Auditors and Fraud

Topics: Auditing, Audit, Financial statements Pages: 28 (6065 words) Published: February 23, 2014
Annales Universitatis Apulensis Series Oeconomica, 11(1), 2009

FRAUD AND ERROR. AUDITORS' RESPONSIBILITY LEVELS
Dan Ştirbu1
Maria Moraru2
Nicoleta Farcane3
Rodica Blidisel4
Adina Popa5
ABSTRACT: Are auditors responsible for detecting fraud in the companies they inspect? Most of the public thinks they are. Auditors often demur. The auditors' duties for the prevention, detection and reporting of fraud, other illegal acts and errors is one of the most controversial issues in auditing. This paper reports the findings of a survey that explores the financial report users’ perceptions on the extent of fraud in Romania and their perceptions of auditors’ responsibilities in detecting fraud and the related audit procedures. This study also finds that there is a widely held misperception of the objective of an audit. This is because, among respondents, a much higher expectation has been placed on the auditors' duties in detecting and reporting fraud than statute or audit standards require. The results of the study show unquestionably the existence, with respect to detection of fraud, of a gap between the perception of the respondents and the present statutory requirements of auditors.

Key words: fraud; auditors’ responsibilities; audit expectation gap JEL code: M42

Introduction
The need for external auditors may be seen as a response to the agency problem and the audit functions as a mechanism to attest to the accountability and stewardship of company management to reduce the possibility of innocent mistakes and deliberate misstatements such as fraud and management manipulation (Chandler, Edwards and Anderson,1993). 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 (Sikka, Puxty, Willmott and Cooper, 1998). This gives rise to research interest on ‘expectations gap’, the differences between what the public expects from an audit and what the auditing profession prefers the audit objectives to be (Chandler and Edwards, 1996).

Are auditors responsible for detecting fraud in the companies they inspect? Most of the public thinks they are. Auditors often demur. This gap between the expectations of auditors an everyone else has existed for a long time. Teo and Cobbin (2005) find evidence of it in 19th century england. In 21st century America, Deloitte Touche Tohmatsu CEO William Parrett remarket that „it’s really extremely difficult for the auditor to find a collusive fraud”, but noted unhappily that investors nevertheless expect them to do so (Taub,2005). That an auditor has the responsibility for the prevention, detection and reporting of fraud, 1

West University of Timisoara, Street J.H.Pestalozzi, nr.16, room M02, Timişoara, Romania, dan@ndconsulting.ro; West University of Timisoara, Street J.H.Pestalozzi, nr.16, room M02, Timişoara, mariamoraru2002@yahoo.com; 3

West University of Timisoara, Street J.H.Pestalozzi, nr.16, room M02,Timişoara, Romania, nicoletafarcane@yahoo.fr; 4
West University of Timisoara, Street J.H.Pestalozzi, nr.16, room M02, Timisoara, Romania, rblidisel@yahoo.com; 5
Eftimie Murgu University from Resita, Street Traian Vuia nr. 1-4, Resita, Romania, popaasa@yahoo.com 2

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Annales Universitatis Apulensis Series Oeconomica, 11(1), 2009

other illegal acts and errors is one of the most controversial issues in auditing, and has been one of the most frequently debated areas amongst auditors, politicians, media, regulators and the public (Gay et al 1997). This debate has been especially highlighted by the collapse of big corporations including Enron and Worldcom. The unanticipated fall of Enron and WorldCom traumatised the world as both of these companies received clean bills of health from their auditors immediately prior to their for bankruptcy.

Although a series of...

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Annales Universitatis Apulensis Series Oeconomica, 11(1), 2009
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