Fraud, Errors and Illegal Acts - Term Paper Example

Fraud, Errors and Illegal Acts Outline The basic responsibility of an auditor is to detect fraud, errors and illegal acts. As per the SAS-99, the auditors are required to perform many functions such as to collect information supportive towards fraud / risk of fraud, to examine the risk of fraud and so on. Auditors are to certify the effectiveness of internal controls of an entity wherein they conducted audit, have to keep records, to advise management and so on. With regard to SAS # 82, auditors are responsible to plan and execute the audit in order to have reasonable assurance regarding availability of financial statement free from misstatement. Internal control, proper reporting mechanism and the implementation of sound accounting policies and procedures shall rest with the management due to which, role of management has increased. Forensic accountant must have in depth study of the documents presented and should have the command to use computer software and so on. Forensic auditors must have excellent written and oral communication skill. Auditors must be aware of IT application and business processes to have a grip on IT related frauds. To nab the tax dodgers, Internal Revenue Service has number of trained people who gather information from different sources / channels to be used to detect tax frauds. IRS has the power to confiscate property of the tax defaulter / tax dodger in order to pressurize them to clear their tax liabilities. FRAUD, ERRORS AND ILLEGAL ACTS The Auditors’ Responsibilities to Detect Fraud, Errors and Illegal Acts The basic responsibility of an auditor is to detect fraud, errors and illegal acts that takes place in an organization and report it to the competent committee for audit to take appropriate measures to prevent fraud, errors and illegal acts (Alleyne & Howard 2005). The role of auditors should be more responsible and cautious against the backdrop of fall of business empires like Enron and world com. As per the SAS-99, the auditors are required to perform many functions such as to collect information that supports to identify the attempted fraud / risk of fraud; to examine the risk of fraud after an evaluation of enterprise’s existing controls, absence of controls, ineffective controls and overriding of controls by the management that culminates fraudulent expenses and skimmed of assets; to pinpoint the individual(s) that are involved in fraudulent transaction, their attitude and past history; identify the loopholes attracting fraud(s) and to suggest management / competent committee of the Board to plug in the identified loopholes (AICPA 2002). After the debacle of Enron and World com, the American legislatures drafted and promulgated an act named as “Sarbanes Oxley Act-2002” just to restore the investor’s confidence. The act sets new pattern of accountability and imposition of penalties for the wrong doers (Alleyne & Howard 2005). According to laid down criteria, auditors have to take into account the mentioned criterion while auditing an enterprise. Auditors who have conducted audit of an organization shall keep audit reviews for a period of five years. Auditors are to certify the effectiveness of internal controls of an entity wherein they conducted audit. They have to advise the management to form a team of experts from finance, audit, information technology, operation, risk management and legal to evolve comprehensive procedure for an effective control on financial transactions (Alleyne & Howard 2005). The team of experts should directly be reporting to the CEO/CFO of the company for necessary guidance and instructions in light of the audit reports. Management should bear the cost of compliance to improve / revamp existing system for an effective internal control. Auditors should not encroach upon the discretions of management for implementation of comprehensive procedure concerning effective internal controls or overcome the internal control deficiencies. Auditors shall advise the management or the competent committee on audit to initiate the process of effective internal control as early as possible (Gay, Schelluch & Reid 1997). Role of Auditors With regard to SAS # 82, auditors are responsible to plan and execute the audit in order to have reasonable assurance regarding availability of financial statement free from misstatement. The auditors have to examine statement in question to provide guidance to the management on the basis of their evaluation and fact findings. The responsibility of an auditor is to detect frauds, errors and illegal acts and suggest remedial measures to the management for prevention of such frauds in future (Zimbelman 1997). Role of Management The primary reason of frauds, errors and illegal acts rests with internal control that lacks sophisticated system in place. All professionals have agreed on the point that internal control, proper reporting mechanism and the implementation of sound accounting policies and procedures shall rest with the management. To combat identified menace, management should focus on an effective internal controls, segregation of functional responsibilities of the employees. Take the example of Manager Credit and Manager Credit Administration in a financial institution. The functional responsibility of Manager Credit is to assess the need of the customer. After determining the need of the customer, he raises the proposal for financing and documents to be obtained there against to secure exposure. The responsibility of Manager Credit to check the documents to be obtained against sanctioned finance and kept it in a centralized location at Head Office and not with the branch where the credit of the customer is parked. Previously the dual function rests with the Manager Credit, which invites temptation of frauds (Gay, Schelluch & Reid 1997). This is the best example of segregation of duties aims at to strengthen the internal control, which helps preventing frauds, errors and illegal acts. Management should place honest people who have a good record of accomplishment to manage the affairs of the company. HR of the company should select employees who have the fame of honesty, integrity and loyalty to the institution for a smooth sail. Management should introduce tough selection criteria for placement of employees on responsible positions (AICPA 2002). Creation of ideal environment in an organization, firing of disrepute people and hiring of honest people would be helpful in combating the identified risks. To create atmosphere conducive for the employees give them credit where the credit is due. Pay for performance policy should be introduced to encourage hard working and honest employees. Top management should be the role model for the rest of the employees. These are the few measures, if implemented, would be the instrumental in preventing frauds (Millichamp 2000). Auditor’s Training to Recognize Complex Financial Crime To train the auditors to detect complex financial crimes, forensic accountancy is the most effective and popular tool in detecting and preventing the financial frauds and the white color criminals responsible for it. Forensic accountant start their career as an auditor of a law firm, which helps him to understand the concept of accounting and auditing in the field of criminal law. Forensic accountant must have in depth study of the documents presented and has the command to use computer software to get more information about transactional activities (Millichamp 2000). Forensic auditors must have excellent written and oral communication skill. They will have to write reports for onward submission to the management concerned. The report in question can be used as an official document for court trial. Forensic evidence can be of solid evidence against the officials at fault for prosecution and if found guilty by the competent court of law, deserve punishment for misdeeds in accordance with the law. It is the need of the hour for the internal and external auditing companies to train the auditors in the forensic accountancy besides other techniques to unearth fraudulent transactions (Gay, Schelluch & Reid 1997). Auditors must be aware of IT application and business processes to have a grip on IT related frauds. Until and unless the auditors are properly trained to track down the culprits, more debacles in the financial world such as Enron and world com would come to surface. There can be no difference of opinion that educated, skilful, trained, technologically sound and experienced auditors can better be served his/her organization in detecting and preventing complex financial crimes (Millichamp 2000). IRS Fraud Detection In the developing economies, there is a general trend of tax evasion at the level of individual, business and other legal entities. To nab the tax dodgers, Internal Revenue Service has number of trained people who gather information from different sources / channels to be used to detect tax frauds. The officials of IRS has unlimited access to tax returns. They can issue summons to get the required information from an individual, corporation and other business avenues. They have the authority to seize assets or freeze bank accounts to recover the payable taxes (Gay, Schelluch & Reid 1997). Once the tax evasion has been detected, IRS has the power to confiscate property of the tax defaulter / tax dodger in order to pressurize them to clear their tax liabilities. Despite the above action, if tax liability still persists, concerned official of IRS has the right to put the seized moveable and immovable assets on auction to collect the proceeds of auctioned assets towards appropriation of outstanding government dues (Millichamp 2000). It does not mean that the tax defaulter has no right to knock at the door of competent court of law for remedy. He has every right to go to the competent court of law for legal remedies against the action taken by the tax collector on the basis of misleading information that culminates freezing of bank account and confiscation of assets. Before going to court of law, it is incumbent upon alleged tax fraudster to file appeal against the proposed action to appropriate tax authority (Millichamp 2000). Bibliography Alleyne, P. & Howard, M. An exploratory study of auditors’ responsibility for fraud detection in Barbados. Managerial Auditing Journal 20 (3) (2005): 284-303. American Institute of Certified Public Accountants (AICPA). Consideration of Fraud in a Financial Statement Audit, Statement on Auditing Standards No. 99. (October 15). New York, NY: AICPA, 2002. Gay, G., Schelluch, P. & Reid, I. Users’ perceptions of the auditing responsibilities for the prevention, detection and reporting of fraud, other illegal acts and error. Australian Accounting Review 7 (1) (1997): 51-61. Millichamp, A.H. Auditing. 7th Ed. London: Letts Educational, 2000. Zimbelman, M.F. The effects of SAS No. 82 on auditors’ attention to fraud risk factors and audit planning decisions. Journal of Accounting Research 35 (1997): 75-97. Read More