Auditors and Fraud Detection: Easier Said Than Done

Unique skills are required to detect and prevent fraud and impending corporate failures. In carrying out an audit and assessing the risk of fraud, auditors must exercise reasonable skill and care (which includes professional skepticism) and assess the client’s integrity. If they fail to do so, they are legally liable. However, unless auditors are provided with the skills and knowledge necessary to perform their role as prescribed, it is unfair to expect them to detect illegal acts, including fraud, and it would be unreasonable to expect them to detect corruption. Auditors may have a duty in terms of other legislation to report any illegal activities they uncover or come to suspect in the course of their work (Labuschagne and Els 2006), but they are not required to consider the risk of corruption unless specific legislation calls for it.

The auditing profession has been criticized and auditors have been sanctioned for failure to (a) gather sufficient competent evidence, (b) exercise due professional care, (c) exercise a sufficient level of professional skepticism, (e) obtain evidence related to management representations, and (f) express an audit opinion (McKenna 2013). William Boynton and Raymond Johnson (2005) have reported that since the fall of Enron, auditing standards have been revamped to re-emphasize the auditor’s duty to detect fraud (see AICPA 2002; IFAC 2009). Financial statement users in many countries continue to believe that auditors ought to have a primary audit responsibility to detect all irregularities (Epstein and Geiger 1994), sustaining (to audit firms’ likely disappointment) what is known as the “expectation gap” concept. In this context, Porter (1997) argued that users’ expectations are beyond what is reasonably expected by common law and by the auditing profession. Porter’s argument remains valid.

 
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