frauds at the cost of investor wealth, confidence and value and the reputation of the company. Corporate frauds are seen in various forms such as fabrication of financial statements through overstatement of assets and understatement of liabilities, misutilisation of public wealth by selected individuals, over/under invoicing, capital markets, criminal breach of trust and pursuing business in an uncompetitive manner through underhand means such as bribing, coercion. The use of corruption to make various day to day activities easy for the company which involves spending investor money illegally is a very commonly seen mechanism. On a daily basis news relating to such fraudulent activities is noticed. The main sources through which such frauds are committed are Management Overriding Controls and Tampering with Financial Statements. Some scams such as Enron of USA and Satyam scam of India have come in the picture and shattered investor confidence. Although Corporate Scams are connected to corporate houses, it is generally seen that all government scams somehow or the other bring big corporate houses in the picture. Hence, these are also an extension of corporate frauds. Examples being the 2G and 3G Scam by telecom minister A.Raja involving Aircel, Swan Telecom and others. These telecom operators obtained 3G licenses in 2009 at 2006 prices uncompetetively and unethically. When this came in the limelight, they had to not only part with their dues, but also a hefty fine, leading to loss in investor wealth. The Consumer forum is being overloaded with complaints of fraud, of promises not being delivered, Suppliers and Distributors are opting for litigation for their long outstanding dues. The legal system not being flawless, these complaints often take years to get noticed and by the time they are solved, the fraudsters make enough money to get off by paying a meager fine. Hence, in this era, auditors need to emerge as a supreme authoritative body. They are the ones who have ultimate control over all financial and non financial information of the company. The role of auditors in this era is no more limited to “opining on the true and fair view of financial statements.” It goes much beyond that-They are the ones who can actually prevent such frauds from occurring, they can bring frauds done by the company or its management into limelight and help punish the offenders. Both the internal and statutory auditors of companies have an equal role to play in preventing fraud and keep a check on the company. The financial statements are a complete reflection of a corporates performance. By studying and evaluating each aspect of the financial statements through different techniques, an auditor can come to the conclusion whether there is an element of fraud in the financial statements or not. SA-240(Revised) relates to the Auditors responsibilities relating to fraud in an audit of financial statements. For the purpose of this SA, the Auditor is concerned with fraud that causes a material misstatement in financial statements. Two types of intentional misstatements are relevant to the auditor – misstatements resulting from fraudulent financial reporting and misstatements resulting from misappropriation of assets. Since financial statements are prepared by the management, fraud may involve sophisticated and carefully organized schemes designed to conceal it, such as forgery, deliberate failure to...
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