fraud detection, redress reporting by auditors
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Managerial Auditing JournalFraud detection, redress and reporting by auditorsHarold Hassink Roger Meuwissen Laury Bollen
Article information:To cite this document:Harold Hassink Roger Meuwissen Laury Bollen, (2010),"Fraud detection, redress and reporting byauditors", Managerial Auditing Journal, Vol. 25 Iss 9 pp. 861 - 881Permanent link to this document:http://dx.doi.org/10.1108/02686901011080044
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Fraud detection, redress andreporting by auditors
Harold Hassink, Roger Meuwissen and Laury BollenDepartment of Accounting and Information Management,
School of Business and Economics, Maastricht University, Maastricht,The Netherlands
Purpose The primary research question of this study is to what extent auditors comply withauditing standards once they encounter fraud and whether compliance is associated with particularfraud characteristics (i.e. material versus immaterial fraud, management versus employee fraud,statutory versus voluntary audit and external versus internal fraud) as well as with auditor (experience)and audit firm characteristics (Big Four versus non-Big Four). The study also aims to provide evidenceon the role of auditors in redressing fraud. Redress refers to the auditee taking measures to nullify theconsequences of the fraud, insofar as possible, and to prevent any recurrence of such fraud.
Design/methodology/approach To gather data on the role of auditors in fraud cases, a surveywas conducted among all audit partners of the top 30 Dutch audit firms. In total, 1,218 audit partnerswere selected and received a postal questionnaire. In total, 326 questionnaires were returned (27 per cent),of which 296 (24 per cent) were usable.
Findings The results reveal that auditors fail to comply with some important elements of fraudstandards. There are substantial differences among audit firms regarding compliance with therelevant auditing standards. Furthermore, auditors appear to encounter corporate fraud onlyincidentally. About half of the auditors believe they have a significant impact on redressing fraud.
Research limitations/implications One of the main research findings is that it is difficult forindividual auditors to build up expertise in fraud detection. There appears to be a need for specifictraining programs for auditors to help them to detect fraud, emphasizing the need for mandatoryconsultation with the technical department of the audit firm once red flags indicating fraud arefound. Indeed, this need for change has been addressed by the Dutch professional accountancy bodyNIVRA as a direct result of the findings of this study.
Originality/value This study extends existing research by investigating the compliance ofauditors with fraud standards and it sheds light on the actual redress experiences of auditors. Itfocuses on the actions taken by auditors or the lack thereof in situations where auditors encounterfraud signals. The study indicates that in the absence of good oversight, auditors have mixedincentives when they are confronted with signals for fraud, resulting in actions that are not always inline with existing regulatory requirements.
Keywords Auditors, Auditing, Fraud, Professional ethics, Regulation, The Netherlands
Paper type Research paper
IntroductionA study on major European business failures revealed that the role of auditors is mostoften questioned and audit firms are most likely to be sued in failures that involvemanagement or employee fraud (Bollen et al., 2005). A widely used explanation for therelatively large number of fraud cases in which the role of the auditor has beenquestioned is the existence of an audit expectation gap, suggesting that society hasunfulfilled expectations concerning the role of the auditor in fraud cases. The potentialcauses of an audit expectation gap have been addressed extensively in existing literature(for an overview, see Nieschwietz et al., 2000). Studies in the area of fraud have mainly
The current issue and full text archive of this journal is available at
Received 14 April 2010Reviewed 25 May 2010Accepted 21 June 2010
Managerial Auditing JournalVol. 25 No. 9, 2010
pp. 861-881q Emerald Group Publishing Limited
focused on the extent to which auditors are able to detect fraud and whether society hasunreasonable expectations in this respect (the reasonableness gap). Less attention hasbeen paid to the gap between what can reasonably be expected from auditors once theyencounter fraud signals and what they actually achieve. Following Porter (1993), thispart of the expectations gap may be a result of either the deficiency of standards andregulations with respect to the duties of auditors in fraud situations (the standards gap)or of the (under)performance of auditors regarding existing duties (the performancegap). With respect to the standards gap, the general public may have expectations thatare not reflected in existing auditing standards. Comparing expectations with existingauditing standards could identify opportunities for changing the standards and fornarrowing the standards gap.
Although several studies have indicated that auditing standards and regulatorychanges have not resulted in an increase in the auditors ability to detect fraud( Jakubowski et al., 2002; Rezaee et al., 2003) it remains unclear to what extent auditingstandards and regulations have impacted the auditors redress and reporting actions insituations where fraud has been detected. Redress refers to the auditee taking measuresto nullify the consequences of the fraud, insofar as possible, and to prevent anyrecurrence of such fraud. Given the existing standards on the role of auditors in fraudsituations, the existence of a performance gap in this context can be due to severalfactors, including the lack of knowledge or competence on how to act once corporatefraud is detected, lack of care in following protocol or the lack of independence of theexternal auditor, possibly because of conflicting interests. All of these explanationstouch upon auditors professional ethics. Given the sensitive nature of fraud reportingand societys expectations of auditors in this respect, compliance with fraud standards isimportant to auditors and to society.
The aim of this study is fourfold. The first objective is to present evidence on thevolume and nature of fraud cases detected by auditors. The second objective is todetermine the extent of auditors compliance with auditing standards regarding fraudredress and fraud reporting. The third objective is to study the impact of various contextvariables (i.e. material versus immaterial fraud, management versus employee fraud,statutory versus voluntary audits and external versus internal fraud) as well as auditor(experience) and audit firm characteristics (Big Four versus non-Big Four) on the actionstaken by auditors in fraud situations. Finally, this study provides recommendations onhow the performance of auditors regarding the detection of corporate fraud andcompliance with relevant auditing standards can be improved.
The two Dutch professional bodies for auditors, NIVRA and NOvAA, commissionedthe study for which the results are presented in this paper. The focus of this study is onthe period 1995-2002. This is a useful period to study auditors compliance withregulations because auditing regulations concerning fraud issues remained unchangedduring this period; after 2002, various changes were implemented. In addition, duringthis period, there was virtually no oversight of audit firms concerning their actions infraud situations; the results of this