Imperfections in Audit Outcomes: Fraud & Corruption - Case Study Example

It is not possible to measure both fraud and corruption accurately in the private and public sectors, except at a great expense. Introduction Auditors and internal auditors have the mandate of ensuring that their work does not only capture cases of corruption and fraud, but also prevent them from occurring. In terms of detection and prevention, the measures used in auditing and accounting techniques may not always inform a perfect system due to difficulties inherent to the problem, people concerned, organizations and government practices (Oluwagbemiga 2010, p. 3). Various complications encountered in establishing impenetrable systems take nearly every shape of the business and environmental factors, making it quite difficult for the modern organizations to claim that they cannot fear corruption and fraud. Internal control standards and procedures, which accounting and auditing research recommend, have attained tremendous success over the years (Porter 1997, p. 14). However, their potential to completely weed out the vices only reaches a certain level beyond which huge expenditure is not worth the efforts. Difficult Control Environment It is not entirely possible to unearth all fraudulent activities and the tightest systems pay a huge cost to maintain accuracy and consistency. One of the main reasons is that fraudulent behavior is a matter of ethics, which depends of a number of variables bordering personal commitments. Employees’ ethical behavior defines the ability of the organization to withstand vices that precipitate fraud and corruption (Alleyne & Howard 2005, p. 285). In order to illustrate the difficulty of having an organization free of corruption and fraud, every employee’s profile on ethical orientation must form the basis of the objectivity of financial procedures. This would entail rigorous behavioral assessment of the human resources, to dig deep into potential corruptibility of their ethics (Belloli 2006, p. 94). Psychometric assessment of the employees in such a system would however not provide the relevant team in terms of balancing talent and skills for the human resources needed in the organization. Business in this sense would look for pure human teams representing the cream of the society in terms of ethical orientation (Boynton, Johnson & Kell 2005, p. 11). The implication that behavior profiling would have is that the capitalism spirit of greed and unreserved aggressiveness in attaining material wealth would dramatically reduce in the organization if such a team were composed (Holtfreter 2004, p. 89). Exclusion of the rest of the society based on ethical values would perhaps attract cynical perceptions about the organization, considering that the business platform is largely secularized. Alternatively, the creation of a perfect organization setting of incorruptible individuals would be inconceivable, since business interactions revolve around the external environment. Corruption would still emerge from beyond the walls of the organization, making it difficult to follow every stakeholder with a direct or indirect interest on the organization. Even if a clean organization is put together to conduct business, corrupt and fraudulent stakeholders will corrupt the organization at one point in the operations life. Internal operations targeted at creating a clean organization in terms of avoiding corruption as well as fraud require that tight internal control standards support such a project. In terms of setting up standard internal control standards beyond any reproach, the organization would need ideal internal and external settings (Porter 1997, p. 34). Internally, employees’ cooperation and support for the tough procedures that standard systems recommend would have to work perfectly in favor of elimination of corruption and fraud. In reality, perfect cooperation in the organization from every employee and department particularly on matters that touch on their perceived ethical values may not work. Human weaknesses in organizational management as well as operations for the junior staff expose the organization to resistance and constant conflicts that require expert resolution as opposed to suppression. Tough company rules may act as deterrence but occurrence of breach of protocol on a frequent basis indicates that commitment from among employees in support of laid down procedures is not availed. Internal control systems, however expensively and expertly composed, may fail to provide shield against fraud and corruption since even the managers of the system come from the organization’s staff (Sharma 2004, p. 115). Hiring of experts and outsourcing internal control system models may offer a little reprieve but the opportunity cost incurred will always affect the organization. For instance, the hiring of external accounting functionality for a local authority may achieve accuracy in detecting and preventing fraud and corruption at the cost of high capital expenditure and reduced morale among employees resisting outsiders running the organization. System complications therefore engage willingness and cost, making it difficult to have a corruption free organization across the industry. In terms of fraud and corruption among competitors, an organization without corrupt deals may find it difficult to launch sufficient competition against rivals who have an advantage of corruption. Cutthroat competition among firms may force “weaker” firms out business since they refuse to participate in fraudulent activities. As an illustration, companies bidding for tenders may use deals behind the scenes to convince managers of the fund to award them the tender on corrupt handshakes, leading to lack of opportunity for those companies without tendencies of corruption. A network of corruption in an industry may complicate fair participation by those companies with corruption intolerant policies (Beasley 1996, p. 445). Public business opportunities particularly find it difficult to avoid corruption at certain levels, even if strict procedures of oversight stand in place of the public. International business deals for instance have governments exerting pressure on other governments and corporations in order to protect their interests. The difference between corruption in government-to-government and corruption in ordinary corporate business deals is the legitimization of a few government officials overseeing trade on behalf of the state. However, corruption at the higher level and at the international level makes the culture of greed, capitalism, uncontrolled interests, among many other vices drive corruption over the limits of control. Globalization for instance has a business agenda driven by a few powerful countries that dictate the mode of international business, where success of competing countries faces suppression just like in a monopoly using corrupt and unethical moves (Carcello, Hermanson & Raghunandan 2005, p. 75). It would therefore amount to hypocrisy if world governments claimed to have put corruption and fraud to an end, since rush for international wealth still drives world agenda at the expense of a just global society. Ethics that compel nations to place sanctions on rising powers on the guise of human rights violations ignore the history of the western nations as they rose to global power (Chowdhury, Innes & Kouhy 2005, p. 900). For instance, the history of slavery and colonialism stole wealth from certain parts of the world channeling it to other parts of the world. Lack of capacity to deal with numerous cases of corruption and fraud implies that the business world will grapple with impacts of irregular business for a longer period. It also implies that the evolving nature of financial crimes and corruption with advancements in technology pushes the fight to a higher level likely to evade human efforts for a long time. In the many successful cases of corruption detection and prevention, the fear of emerging threats still poses in front of ambitious business plans. The future looks uncertain in terms of preparedness to deal with corruption and fraud in the economy that continually establishes itself on innovation and computer applications. Despite the confidence that computer experts give to the investor community that these vices will be contained as they emerge, the risk posed still poses a great threat in terms of costs (Apostolou, Hassell, Webber & Sumners 2001, p. 8). Expensive and Inadequate Efforts Forensics and other departments established in need of reducing and eliminating corruption and fraud require huge amounts of investment for the modern firm. As mentioned above, rigorous procedures may form part of internal standards to try to sieve out corruption as well as fraud from the accounts of the company (Edwards & Marden 2005, p. 23). These procedures have found invaluable assistance from technology, which facilitates higher accuracy for approaches used in detection and prevention of fraud. However, the identification of such malpractices does not change the environment from which they emerge from, which creates more suspicion that they can only reappear than disappear. Huge investments in forensics departments expose the organization to potential danger of cases beyond current capacity. The only way to overcome such a fear would perhaps entail directing significant portion of research and development funding towards capacity enhancement for forensics other than product development. Making detection and prevention components the central theme of business would harm business innovation since customers want value for their money, without reference to what measures led to the product. Incurring huge costs in operation procedures implies that the cost passed on to the customer in the pricing element will defy logical value attachment on the product. Production costs, therefore, would face an upward trend if fraud and corruption pose threats to productivity of the organization (Blue Ribbon Committee 1999, p. 9). Professional bodies continue to gather the best possible information to assist firms to raise capacity to deal with malpractices and remain professional in business practices. One assumption that these bodies make is that the firms around the world have similar settings to achieve their proposed practices (Nestor 2004, p. 348). Formation of these bodies and their sustenance incurs costs that must pass on to the supporting donors. These bodies provide useful information to running of modern businesses but the expertise level proposed fail to acknowledge challenges of different parts of the world and their information perhaps benefits a few areas. The usefulness faces limitation from factors such as a political setting fails to comply with principles of fairness. Usefulness of the provisions of the various professional bodies would tremendously increase if the bodies provide setting specific realignment advice in order to cater for the real scenes in some parts of business world (Apostolou et al. 2001, p. 21). This would entail meeting more costs for the research to penetrate to every part of the world. Research in this regard will require more professionals forming part of the advisory bodies as opposed to the real business operations participation. To illustrate the importance of this functionality, removal of the advisory services and channeling of these experts to actual running of organizations would make direct contribution to productivity. Legislation for various issues entails expensive procedures in politics and it is hard to predict the ability of the laws made to overcome the vices. Alternatively, several pieces of legislation would require formulation in order to cover nearly every element of fraud in an industry. For instance, the complex US healthcare industry has several legislations that still miss to tackle fraud and corruption as efficiently as it is expected (MVP 2010, p. 2). In poor countries, the government’s ability to fund legislation with regard to fraud and corruption faces challenges from other vital issues, such as healthcare and security. It implies that private organizations may find a chance to fund legislation with provisions that favor their interests in the market. Public interest in such countries therefore faces a number of risks due to such settings, indicating the difficulty that various locations may face in conducting fair business (Public Oversight Board 1993, p.12). In countries where laws significantly tackle fraud and corruption, the enforcement agencies may not have the necessary capacity and willingness of enforcement (Monroe & Woodliff 1994, p. 47). For instance, the police and courts may not have sufficient capacity to deal firmly with cases of fraud and corruption due to lack of necessary technology to unearth every detail. Concealed evidence may be difficult to unearth and huge investment from the national kitty must support such efforts. However, the laws available for enforcement may not match the crime and cases of leniency of the justice system to deal with financial crimes still form part of criticism of sufficient deterrence measures. Missing gaps would require huge amounts of money to ensure tighter systems in elimination of the vices. It therefore implies that the confidence that control standards need to achieve before absolute safety and accuracy can be claimed would require a fortune from the business fraternity. Conclusion Fraud and corruption are activities that are most undesirable for any organization. In fact, many experts including auditors strive to ensure that these activities do not take root in the organization. However, it is beyond doubt that it is not entirely possible to unearth and measure all fraudulent activities. One main reason for this is that fraud is a matter of ethics, which depends of several variables bordering personal commitments. Also, there reaches a level at which huge investments to contain fraud and corruption bear little rates of returns. References Alleyne, P. & Howard, M. (2005) An exploratory study of auditors’ responsibility for fraud detection in Barbados. Managerial Auditing Journal. vol. 20, no. 3, pp.284-303. Apostolou, B. A., Hassell, J. M., Webber, S. A., & Sumners, G. E. (2001) The relative importance of management fraud risk factors. Behavioral Research in Accounting, vol. 13, pp.1-24. Beasley, M. S. (1996) An empirical analysis of the relation between the board of director composition and financial statement fraud. The Accounting Review, vol. 71, no. 4, pp.443-465. Belloli, P. (2006) Fraudulent overtime. The Internal Auditor, vol. 63, no. 3, pp.91-95. Blue Ribbon Committee. (1999) Report and Recommendations of the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees. New York, NY: New York Stock Exchange. Boynton, W., Johnson, R. & Kell, W. (2005) Assurance and the integrity of financial reporting. (8th edn). New York: John Wiley & Son, Inc Carcello, J. V., Hermanson, D. R. & Raghunandan, K. (2005) Factors associated with U.S. public companies' investment in internal auditing. Accounting Horizons, vol. 19, no. 2, pp.69-84. Chowdhury, R., Innes, J. & Kouhy, R. (2005) The public sector audit expectation gap in Bangladesh. Managerial Auditing Journal. vol. 20, no. 8, pp.893-905. Edwards, R., & Marden, R. (2005) Employee fraud in the casino and gaming industry. Internal Auditing, vol. 20, no. 3, pp.21-30. Holtfreter, K. (2004) Fraud in US organizations: An examination of control mechanisms. Journal of Financial Crime, vol. 12, no. 1, pp.88-95. Monroe, G. & Woodliff, D. (1994) An empirical investigation of the audit expectation gap: Australian evidence. Australian Accounting Review. November 1994, pp.42-53. MVP (2010) Detecting and preventing fraud, waste and abuse. [Online] Available from [Accessed 2 November 2012] Nestor, S. (2004) The impact of changing corporate governance norms on economic crime. Journal of Financial Crime, vol. 11, no. 4, pp.347-352. Oluwagbemiga, A. O. (2010) The role of auditors in fraud detection, prevention and reporting. Library Philosophy and Practice e-journal, (11-2-2010) paper 57 Porter, B. (1997) Auditors’ responsibilities with respect to corporate fraud: a controversial issue, in Sherer, M. & Turley, S. (Eds), Current Issues in Auditing, London: Paul Chapman Publishing. Public Oversight Board (POB) (1993) Issues Confronting the Accounting Profession. Stamford, CT: POB. Sharma, V. D. (2004) Board of director characteristics, institutional ownership, and fraud:Evidence from Australia. Auditing: A Journal of Practice & Theory, vol. 23, no. 2, pp.105-117. Read More