Paper on Audit: Auditors Do Not Have Full Responsibility to Detect Fraud

It is the interest of the various stakeholders of a company that any fraudulent activities are discovered and those involved punished for their criminal acts. Many of the major financial scandals that have been witnessed in the world have led to the increasing blame on the auditors. There are internal and external auditors of a company. It is obvious that the internal auditors have a duty to help the management detect any fraud that may be taking place in the company. However, it is not the role of the independent auditors to detect fraud. This paper argues for the case that it is not the role of the external auditors to detect fraud in companies in Canada. The paper gives various reasons and the limitations that make it difficult for the auditors to detect fraud.

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First, the role of the auditors as per the law and the international audit standards, the work of the auditors is to find out whether there are material misstatements that would make the financial statements prepared unreliable. They also inform whether the generally accounting standards have been followed. In this case, material misstatements may occur because of errors or fraud. Material misstatements is a relative word because it is upon the auditors to determine what amounts to material misstatements. If the misstatements cannot change the decision of the various stakeholders because they are immaterial, then it means that the auditors have no role of reporting (Coenen, 2008). Based on all these legal definitions, it can be seen that there is no law that obliques the auditors to report any fraudulent activities. The opinion that the auditor is expected to give does not require them in any way to point out whether there are fraudulent activities taking place in the company. It is the role of other stakeholders such as directors and the internal auditors to detect frauds in case they are happening in a company.

Based on this argument, it would be illegal for the auditors to report fraud to the shareholders to other parties. Confidentiality of information is a major value that the auditors are expected to uphold. They cannot reveal transactions that a company makes, to the general public because this would result in legal suits. The only option left is for the auditors to report the fraudulent activities to the top management, if they realize that the fraud is committed by a junior employee. The question is what happens when the fraud is committed by the top management of a company (Coenen, 2008). Even if the auditors reported the fraudulent activities to the management, there may be no action taken regardless of whether they have detected such fraud. This shows that the auditors, in general, have no duty in detecting fraud since it is not their role.

The work of the auditor is guided by law, and this leaves a great room to fail to detect fraudulent activities. The auditors are expected to perform their work within a short period, and this means that they cannot go through every transaction in a company to ensure that it us not fraudulent. They are expected to rely heavily on the accuracy of the systems in place as well as the information that the internal auditors provide (Vinten, 2005). If the external auditors realize that most of the transactions respect the GAAPs and that there are strong internal controls that ensure that there is the accuracy of information and there is no chances of fraudulent activities, they perform fewer tasks to find out whether there are material misstatements. This means that it is possible for the auditors to ignore areas that seem to have strong internal controls, without realizing that the fraud may still happen through such systems.

Concealed fraud are very difficult to detect, considering that they are intentional and well planned. Misstatements can result from errors that the employees may have made in the process of entering transactions. Such errors if material can be detected by the organization or even the auditors. Misstatements that result from fraudulent activities are not easy to detect, because the employees engage in fraud as long as there are loopholes that can help conceal their acts. They are keen to ensure that the auditors do not detect such activities. This is especially the case where the top management is involved, and they rely on experts who advise them on how to conduct the fraudulent activities. In such a case, it would wrong to expect that the internal auditors will detect fraud. The external auditors are not involved in the day to day activities of the company, hence may never get to detect fraud.

So far, theory suggests that the external auditors do not have the duty to detect fraud. If they were required to detect fraud, it would be important to increase their duties and responsibilities, to ensure that they evaluate all transactions, and require the management of companies to comply and give all the items that the auditors require in order to complete their tasks of detecting fraud. Otherwise, requiring the auditors to detect fraud would lead to very many legal suits especially when companies collapse due to undetected fraud. This is why many auditors are keen to clearly describe their mandate to the shareholders, and ensure that they do not hold them responsible for any damages that may occur as a result of fraudulent activities. The executive board is mainly responsible for overseeing the management of companies, to ensure that there are policies and procedures to be followed in the management of company resources (Vinten, 2005). They are also required to ensure that there are effective internal controls that eliminate any incidences of fraudulent activities. They can summon the management any time and seek clarification about various activities in the company. This is why they are more responsible for the fraudulent activities that occur in the company, and should do all it takes to detect the fraud early, as compared to wait for the auditors to detect and report to them.

Counter arguments

From another point of view, there are arguments that the auditors have the duty of detecting fraud. There has been changes that have been implemented especially after major financial scandals such as those of Enron, which are meant to improve the ability of auditors to detect fraud. Before auditing process is started, it is a requirement that the auditors have a brainstorming session where they can talk with the various stakeholders in the company, ask as many important questions as possible, so that they can determine whether there are possible fraudulent activities that may be taking place in the company. In case they suspect such activities, they are obliged to conduct more tests on the various transactions done by the various employees to help understand whether there are possible errors. The auditors are not prevented from doing tests in all transactions in case they suspect that there may be fraudulent activities happening in the company (Coenen, 2008). The auditors can also contact the third parties involved in transactions such as financial institutions as well as suppliers and customers of the company, to prove that the transactions that are suspected are correct. This means that they can easily detect fraud.

The auditors only add value to the investors and shareholders, if they can give an assurance that the financial statements that they have audited are free from errors and fraud, which lead to misstatements. Fraud is one of the factors that lead to misstatements, and this means that it should be reported whether the financial statements have misstatements and if present, there is a need for description about the cause of the misstatement such as fraud, and what the implication such misstatements have on the financial statements and the decision-making processes by the various stakeholders. These legal requirements thus oblique the auditors to detect fraud and report them to the relevant stakeholders. It would be unethical for the auditors to detect fraud, or ignore any incidences that may indicate the presence of fraud, and still give the opinion that the financial statements are prepared following the GAAPs. It is upon the auditors to report fraud because it is one of the factors that result to the financial misstatements. By reporting that the financial statements are not free from material misstatements, the auditors can stimulate further investigations where they can still be involved to ensure that the fraudulent activities are also discovered. If such a procedure is followed, the auditors would have played the role of detecting fraud.

The definition of the world material in accounting vary depending on context, and does not necessarily relate to the quantities that are stolen in a fraudulent transaction. While errors can be ignored unless they are material, fraud is material regardless of the amounts involved because it involves attempts to steal money from the shareholders. This means that the auditors cannot argue that they did not report a fraud just because it was not material (Vinten, 2005).

Refutation

All the various reforms that have been initiated since various scams have emerged have not in any way compelled the auditors to detect fraud. The reforms have emphasized more on the need to increase the disclosure by the companies, which is the role of the accounting department of a company. The changes in the audit have required more independence for the auditors, which ensures that there are no chances of collusion to engage in criminal activities such as fraud. However, the loopholes that protect the management of companies remain considering that the auditors still have to rely heavily on the information that they receive from the management. It is possible for the management to provide misleading information as well as false evidence to show that the accounting department is doing very well. This does not in any way mean that fraud will have to be detected considering that the auditors may not necessarily prove the authenticity of the financial documents and the information that the management and other employees avail to them (Coenen, 2008). Though the auditors are given the authority to contact third parties who can help to tell whether they engaged in certain transactions with the company that is being audited, such parties are not obliged to respond to such requests. Some of them never respond, and nothing can be done to them to compel them provide the necessary information. It is also possible for such parties to work with the management of companies to conceal important information that can hide the evidence that show that fraudulent activities have taken place in a company. Therefore, it is misleading to argue that the various changes in the Canadian audit activities including the Sarbanes-Oxley law has compelled the auditors to detect fraud in a company.

It is true that the misstatements that the auditors are expected to detect include fraud. In some cases, the auditors end up detecting fraud as well as material errors that would require reporting. This is why the auditors are allowed to give a qualified report in relation to the financial statements of a company, in case there are areas that they think need to be investigated for fraudulent activities. Fraud audit can then be performed to find out the nature of fraud that has been happening. This does not mean that the auditors have the duty to go into detail and explain the fraudulent activity. They are expected to give an opinion, and not an explanation of the details of the fraud and errors that have been discovered. Furthermore, finding out whether there was fraud requires great skills that the auditors are not required to have in order to perform their duties. An example is where there is...