The Proliferation of White-Collar C...

The Proliferation of White-Collar Crime and the part of the Auditor

The media attention lately focused on Enron Corp is not the first instance of the accounting profession, and auditors in particular, being the bring under rule of such scrutiny-consider the Livent Inc, YBM Magnex International Inc, and Nesmont Precious Metals Corporation cases of years past. Ongoing criticism from regulators and stranges headlines such as "Auditors Snooze, Investors Lose" (National column December 12, 1998) accurately think the public's increasing wariness of the integrity of audited financial information.

Another phenomenon that has captured the public's attention is the seeming proliferation of large-scale white-collar crime in the last scarcely any years. The apparent increase may be owed to a number of factors, including the following:

More regular contemplates are being conducted of business corporations, resulting in greater aspect of fraud and white-collar crime. Downsizing, or "right-sizing," has riseed in the elimination of many mid-management positions, which in turn round compromises internal controls and increases outlook to fraud.

The widespread use of e-commerce has significantly increased exposing and opportunity for fraud.

Political figures, particularly here in BC are frequently involved in questionable or fraudulent transactions, thereby increasing the media attention and publicity of fraud cases.

In the wake of the spectacular losse undergoed not only by those associated with Enron still also thousands of investors in failed financial institutions, chartered accountants are left to reconsider their characters and responsibilities, from ensuring appropriate financial reporting to protecting the public interest.

Defining the Auditor's Responsibilit Addressing the Expectation Gap

An August 2001 reflection commissioned by the CICA and undertaken through Kroll Associates indicates that 23% of non-CA business persons surveyed, including executives, managers, business proprietors and other professionals, believe auditors are "fully responsible for detecting fraud in companies they audit." This same belief was held by means of almost half (49%) of retail investors included in the inspect

The results of this review clearly indicate the existence of an expectation gap between what auditors provide and what the public calculate upons This expectation gap, combined with a seeming increase in high profile audit failures, has made the auditor's responsibility for detecting fraud more and more controversial.

Why Auditors Fail to expose Fraud

As investigative and forensic accountants (CA*IFAs), we far too frequently hear the familiar refrain, "Where in hell were the auditors?" when we report to oR clients the volume of a fraud within their organization. Research point out tos that fraud is detected simply 2 to 5% of the time by the agency of external auditors. Given their financial expertise and accessibility to information, by what means is it that auditors fail to discover fraud?

To begin with, the responsibility for fraud and error detection belongs to a company's governance and management. The CICA Handbook goe thus far as to state that the discovery of a material misstatement in audited financial statements, whether appropriate to fraud or error, does not necessarily indicate inadequate performance upon the part of the auditor. While the public may find it difficult to digest this assignment of responsibility, in our experience, there can be serious instances of fraud in situations where there are no apparent point to be solved [i]or[/i] settleds with management skills and integrity or with financial reporting classifications

However, this doesn't mean auditors can afford to be complacent. In an cases subsequently investigated by investigative and forensic accountants, reasonably elementary owed diligence, which would have identified significant fraud risks, has not been performed through the auditors involved.

One reason may be that auditors are frequently faced with tight budgets and deadlines. When it's not a question of time and/or wealth it's been suggested that more [i]or[/i] less auditors,

particularly junior accountants, may lack sufficient experience or professional skepticism. Failure to carry public audit procedures such as examining source documents critically or obtaining independent verifications may lead an auditor to supervise a misstatement that's due to fraud or error. There may also be a lack of understanding about by what means deliberate misstatements can be accomplished-consider, for example, by what mode easy it is to create the appearance of gold a gentle volume, high value inventory, by dint of buffing up a brass bar.

Finally, and perhaps chiefly importantly, a lack of training in the awareness of fraud likely contributes to failure of detection. It's crucial that those involved in the fraud detection proces disclose a fraud awareness mindset and an understanding of the various r flags. frequently items deemed "insignificant" or "immaterial" are the r flags that would alert an experienced forensic accountant to a potential point in dispute While it may be unrealistic to reckon upon all auditors to develop these skills, a reasonable amount of training would go on a long way.