Evolution of Cheating and Dishonesty in Auditing Since 1982 to 2017
Why are the acts of dishonesty and cheating rapidly increasing in auditing for the past several decades? Should auditors be in a position to detect fraud in financial statements? Even if dishonesty and cheating cases are relatively minimal among the number of audits performed annually, they certainly grab the most attention. Following the suggestions of the committee of sponsoring organizations, consideration of dishonesty and cheating behaviors has become part of the audit with the issuance of the statement of auditing standard (SAS) No. 78. Also, the Sarbanes-Oxley Act of 2002 oversights the evaluation of cheating and dishonesty cases and external auditor's opinions. Since SOX built up the Public Company Accounting Oversight Board (PCAOB), late papers have concentrated on the connection between the accounting profession, the SEC, and the U.S. Congress. An examination by Forsythe, Isaac, & Palfrey (1989); King & Wallin (1991), SOX from an institutional point of view checked on how historical occasions prompted various institutional improvements that led in turn to changes in accounting and auditing practices. The auditors presumed that this procedure, which includes the communication of U.S. legislative issues with the improvement of accounting rules, shows a legal requirement for regulation of the accounting profession by the SEC and the U.S. Congress.
Recently, Hurtt, BrownLiburd, Earley, & Krishnamoorthy (2013); Moore, Tanlu & Bazerman (2010); and Moreover, Kim & Trotman (2015), conducted an investigation on some events that shows how fraud takes place. For instance, the McKesson scandal that took place in 1938, failure of Enron in 2001 and Saving and Loan failures of 1980's. Regarding McKesson scandal, the accounting officer gave revised standards for observation of confirmation and inventory of receivables. However, Saving and Loan failures, the government stopped hearing chaired by Metcalf, Moss, and Dingle and auditing standards were given to narrow down the gap between audit of financial statements and public perception.
The auditing experts, over the past 35 years have established their own set of tools to unravel such misrepresentations and to make sure that financial reports are by accepted accounting principles. However, when fraudulent cases go uncovered by accounting professionals, these principles have always been supplemented with additional rules by the United States Congress and by SEC. Moreover, auditors in collaboration with researchers have developed various decision models to help in the detection of fraud. This paper focuses on examining the evolution of cheating and dishonesty in auditing while less mentioning of auditing and accounting literature designed to measure financial fraudulent and difficulties. Lastly, we present our conclusion and future actions suggested by various authors.
Dishonesty and cheating in audit, according to Kachelmeier (1990); Fisher (1987); Dopuch, King, & Wallin (1989); Wallin (1989), are an intentional act by an individual or a group of individuals among management, staffs or third parties, which results in a misrepresentation of financial statements. In other words, they are acts viewed as the intentional misrepresentation, omission or concealment of the truth with the aim of manipulation or deception to the financial detriment of an organization or an individual. The acts also include theft, embezzlement or any attempt to steal or obtain something in an illegal way, harm or misuse the assets of the firm. The act of cheating and dishonesty has increased for the past 35 years, and professionals claim that this trend is likely to move on through the following decades. The literature on this field has evolved over the decades. These acts have led to fraud in many organizations resulting into few years' closure or permanent closure. A significant number of authors have recognized that there is a constraint in the way auditors make misrepresentation judgments and at a time make it difficult to detect fraud.
However, during the late 1980s, there have been improvements regarding dishonesty and cheating or even fraud which has been perceived by others as marking significant extensions to auditor obligations. Although the auditor's duties for detecting fraud since 1982 have not changed from (SAS) Statement Auditing Standards No. 82, the amended standards give significant procedures on how the auditors should design and play out the audit in order to establish and identify the risks of assets misstatements arising from dishonesty and cheating.
Additionally, the Auditing Standard Board (ASB) issued a statement regarding auditing standards that imposed greater roles on auditors to detect frauds in financial statements in 1998. The ASB established a task to re-determine the responsibilities of auditors in detecting fraud and offered operational guidance to practitioners. Also, a significant number of accounting experts realize and acknowledge that auditors are not always equipped to detect the occurrence of fraud or existence of cheating and dishonesty. It is clear that in the presence of fraud, Auditors lack the persistent presence needed for establishment and implementation of fraud detection and prevention criteria. Contrary to other crimes which may be evident, cheating and dishonesty by their nature, typically involves concealment by its perpetrators.
In most countries, cheating and dishonesty are deployed by many businesses in order to acquire and retain business. In private sectors, cheating and dishonesty are very rampant in transactions amongst business associates, including suppliers and much less when transacting businesses with the government. Other researchers have stated that businesses lose seven to nine percent of their revenues through cheating and dishonest employees which eventually leads to loss of millions of jobs every year. The field of detecting these acts is particularly significant from the investor's perspective. Generally, all entrepreneurs need assurance that the properties of the company are effectively stated and protected. It is also good for auditors to be more vigilant in the delivery of their duties by ensuring that care and diligence is at the fore front of their objectives so that these behaviors can be noticed and exposed on time. According to Jiambalvo & Waller (1984); Butler (1985); Daniel (1988); Libby & Libby (1989); IL Ashton (1990); Kachelmeier & Messier (1990); Emby (1990); Moeckel (1990); Ricchiute (1992); McDaniel's (1990); and Ashton (1990), this is essential if auditors are to secure and save their expert reputation and respectability and avoid legal expenses.
As per Gibbins & Emby (1985); Kennedy (1992); Ashton (1990); Johnson & Kaplan ( 1991 ); Tan ( 1991); and Anderson, Kaplan & Reckers (1992), fraud may happen because the duty regarding its prevention is not a typically allocated task. Since cheating and dishonesty is acknowledged as inevitable, known cases go unpunished, and the malady spreads; since security is thought excessively costly or secured by fidelity bonds. It might likewise endure when its prevention action is not taken genuinely and when these acts are acknowledged as something that cannot be avoided. Fraud exists when one or more of the accompanying conditions exist: misappropriation of benefits, overstatements of advantages or understatement of liabilities to show more favorable financial position related to consequence of operation, robbery of property through transactions with branches or backups of the parent organization, and absence of exposure of critical data (Elder, et al., 2010). In addition, the responsibilities of the accounting practitioners have not been very much characterized from inception.
In the late 1990s, auditors asserted fraud detection as a review objective. Epstien & Geiger (1994); Humphry, Mosry & Turley (1993); Winter & sulviian (1994); Loebbecke, Einin & Willingham (1989); Aobrcht & Romney (1986); Cushing, Graham, palmrose, Roussey & solomeon (1995); Bloomfield (1995); Fellingham & Newman (1985); Shibano (1990); and Zimbelman (1997), demonstrated that it was the auditor's duty to answer to investors every untrustworthy financial statement which had happened and which influenced the appropriateness of the financial statement. However, the educated judge likewise argued that the auditors could not be required to reveal all misrepresentation submitted by the organization, since the auditors are not a backup plan or guarantors, but rather are required to direct the audit with reasonable and sensible ability. As demonstrated by Libby (1995); Messier (1995); Solomon & Shields (1995); Bloomfield, Libby, & Nelson (2001); Ismail & Trotman (1995); Libby & Trotman (1993); and Yip-Ow & Tan (2000), during the 1990s, it turned out to be discovered that the key audit objective was the check and verification of records and accounts.
The profession claimed that detection of fraud was administration's duty since the administration had a duty to actualize fitting interior control frameworks to prevent frauds in their business. This was because of the expansion in size and volume of organizations' transactions that made it essentially impossible for the auditors to look at all transactions. Auditors utilized examining and testing systems, which offers just sensible affirmation of the financial statements. Moreover, auditors were not in a position to utilize sampling and testing criteria, which provided only reasonable assurance of the contents of financial statements. Further, auditors were unable to expose the fraud that entailed undocumented transactions, theft, embezzlements and other many irregularities.
Research carried on by Frankel, Johnson & Nelson (2002); DeFond, Raghunandan & Subramanyam (2002); and Kinney, Palmrose & Scholz (2003), suggested that an average firm loses more than 6% of its gross revenues to various forms of dishonesty and cheating. Most of these acts are done by staffs or by outsiders in collaboration with workers. Ways utilized to embezzle finances are simple and yet are largely uncovered by internal auditors. Various writers of literature regarding this field have described cheating and dishonesty differently depending on the scope and context of the individuals and businesses associated with them. Since dishonesty and cheating lead to frauds within organizations, they include a wide variety of acts; all aimed at deceiving the victim or acquire free benefits.
Cheating and dishonesty are a pervasive fact of life in the business globally. Carpenter (2007); Stroebe, Nijstad & Rietzschel (2010); and Hammersley (2011), defined cheating, dishonesty, and fraud as voluntary actions of an individual or persons to mislead with the aim of financial gain. Other auditors define them as deliberate steps by an individual or people to mislead or deceive with the intention of misappropriating properties of an organization or distorting business apparent financial strength or obtaining an unfair advantage.
Where cheating and dishonesty is caused by breaching security arrangement, firms are reluctant to deploy the commission of fraud. Auditors are focusing on maintaining privacy as to their client's affairs. In regard to the above discussion, fraud may be referred as international deception stealing or cheating and can be done against the will of users like investors, government organizations as well as customers. Statements on auditing standards no 82 identified two types of fraud to be the misappropriation of properties and fraudulent financial reporting. Fraudulent financial reporting is when the management tends to inflate the real profit either by overvaluing assets and revenue or undervalue liabilities and expenses in order to change the financial reports. While misappropriation of property is also called employees fraud and it is where workers steal money and other assets for their bosses. There are some fraud schemes which comprise kickbacks, embezzlement and company assets.
To sum it all, this paper draws its focus on discussing the history of cheating and dishonesty in various organizations for the past 35 years. It also brings about the understanding of several ways that have been established by academics to detect fraud in both auditing of United States political setup and accounting professionals that response to most companies' failure and fraudulent events.
There are assumptions that the ways that detect bankruptcy can also be used to detect cheating and dishonesty. In order to ascertain the assumption, there is a selection of three bankruptcy detection formula developed for the past 35 years that is between 1982- 2017. In 1995 a model was developed to detect cheating and dishonesty. To correctly examine if there is a correct prediction of fraud there was the use of data sample that was extracted from two recent and different periods which were subject to activities of fraudulent financial reporting. The examination was further expanded by using the model and adding a cheat variable that was designed based on appropriate indicators of cheating and dishonesty identified by accounting professionals over a specific period.
These studies were important because the accounting professionals have arrived at a point where the auditors are critically concerned with the evaluation of financial statements which involves rules, regulations, and expectations to detect cheating and dishonesty developed by both private and public industries. There is a belief that the combination of government enforcement, policies and regulations has to lead to the development of models that are used to detect cheating and dishonesty. It is clear from all the studies conducted for the 35 years that when the cheating and dishonesty variables are included in bankruptcy prediction model, the performance of bankruptcy model is enhanced. The model by Ashton (1974); Nelson & Tan (2005), is a cheating and dishonesty model that performs better with the addition and inclusion of fraud variables and its capability to provide qualitative data. However the evaluation of fraud risk factor that includes the cheating and dishonesty variable must continue to be carried out in order to reflect a "red flag" indicator.
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