Empirical Study on the Assessment of the Auditor's Responsibility Regarding the Risk of Financial Fraud (original) (raw)
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2017
This study analyzes the influence of financial stability, financial targets and the role of the quality of auditors against fraud measures financial statements. This study using purposive sampling and use of the 21 companies that commit fraud recorded in the financial statements of the Financial Services Authority and 21 companies did not commit fraud which includes compass 100 in the Indonesia Stock Exchange using logistic regression analysis. The study found a positive effect of variable quality auditor against fraudulent financial reports, found a negative influence financial stability and financial variables against the target of fraudulent financial statements. Limitation of this study are limited variables and proxy variables used to measure financial targets, further research is recommended to add the variables that affect the occurrence of acts of fraud financial statements, and look for a proxy for a target financial variables.
Brilliant International Journal Of Management And Tourism
This research intends to test and analyze the effect of competence, independence and professionalism through audit quality on fraud detection by the Auditor at the Public Accounting Firm in DKI Jakarta in 2022. The sampling technique is through purposive sampling with multistage random sampling of 81 Auditors with 10 (ten) ) KAPA, which is then processed with Smart-PLS. Previous studies only used a purposive random sampling technique on KAP at random. The results of the tests in this study indicate that competence, independence and professionalism have a positive and significant effect on audit quality. Audit quality has a positive and significant effect on fraud detection. Furthermore, competence, independence and professionalism have a positive and significant impact on fraud detection. The path analysis test also shows that competence, independence and professionalism have a positive and significant effect on fraud detection through audit quality. These three variables show a pos...
COMPLICITY OF AUDITORS IN FINANCIAL STATEMENT FRAUD IN CORPORATE GOVERNANCE
Abstract The numerous cases of financial fraud reporting in recent times have precipitated the outcry of most stakeholders in the business environment for the need to critically examine the parties responsible for the preparation of such reports in pursuance of their interest. This paper studied the complicity of Public Company Auditors in Financial Statement fraud. To achieve this objective, the responsibilities and obligation of the Auditor to detect and report financial statement fraud before their perpetration was reviewed. The study revealed that, apart from the numerous financial statement fraud cases committed by other stakeholders in corporate governance, 23 percent of Auditors were involved in financial fraud cases, implying that some auditors are complicit in financial statement fraud. As a result, this phenomenon corroborates the need for International Reporting Agencies such as an International Accounting Standard Board (IASB) to develop more creative measures in identifying and reporting fraud. Keywords: Complicity, Fraud, Stakeholders, Auditors, Agencies, financial statement.
Fraud Risk and Audit Quality: The Case of Us Public Firms
Copernican Journal of Finance & Accounting
The study raises questions about the fraud detection technique and the relevance of audit quality to mitigate fraud. The paper suggests a more comprehensive proxy for fraud risk that relies on the combination of Z-score and Beneish M-score. Basing on Logit, regressions are applied to a sample of 5,613 US-listed public firms. The study reveals that the existence of an internal auditor and independent members within the audit committee would potentially reduce the fraud risk. Hiring a Big external auditor and paying it high fees is also helpful. Findings show that, unlike the firm leverage, both firm profitability and growth opportunities have a negative effect of on fraud risk. Leverage provides a motivation for fraudulent financial reporting. It is important to note that this research underscores the audit’s monitoring role to mitigate fraud. Also, the adopted model helps regulators, bankers, managers and auditors to detect fraud at an early stage. So needed action can be taken at s...
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This study aims to provide empirical evidence on the factors that affect Jakarta auditor's fraud detection ability. The factors are auditor tenure, fraud detection experience, level of education, fraud training, and professional skepticism. This study is hypothesis-testing research; Respondents are 120 auditors from seven public accounting firms in Jakarta who participated in this study, thought a questionnaire. Data collected is done during April 2015 by visiting the public accounting firm that has been willing to participate in this study. The type of data used is primary data and is a cross-section; data is collected only once. The conclusion of the study is that auditor tenure, and fraud training does not affect the ability to detect fraud. While fraud detection experience, the auditor's level of education and professional skepticism positively influence fraud detection capability. Limitations, suggestions, and research implications hare described at the end of this report.
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This study examines the roles of external auditors in fraud reduction in Ethiopia including the factors that influence external auditors' responsibility and expert performance in detecting fraud. The study adopts questionnaire data and depth interviews research approach by combining data gathering instruments of research questions, The questionnaire data were analyzed using descriptive statistics, and correlations, and data from interview were interpreted qualitatively. The findings of the study show that, auditors are responsible for detection and uncovering fraud, and are legally liable for subsequently discovered misstatement in audited financial statements The results of the research result indicate that most of the private audit firms do not comply with professional ethics and lack independence from their client. This non-compliance came from self-interest, self-review and familiarity threats which results from having family, financial and personal relationship with their c...
The Role of the Auditor in the Prevention and Detection of Business Fraud: SAS No. 82
The cost of fraud to business in 1996 was six percent of annual revenue. Everyone is victimized by high product costs and lower corporate profits. When fraud is detected within a business, there is usually shock and disbelief that a trusted employee who resembles the "person next door" could have done what they are accused of. In light of the cost and characteristics of offenders, it is important to develop strategies to prevent or detect business fraud. In light of heightened public expectations and new expectations for auditors following the savings and loans scandals, this paper asks what the responsibilities are of external auditors, internal auditors, and management.
How trust underpins auditor fraud risk assessments
Nederlands Tijdschrift Voor Geneeskunde - NED TIJDSCHR GENEESKD, 2007
This study investigates whether indications of mistrust, associated with an organization's financial reporting culture, are related to auditor fraud risk perceptions, observations and experiences. Using a sample of 5,603 client acceptance and audit continuance assessments at a Big Four audit firm in the Netherlands, this study finds that: (1) manager integrity, honesty, and ethics are considered by audit partners to be of highest importance in fraud risk assessments; (2) the aggressiveness of an organization's revenue recognition and accounting estimates appear to significantly influence auditor fraud risk perceptions; and (3) the quality of the audit-client relationship, and the level of senior management experience, provide important cues influencing auditor perceptions in "low risk" fraud situations, but neither are used to identify nor categorize high fraud risk clients. These empirical findings highlight the significant importance of senior management attitu...
Big Five Audits and Accounting Fraud
Empirical studies of earnings management, audit pricing, and audit reporting provide extensive evidence that the Big Five public accounting firms are associated with higher quality financial statements (Francis 2004). Nevertheless, the recent high-profile financial reporting failures that roiled the U.S. capital markets cast doubt on whether this proposition remains valid. Indeed, many commentators interpret the steep upward trend during the late 1990s and early 2000s in accounting misstatements by companies with Big Five auditors as almost conclusive evidence that their assurance services have deteriorated over time (e.g., Coffee 2002; Imhoff 2003; Zeff 2003). Among other explanations, some observers blame these watershed events on the more lenient litigation landscape having a disproportionate impact on Big Five quality as well as market conditions that led them to increasingly pursue lucrative consulting contracts to the detriment of their independence on audit engagements (e.g., Earley, Odabashian, and Willenborg 2003). Measuring trends in absolute audit quality is typically infeasible, so we more narrowly focus on discriminating between the relative performance of the Big Five and non-Big Five audit firms in preventing companies from orchestrating accounting fraud. Several commentators motivate arguments on the underlying reasons for the apparent erosion in Big Five audit quality by highlighting the well-known cases of fraudulent financial reporting by their clients (e.g., Coffee 2002; Cox 2003). However, rigorous evidence on whether companies are less likely to engage in accounting fraud if they are audited by Big Five firms or whether the relative quality of financial statements audited by Big Five firms has declined over time remains elusive. Against this backdrop, we test whether Big Five audits are associated with a lower incidence of accounting fraud. Conditional on observing this negative relation, we proceed to examine two additional questions that provide our main contribution to extant research: (1) Did the negative relation between the presence of a Big Five auditor and fraud likelihood change in the years leading up to the Sarbanes-Oxley Act of 2002 (SOX)? (2) Is the negative relation explained by Big Five auditors supplying higher quality audits, or by the endogenous effects of screening by auditors and selection by their clients? Analyzing accounting frauds suits our purposes since they were the catalysts for recent major legislative and regulatory changes largely aimed at improving the quality of audited financial statements. In other words, this is an opportune testing ground for our research on the link between Big Five audits and accounting impropriety. We collect the Accounting and Auditing Enforcement Releases (AAERs) issued by the Securities and Exchange Commission (SEC) for accounting frauds committed by companies between 1981 and 2001, which provides a fraud sample of 1,109 company-years. The control sample consists of 162,804 company-years in which there were no allegations of accounting fraud. We begin by providing univariate evidence on the association between Big Five audits and accounting fraud. For the entire sample period, the frequency of accounting fraud is 0.61 percent in Big Five clients and 0.92 percent in non-Big Five clients. The difference between these frequencies is highly significant, reinforcing prior research that brand-name auditors are associated with higher quality financial statements (Francis 2004). We then examine whether the negative association between Big Five audits and accounting fraud remains stable over time. Univariate tests reveal that the associations are negative in every year between 1981 and 1995 and they are statistically significant at the 0.05 level or better in most years. However, there is a sudden change after 1995 with the relation between Big Five audits and fraud becoming insignificant between 1996 and 2000. Moreover, the association becomes significantly positive in 2001, suggesting that the clients of Big Five firms are more likely to commit fraud than are the clients of non-Big Five firms in the year prior to the passage of SOX. Altogether, the univariate evidence corroborates claims that Big Five audits were no longer associated with a lower incidence of accounting fraud in the years immediately before 2002. Next, we report multivariate evidence on the relation between Big Five audits and accounting fraud. Consistent with the univariate tests, we find strong, robust evidence in both unmatched and matched samples that companies with Big Five auditors are less apt to engage in fraudulent financial reporting over the full sample period. Our probit coefficient estimates imply that hiring a Big Five auditor translates into the client being about four times less likely to engage in accounting fraud, reflecting the first-order economic impact on audit quality. We also report multivariate evidence on the stability of the negative association between Big Five audits and accounting fraud over time. Reinforcing the univariate analysis, we find significant negative associations in the period from 1981 to 1995. More importantly, the multivariate results include significant negative associations in the period from 1996 and 2001, which is inconsistent with both the univariate analysis and with claims that the Big Five quality differential had fallen in the years leading up to SOX. The negative Big Five coefficients are also similar in magnitude in the two periods, )0.63 (z-statistic = )7.73) in 1981–1995 and )0.69 (z-statistic = )5.10) in 1996–2001. Overall, the univariate results suggest that the negative relation between Big Five audits and accounting frauds vanishes after 1995 whereas the multivariate results indicate the opposite (i.e., that there is no such structural break). Additional tests demonstrate that the apparent structural break in the univariate results stems from the lack of a control for company size. Corroborating prior studies (e.g., Desai 2005), we find that larger companies were increasingly likely to engage in accounting fraud after 1995. Consequently, the apparent diminution in Big Five audit quality after 1995 actually reflects the increasing propensity for large companies to commit accounting fraud. Since the multivariate evidence indicates a stable negative relation between Big Five audits and the likelihood of accounting fraud, we next examine whether this finding reflects the causal effect of Big Five firms’ superior external monitoring. One alternative explanation is that these auditors are more adept at screening out the companies that are most likely to commit fraud. Another explanation is that companies planning to commit fraud are less likely to appoint Big Five audit firms. We shed light on these issues by examining auditor changes before and during the fraud years. Our results fail to support either of these alternative explanations. Specifically, we find no evidence that Big Five audit firms are more likely to resign from clients that engage in fraud, which is inconsistent with the screening argument. Similarly, the results do not suggest that fraud companies are less likely to switch to Big Five audit firms, which is inconsistent with the selection argument. Contrary to recent criticisms of the Big Five firms, we provide compelling evidence that they were consistently associated with a lower incidence of accounting fraud, even in the years shortly prior to the sweeping corporate governance reforms. Moreover, this finding is robust to controlling for the endogenous effects of screening by audit firms and selection by their clients.
Fraud Detection (From the public accountant perspective)
2019
Fraud cases and financial statements manipulation have been increasing in the past five years, and surprisingly, even well-known public accounting firms in the world had been involved in several cases. Public were starting to have doubt about the audit quality, whereas the auditor profession’s existence depended on public trust as a stakeholder of the profession. The purpose of this research was to examine the influence of audit experience, the ability to assess fraud risk, and professional skepticism on the success of external auditors in detecting fraud. The independent variables were audit experience, the ability to assess fraud risk, and professional skepticism, and the dependent variable in this research was the success of external auditor to detect fraud. The method used in this research was the analytical descriptive method using the survey approach. The survey has been applied to 92 auditors in Jakarta, Indonesia, as the respondents. Collecting data was conducted by question...