Changing Perceptions of the Role of the Company Auditor, 1840–1940

One advantage of studying history is to explain present practice or at least to help place current phenomena in perspective. This paper seeks to explore two related themes which have proved problematic from the earliest times of company auditing in the UK: the nature of the auditor's responsibility; and the public's perception of his role. The conventional view is that auditors were initially concerned mainly with fraud detection, and that it was not until the 1930s that greater emphasis was devoted to the verification of financial statements. This study suggests that statement verification was the primary audit concern in relation to public companies as early as the 1830s, though we acknowledge that later in the century more emphasis was placed on fraud detection. We therefore see the current debate over the auditor's responsibility as merely the latest movement in a continuing and fluctuating theme. We also show that the profession has encountered great difficulty in reconciling public expectations with the practicalities of auditing. General confusion over the role of the auditor has existed to such an extent that it has been difficult even for the profession to reach agreement on the main purpose of company auditing, and the message to be sent to the investing public. In these endeavours, the accounting profession was at the same time both helped and hindered by legal developments.     

上市公司财务欺诈问题的研究

目前,对于财务欺诈的研究,集中在成因理论和制度防范上,大多采用规范分析的方法。本文从财务欺诈的成因分析入手,结合我国证券市场己披露案例的研究,我国证券市场的现状,深入分析了财务欺诈的成因。主要有外部环境制度上的缺失因素,也存在企业内部治理结构缺陷的影响。尤其在我国特殊的市场体制下,财务欺诈更是有它自身形成的诱因,阐述了从独立审计的角度,建立应对财务欺诈的防范体系的对策。     

Why computer-mediated communication improves the effectiveness of fraud brainstorming

Current auditing standards require auditors to conduct a fraud brainstorming session aimed at considering ways in which the audit client's financial statements might be fraudulently misstated. Lynch et al. (2009) document that computer-mediated fraud brainstorming is significantly more effective than face-to-face brainstorming for generating relevant fraud risks. In this study, we code and analyze process-level data from the Lynch et al. (2009) study to understand the factors contributing to the greater effectiveness of electronic fraud brainstorming. Specifically, we conduct mediation analysis to discern the degree to which equality of participation and two measures of task focus contribute to greater fraud brainstorming effectiveness when using a computer-mediated communication system compared to traditional face-to-face brainstorming. We also examine participants' perceptions of ease of system use, satisfaction with the process, and satisfaction with the outcome. Overall, the results indicate that the primary reason for the greater effectiveness of electronic fraud brainstorming is the greater degree of task focus as revealed through the length of comments made when using computer-mediated fraud brainstorming. In an absolute sense, participants using electronic brainstorming felt that their brainstorming mode was easy to use and they were satisfied with the process and outcome. The primary contribution of this study is in enhancing our understanding of precisely why computer-mediated fraud brainstorming outperforms face-to-face fraud brainstorming.     

The Dempster‐Shafer Theory: An Introduction and Fraud Risk Assessment Illustration

This article introduces the Dempster‐Shafer theory (DS theory) of belief functions for managing uncertainties, specifically in the auditing and information systems domains. The use of DS theory is illustrated by deriving a fraud risk assessment formula for a simplified version of a model developed by Srivastava et al. (2007). In this formulation, fraud risk is the normalised product of four risks: risk that management has incentives to commit fraud; risk that management has opportunities to commit fraud; risk that management has an attitude to rationalise committing fraud; and risk that an auditor's special procedures will fail to detect fraud. The article demonstrates how to use such a model to plan for a financial audit where management fraud risk is assessed to be high. In addition, it discusses whether audit planning is better served by an integrated audit/fraud risk assessment as now suggested in SAS 107 (AICPA 2006a, see also ASA 200 in AUASB 2007) or by the approach illustrated here where a parallel, but separate, assessment is made of audit risk and fraud risk.     

A taxonomy to guide research on the application of data mining to fraud detection in financial statement audits

This paper explores the application of data mining techniques to fraud detection in the audit of financial statements and proposes a taxonomy to support and guide future research. Currently, the application of data mining to auditing is at an early stage of development and researchers take a scatter-shot approach, investigating patterns in financial statement disclosures, text in annual reports and MD&As, and the nature of journal entries without appropriate guidance being drawn from lessons in known fraud patterns. To develop structure to research in data mining, we create a taxonomy that combines research on patterns of observed fraud schemes with an appreciation of areas that benefit from productive application of data mining. We encapsulate traditional views of data mining that operates primarily on quantitative data, such as financial statement and journal entry data. In addition, we draw on other forms of data mining, notably text and email mining.     

Government auditing and corruption control: Evidence from China’s provincial panel data

Since its foundation, China’s government auditing system has played a very important role in maintaining financial and economic order and improving government accountability and transparency. Though a great deal of research has discussed the role of government auditing in discovering and deterring corruption, there is little empirical evidence on whether government auditing actually helps to reduce corruption. Using China’s provincial panel data from 1999 to 2008, this paper empirically examines the role of government auditing in China’s corruption control initiatives. Our findings indicate that the number of irregularities detected in government auditing is positively related to the corruption level in that province, which means the more severe the corruption is in a province, the more irregularities in government accounts are found by local audit institutions. Also, post-audit rectification effort is negatively related to the corruption level in that province, indicating that greater rectification effort is associated with less corruption. This paper provides empirical evidence on how government auditing can contribute to curbing corruption, which is also helpful for understanding the role of China’s local audit institutions in government governance and can enrich the literature on both government auditing and corruption control.     

The impacts of electronic commerce on auditing practices: an auditing process model for evidence collection and validation

The main purposes of this paper are twofold. First, the paper identifies and discusses the potential impacts of electronic commerce on auditing practices in the emerging paperless on-line transaction environment. Second, it provides two auditing process models that incorporate modern network security techniques and show how an audit can be conducted in an EC environment. A periodical auditing process model (PAPM) is proposed to demonstrate how secure electronic technologies can be used to facilitate the auditor's evidence collection and validation process for annual and semi-annual audits. We also present a continuous auditing process model (CAPM) which extends the functions of PAPM for continuous auditing. In CAPM, a real-time transaction monitoring system is used to link to firms' accounting information systems for assisting the auditor to detect abnormal activities and generate exception reports on a continuous basis. The CAPM approach intends not only to ensure integrity and effectiveness of the entire accounting system, but also to guarantee the correctness and usefulness of the constantly generated financial statements for public dissemination. The main contribution of this paper is that it illustrates a conceptual framework which shows the feasibility of continuously auditing electronic transactions in the EC environment. Copyright © 2000 John Wiley & Sons, Ltd.     

Climate‐related Risk and Financial Statements: Implications for Regulators,Preparers, Auditors and Users

Interest among investors in understanding climate‐related risk from companies’ management has increased in recent years. Despite this, climate‐related risks are currently predominantly discussed outside the financial statements, if at all. However, as set out in the Australian Accounting Standards Board (AASB)/International Accounting Standards Board's (IASB) Practice Statement 2 Making Materiality Judgements (APS/PS 2), qualitative external factors such as the industry in which the entity operates and investor expectations may make such risks ‘material’ and warrant disclosures when preparing financial statements, regardless of their numerical impact. The AASB and the AUASB expect that directors, preparers and auditors will be considering APS/PS 2 when preparing and auditing financial statements. This paper provides an outline of the guidance and motivation behind the issuance of the bulletin on climate‐related risk disclosures, key takeaways and recommendations, and the AASB's and AUASB's suggestions on the type of evidence that would be useful for standard setters.     

Artificial Neural Networks Applied to Ratio Analysis in the Analytical Review Process

Experts claim that artificial neural network (ANN) technology can outperform standard statistical methods when applied to examine actual financial data. Researchers have used ANNs to analyze bankruptcy prediction, bond rating and the going-concern problem. Financial firms have employed ANNs commercially to predict commercial bank failures, detect credit card fraud and verify signatures. For accounting and auditing problems, however, application of ANN technology has been limited. Preliminary experiments tested whether an ANN offered improved performance in recognizing material misstatements during the analytical review process of auditing. Four years of audited financial data from a medium-sized distributor were input as data streams to calibrate the ANN across fifteen financial accounts. Researchers compared a presumed lack of actual errors and certain seeded material errors with signals from the ANN analytical review process to evaluate performance. Results were compared to analyses where financial ratios and regression methods were employed as analytical review techniques. Results tentatively suggest that the ANN method recognized patterns within financial accounts more effectively than did financial ratio and regression methods. ANNs applied as a forecasting tool seem useful for identifying patterns that can indicate potential investigations of a firm's unaudited financial data in the current year.     

基于财务报表审计的会计舞弊揭示机制研究

目前企业会计信息失真主要因会计舞弊引起,CPA能否有效揭示重大会计舞弊已经直接影响到CPA行业的生存价值。中注协因此发布了大量的新准则,试图借鉴国外先进的审计技术,将风险导向审计理念引入到我国的审计实践中来,以提高CPA揭示会计舞弊的能力。但CPA不能有效揭示重大会计舞弊主要的不是技术问题,本文在借鉴国外经验的基础上,分析我国CPA不能有效揭示会计舞弊的原因,提出应将CPA审计和政府审计相结合,共同揭示企业会计舞弊。     

Government audit supervision,financialization, and executives' excess perks: Evidence from Chinese state-owned enterprises

In recent years, the phenomenon of corporate financialization has become increasingly prevalent in China. This paper uses data from Chinese state-owned listed firms from 2006 to 2018 to investigate whether large-scale financial investments by companies facilitate executives' excess perk consumption, and whether government auditing, as an important component of the national governance system, can play a governance role in this behavior. The results show that corporate financialization behavior significantly exacerbates executives' excess perks, and government auditing can mitigate the effect of corporate financialization on executives' excess perk consumption. We find that increased cash flow is the mechanism by which financialization behavior positively affects executives' excess perks. Furthermore, this study reveals that the implicit corruption of state-owned enterprise executives through corporate financialization is primarily based on compensation psychology, which will reduce the effectiveness of monetary compensation contracts. However, government auditing can effectively constrain this influence.     

Regulation of accountancy and the power of capital: some observations

In response to Briloff’s study of the regulation of fraudulent financial reporting in the USA, this paper examines the regulation of financial reporting and auditing in the UK. In common with Briloff, it reports that little effective regulatory action is taken against auditing firms implicated in audit failures and/or the publication of “defective" financial statements. Seemingly, as major fraction of international capital, auditing firms have colonised and captured the state to shield themselves from regulatory action.     

SEC communications to the independent auditors: An analysis of enforcement actions

All 415 SEC releases issued between the end of 1972 and the end of 1989 were analyzed to clarify the SEC's philosophy of independent auditing and to document the violations of generally accepted auditing standards (GAAS) reported in the releases. Among the findings are 1) the SEC consistently concluded that the primary purpose of an independent audit is to enhance the efficiency of the capital markets and help protect the investing public by providing reasonable assurance concerning the integrity of the financial statements and related disclosures; 2) the SEC attributed many independent audit failures to questionable independent auditor judgement in adhering to professional standards, most often because of insufficient gathering of audit evidence due to over-reliance on management representations; 3) the large majority of cases in which the SEC associated the auditor with fraudulent financial reporting (usually constructive fraud) involved smaller audit firms; 4) the large majority of cases of management fraud in which the auditors were deceived by clients involved large audit firms. In the final section of this paper, we discuss the influence of enforcement releases on independent audit standard setting and possible implications for the audit profession in the future.     

Accounting control,governance and anti-corruption initiatives in public sector organisations

This special issue focuses on the interactions between accounting, public sector organisations and the socio-economic and political environments in which they operate, with a specific focus on the critical analysis of policy and practice in the fight against corruption. The aim of the special issue is to disseminate knowledge to enable a more sustainable, accountable and less corrupt public sector, regardless of where it is located in the world. It presents the work of a global community of scholars engaged in research projects on policies and strategies related to accountability, transparency, auditing, regulatory disclosure, governance, investor protection and anti-corruption initiatives in public sector organisations. The papers presented here address many different angles of corruption and aspects of the way in which it is reported using a broad range of methodologies, theoretical frameworks and research locations. Collectively, these papers demonstrate that more attention needs be given to investigating the human cost associated with illegal activity that leads to human suffering, inequality, and lifetime costs. They further emphasise that we have much to learn about regulatory disclosure and jurisprudential practice in the fight against fraud and corruption.     

Auditors as modern pharmakoi: Legitimacy paradoxes and the production of economic order

Despite a continuous flow of audit failure episodes the auditing profession keeps on being seen as technically and morally legitimate. This paper seeks to better understand how the paradox that surrounds the legitimacy of financial auditing develops. Relying on René Girard's theoretical developments on scapegoating, sacrificial rituals and mythification, we argue that auditors are often (but not always) selected as sacrificial victims in the wake of major corporate scandals. Rationalized mythologies are mobilized in the process by which auditors are morally and/or legally condemned, in a way which maintains or strengthens the legitimacy of the financial audit function. Fundamentally speaking, we contend that financial auditors can be conceived of as modern pharmakoi, constituting a reservoir of victims to sacrifice whenever fraudulent financial statements surfacing in the public arena threaten to severely disrupt the credibility and smooth-functioning of capital markets. We confront our theoretical translation of Girardian theory to the empirical domain through an analysis of the breakdown of accounting firm Arthur Andersen, in which we examine how the legitimacy paradox surrounding the financial audit function is produced and reproduced. One of our key conclusions is as follows: despite claims which commonly celebrate the rationality of capital markets, the latter's functioning and the sustaining of economic order are predicated on the production and reproduction of mythologies.     

An experimental study of users’ responses to qualified audit reports in China

This paper presents the results of an experimental study on users’ responses to the qualification of audit reports in China. By employing the type of audit report (e.g., unqualified vs. qualified auditor opinion) as a manipulated variable in the experiment, we found mixed responses from the participants towards the perceived impact of a qualified audit report on users’ understanding and use of the financial statements. In general, Chinese users, credit and loan officers in particular, perceived a qualified auditor opinion as having a somewhat negative impact on the credibility of financial statements. However, no significant difference was found in users’ investment or credit decisions with respect to their exposure to the financial statements accompanied by an unqualified or a qualified auditor opinion. The study findings suggest that the U.S.-style qualified audit reports have fairly limited “information content” to users in the present Chinese auditing environment and that there is a need to further improve Chinese auditing standards and practices. In addition, the study provides some insights into recent auditing developments in China.     

Jack's Sports Bar

This two‐part case focuses on indicators or red flags of a possible fraud being committed by a majority shareholder against a minority shareholder. The student assumes the role of an accountant investigating the possible fraud. In Part 1 the student is provided with a whistleblower complaint and examines the draft financial statements that will be used for the purchase price of the sale of shares by the minority shareholder to the majority shareholder. In Part 2 the student is provided with further information on inventory controls and the accounting practices. Drawing on the student's knowledge of control systems and financial statement analysis, the student's task is to identify the possible fraudulent transactions and quantify their effect.     

Revenue Recognition: Judgment in the Spotlight / LA CONSTATATION DES PRODUITS: PLEINS FEUX SUR LE JUGEMENT

This paper examines recent history in the area of revenue recognition in financial reporting by Canadian public companies. Revenue recognition is critical because of the profound impact this accounting policy has on the financial statements, but it can be highly judgmental. Restatement of public financial statements is taken as evidence that the reliability of the reported results, as initially presented, is questionable ‐ that is, the financial statements do not fairly reflect the financial position of the organization. We examine recent newsworthy examples of restatement of revenue by Canadian public companies to determine whether this can be traced to faulty professional judgment or to other circumstances, such as deliberate misrepresentation. Les auteures se penchent sur l'histoire récente de la constatation des produits, dans l'information financière communiquée par les sociétés ouvertes canadiennes. L'importance cruciale de la constatation des produits tient aux répercussions profondes qu'a la méthode de constatation sur les états financiers et au fait qu'elle peut faire largement appel au jugement. Les auteures évaluent certains exemples canadiens récents de retraitement des produits qui sont dignes d'être rendus publics, afin d'en déterminer les paramètres.     

Financial Statement Fraud: Some Lessons from US and European Case Studies

This paper studies 14 companies that were subject to an official investigation arising from the publication of fraudulent financial statements. The research found senior management to be responsible for most fraud. Recording false sales was the most common method of financial statement fraud. Meeting external forecasts emerged as the primary motivation. Management discovered most fraud, although the discovery was split between incumbent and new management.