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INTRODUCTION
Over the years, the quality of financial reporting has varied widely. Some of the companies did the bare minimum to meet accounting standards, while others were more cautious. Most of the recent emerging corporate scandals that rocked US companies from Enron to WorldCom were a result of accounting problems and board oversights. In the case of Enron, the board bore significant responsibility for the company's collapse, as Enron's high-risk accounting practices were not hidden from them. WorldCom was reclassifying expenses as capital spending, which led to US$3.9bn fraud at the US telecommunication company by boosting operating cash flow margins. Xerox Corporation, a US photocopier company, had overstated its operating earnings by $1.4bn by using accounting practices to inflate its profits. In a nutshell, 'the accounting scandals at Enron, WorldCom and Xerox have all come in different forms and guises. At Enron it was illicit use of off-balance sheet partnership; WorldCom executives booked routine costs of business investments; and Xerox got too aggressive in its accounting of equipment leases'.2
The common misconception relates to the public perception that the primary role of employing an auditor is to detect fraud.3 It is the management (directors), rather than the auditors, who arc responsible for ensuring that proper accounting records and statements are prepared and maintained. The growing concern over fraud leads to a false perception by the financial statement users of the auditor's role as extending to the detection of all sorts of fraud. This paper is mainly concerned with fraud, based on the author's thesis that it is possible to prevent corporate scandals by tackling fraud.
The question remains: whose duty is it to detect fraud - company directors or auditors? In this respect the paper will analyse the various facets of financial fraud, what constitutes auditors' breach of duties to their clients, responsibility for the monitoring and reporting of fraud, the provisions of the UK Auditing Practices Committee (APC) guidelines and fraud detection and prevention.
WHAT IS FRAUD?
Fraud is 'deliberate steps by one or more individuals to deceive or mislead with the objective of misappropriating assets of a business, distorting an organisation's apparent financial performance or strength, or otherwise obtaining an unfair advantage'.4 Fraud involves the use of deception to obtain an unjust or...