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Fraud detection
Fraud detection, redress and
reporting by auditors
Harold Hassink, Roger Meuwissen and Laury Bollen
Department of Accounting and Information Management, 861
School of Business and Economics, Maastricht University, Maastricht,
The Netherlands Received 14 April 2010
Reviewed 25 May 2010
Accepted 21 June 2010
Abstract
Purpose – The primary research question of this study is to what extent auditors comply with
auditing standards once they encounter fraud and whether compliance is associated with particular
fraud characteristics (i.e. material versus immaterial fraud, management versus employee fraud,
statutory versus voluntary audit and external versus internal fraud) as well as with auditor (experience)
and audit firm characteristics (Big Four versus non-Big Four). The study also aims to provide evidence
on the role of auditors in redressing fraud. Redress refers to the auditee taking measures to nullify the
consequences of the fraud, insofar as possible, and to prevent any recurrence of such fraud.
Design/methodology/approach – To gather data on the role of auditors in fraud cases, a survey
was conducted among all audit partners of the top 30 Dutch audit firms. In total, 1,218 audit partners
were selected and received a postal questionnaire. In total, 326 questionnaires were returned (27 per cent),
of which 296 (24 per cent) were usable.
Findings – The results reveal that auditors fail to comply with some important elements of fraud
standards. There are substantial differences among audit firms regarding compliance with the
relevant auditing standards. Furthermore, auditors appear to encounter corporate fraud only
incidentally. About half of the auditors believe they have a “significant” impact on redressing fraud.
Research limitations/implications – One of the main research findings is that it is difficult for
individual auditors to build up expertise in fraud detection. There appears to be a need for specific
training programs for auditors to help them to detect fraud, emphasizing the need for mandatory
consultation with the technical department of the audit firm once “red flags” indicating fraud are
found. Indeed, this need for change has been addressed by the Dutch professional accountancy body
NIVRA as a direct result of the findings of this study.
Originality/value – This study extends existing research by investigating the compliance of
auditors with fraud standards and it sheds light on the actual redress experiences of auditors. It
focuses on the actions taken by auditors – or the lack thereof – in situations where auditors encounter
fraud signals. The study indicates that in the absence of good oversight, auditors have mixed
incentives when they are confronted with signals for fraud, resulting in actions that are not always in
line with existing regulatory requirements.
Keywords Auditors, Auditing, Fraud, Professional ethics, Regulation, The Netherlands
Paper type Research paper
Introduction
A study on major European business failures revealed that the role of auditors is most
often questioned and audit firms are most likely to be sued in failures that involve
management or employee fraud (Bollen et al., 2005). A widely used explanation for the
relatively large number of fraud cases in which the role of the auditor has been
questioned is the existence of an audit expectation gap, suggesting that society has Managerial Auditing Journal
Vol. 25 No. 9, 2010
unfulfilled expectations concerning the role of the auditor in fraud cases. The potential pp. 861-881
q Emerald Group Publishing Limited
causes of an audit expectation gap have been addressed extensively in existing literature 0268-6902
(for an overview, see Nieschwietz et al., 2000). Studies in the area of fraud have mainly DOI 10.1108/02686901011080044
MAJ focused on the extent to which auditors are able to detect fraud and whether society has
25,9 unreasonable expectations in this respect (the reasonableness gap). Less attention has
been paid to the gap between what can reasonably be expected from auditors once they
encounter fraud signals and what they actually achieve. Following Porter (1993), this
part of the expectations gap may be a result of either the deficiency of standards and
regulations with respect to the duties of auditors in fraud situations (the standards gap)
862 or of the (under)performance of auditors regarding existing duties (the performance
gap). With respect to the standards gap, the general public may have expectations that
are not reflected in existing auditing standards. Comparing expectations with existing
auditing standards could identify opportunities for changing the standards and for
narrowing the standards gap.
Although several studies have indicated that auditing standards and regulatory
changes have not resulted in an increase in the auditor’s ability to detect fraud
( Jakubowski et al., 2002; Rezaee et al., 2003) it remains unclear to what extent auditing
standards and regulations have impacted the auditor’s redress and reporting actions in
situations where fraud has been detected. Redress refers to the auditee taking measures
to nullify the consequences of the fraud, insofar as possible, and to prevent any
recurrence of such fraud. Given the existing standards on the role of auditors in fraud
situations, the existence of a performance gap in this context can be due to several
factors, including the lack of knowledge or competence on how to act once corporate
fraud is detected, lack of care in following protocol or the lack of independence of the
external auditor, possibly because of conflicting interests. All of these explanations
touch upon auditors’ professional ethics[1]. Given the sensitive nature of fraud reporting
and society’s expectations of auditors in this respect, compliance with fraud standards is
important to auditors and to society.
The aim of this study is fourfold. The first objective is to present evidence on the
volume and nature of fraud cases detected by auditors. The second objective is to
determine the extent of auditors’ compliance with auditing standards regarding fraud
redress and fraud reporting. The third objective is to study the impact of various context
variables (i.e. material versus immaterial fraud, management versus employee fraud,
statutory versus voluntary audits and external versus internal fraud) as well as auditor
(experience) and audit firm characteristics (Big Four versus non-Big Four) on the actions
taken by auditors in fraud situations. Finally, this study provides recommendations on
how the performance of auditors regarding the detection of corporate fraud and
compliance with relevant auditing standards can be improved.
The two Dutch professional bodies for auditors, NIVRA and NOvAA, commissioned
the study for which the results are presented in this paper. The focus of this study is on
the period 1995-2002. This is a useful period to study auditors’ compliance with
regulations because auditing regulations concerning fraud issues remained unchanged
during this period; after 2002, various changes were implemented. In addition, during
this period, there was virtually no oversight of audit firms concerning their actions in
fraud situations; the results of this paper therefore provide a good understanding of the
behaviour and incentives of auditors with respect to fraud situations.
This study is organised in five sections. First, existing studies on fraud detection
and reporting by auditors will be discussed. After that, the auditor’s responsibility
regarding fraud detection in the Netherlands in the period 1995-2002 will be described.
Next, the research method of the study will be presented. Subsequently, the empirical Fraud detection
results of the study will be presented and finally, conclusions will be drawn.
In the first type of fraud-related auditing research, the existence of an expectation gap
is used to explain the level of lawsuits against auditors in fraud cases (Palmrose, 1991;
Bollen et al., 2005). Such lawsuits have introduced the effect of litigation risk into
auditors’ fraud detection, as a result of which auditors may adjust their audit planning
to understate firm performance (Baron et al., 2001). The second type of studies deals
with predictors of fraud and auditors’ use of fraud cues to assess fraud risk, with or
without the help of decision aids. The studies on the predictors of fraud have
provided empirical evidence on the validity of fraud cues by having partners identify
and evaluate fraud cases to determine fraud cues or so-called “red flags” (Albrecht and
Romney, 1986; Loebbecke et al., 1989). The studies on the use of fraud cues are
predominantly based on behavioural decision theory and focus on how auditors assess
fraud risk (Hackenbrack, 1992; Zimbelman, 1997; Knapp and Knapp, 2000). These
studies have found many factors that affect the ability of auditors to detect fraud
(e.g. experience and ethical reasoning), and that auditors generally have difficulty in
assessing fraud risk. Furthermore, research in this area has shown that the use of tools
and decision aids improves fraud detection, although auditors typically are very
reluctant to use such aids (Eining et al., 1997). The third type of research concerns
auditing plans and procedures and the way they relate to the detection of fraud. Studies
in this area have shown that as a result of changes in auditing standards, auditors may
become more responsive to fraud risk (Glover et al., 2003; Mock and Turner, 2005),
while others found no association between fraud risk assessment and the planning of
more effective fraud procedures, thus questioning the effectiveness of standard
auditing tools in a fraud setting (Asare and Wright, 2004).
Legal context
This section describes the legal context with respect to the role of auditors in fraud
cases in the Netherlands at the time of this study (1995-2002). In this period, Dutch
auditors were required by their professional bodies, NIVRA and NOvAA, to comply 865
with two fraud standards:
(1) the Dutch Auditing Standard 240 “fraud and error” (further referred to as DAS
240); and
(2) the “by-law on reporting on fraud” (further BLF)[5].
DAS 240 was based on the international standard ISA 240 and held the client primarily
responsible for preventing and detecting fraud. The auditor was not held responsible
for fraud prevention. DAS 240 specified several issues auditors had to take into
consideration before and while performing the audit; see also Figure 1 and the Appendix.
The BLF extended the scope of ISA 240, by additionally requiring the auditor to inform
management in writing if he suspected fraud. If it concerned material or management
fraud, he had also to notify the supervisory body in writing. If, after further investigation,
fraud was indeed detected, the auditor had to inform management again and redress had
to be demanded. The supervisory body was contacted again if management failed to take
reasonable steps to redress the fraud. If the supervisory body failed to take appropriate
action, the auditor had to resign from his engagement. If the engagement concerned
a statutory audit, the auditor had to notify a dedicated governmental agency. Hence, in
the window 1995-2002, Dutch auditors had to take the following steps in case fraud
signals appeared while an audit was being performed:
(1) Inform management in writing when fraud is suspected[6].
(2) Inform the supervisory body in writing:
.
in case of management fraud;
.
in case of material fraud with regard to the financial statements; and
.
in case the management fails to take reasonable action[7].
(3) Request redress from management when fraud is detected[8].
(4) Resign from his engagement when insufficient steps have been taken to redress
material fraud[9].
(5) Notify the relevant governmental agency of the lack of redress in case of a
statutory audit[10].
Yes
No Finish audit as
Inform
management (BL) planned/issue
opinion (ST)
Yes
Inform management about mis-
No statements and sources. Mana-
gement might have to adjust
accounting procedures. Finish
Yes audit as planned. (ST)
YES
Figure 1.
Outline of audit procedure
according to Dutch
Auditing Standard 240
and by-law
Notes: Parts to be found in DAS 240 are tagged with (ST); parts coming from the by-law with (BL)
(1) Questions relating to the features of the fraud cases auditors had experienced in
the period 1995-2002.
(2) Questions on the reporting and redress of these fraud cases.
(3) Questions on the perceived role of the auditor in the redress process.
To improve the response rate and to limit response bias due to the sensitive nature Fraud detection
of the subject of the questionnaire, a procedure was designed that fully guaranteed
the anonymity of the individual respondents as well as their audit firms. The
envelopes, containing a cover letter, the questionnaire and a self-addressed envelope,
were mailed by a notary in civil law. The questionnaires were marked with a unique
number per audit firm (five categories: four “Big Four audit firms” and one category
“non-Big Four audit firms”) that was known only to the notary. Approximately, three 867
weeks after mailing the questionnaires, a reminder was sent to every selected auditor
(including those auditors who had already responded)[12]. In total, 1,218 partners of the
top 30 Dutch audit firms – as measured by revenues – were selected. Table I shows
that eventually 326 questionnaires were returned (27 per cent), of which 296 (24 per cent)
turned out to be usable[13]. Of the respondents, 49 per cent were partners at a Big
Four audit firm, while 43 per cent were partners at a non-Big Four audit firm.
The “miscellaneous” category consists of partners who were affiliated with both a
Big Four and non-Big Four audit firm in the window of the study. About 10 per cent of
the respondents were affiliated with Audit firm A, 8 per cent with Audit firm B, 14 per
cent with Audit firm C, 20 per cent with Audit firm D and 48 per cent with non-Big
Four audit firms. On average, the respondents had 9.9 years of experience as an audit
partner. Exactly, half of the respondents had limited experience as an audit partner
(0-10 years). Average (11-20 years) and extensive (20 þ years) experiences were
exhibited by 38 and 12 per cent of the sample, respectively.
Three remarks can be made concerning the quality of the collected data. First, the
overall response rate is satisfactory, especially considering the sensitive nature of the
topic. Second, although it cannot be guaranteed that the sample is representative for
the population as a whole, there are no indications of the existence of a non-response
bias. This has been examined by comparing a number of characteristics of the later
respondents with the characteristics of the early respondents. The rationale here is
that later respondents exhibit some similarities to the non-responding group. t-tests do
not indicate significant differences. Third, an inherent risk of a questionnaire is that the
respondents give socially desirable answers. This risk has been mitigated as much
Empirical results
868 The detection of fraud
In the 296 usable questionnaires, a total of 317 detected fraud cases were mentioned,
suggesting that on average audit partners of the top 30 audit firms in the Netherlands
detected 1.07 fraud cases in the period 1995-2002. The low number is consistent with
previous research, although it is still smaller than the number given by Loebbecke et al.
(1989), who reported an average of 3.1 cases. However, the time frame investigated in
the current study (eight years) is narrower than the one in Loebbecke et al. (1989).
Furthermore, Loebbecke et al. excluded partners who had not encountered fraud
(40 per cent of their sample). Translating the findings of Loebbecke et al. to the
parameters of the current study suggests that the respondents in the Loebbecke et al.
study would have encountered on average 0.76 fraud cases in the eight-year period, which
is more comparable to the empirical findings of 1.07 fraud cases in the current study[14].
In the remainder of this section, the characteristics of fraud cases mentioned by the
respondents will be analyzed in more depth. The analyses will focus on four elements:
(1) material versus immaterial fraud;
(2) management versus employee fraud;
(3) fraud detected during a statutory audit versus voluntary audit; and
(4) external versus internal fraud.
Detection of fraud
869
Table II.
MAJ 3. Statutory versus voluntary audit. Most of the 317 fraud cases were detected during
25,9 statutory audits rather than during voluntary audits (81 versus 19 per cent). Non-Big
Four audit firms discovered fraud more often during voluntary audits in comparison
with Big Four audit firms (34 versus 12 per cent). Furthermore, differences were found
among audit firms with respect to the proportion of fraud cases detected during
statutory or voluntary audits. For instance, audit partners in audit firm B detected all
870 fraud cases during statutory audits, while in audit firm E only two-thirds of the fraud
cases were detected during statutory audits. These differences are significant at the
1 per cent level. Finally, partner experience was not related to the detection of fraud
during statutory versus voluntary audits.
4. External versus internal fraud. In the survey, external fraud was defined as fraud
that predominantly harms external parties, such as the government or customers. In
contrast, internal fraud was described as fraud that primarily harms the company of
the person who commits fraud. Examples of internal fraud include theft of assets and
incorrect claiming of expenses. Table II shows that a large proportion of the 317 cases
reported referred to internal fraud rather than external fraud (71 versus 29 per cent).
Also, the proportion of detected external versus internal fraud differed between Big
Four and non-Big Four audit firms. Big Four audit firms detected external fraud less
frequently than did non-Big Four audit firms (24 vs 47 per cent) which is significant at
the 1 per cent level. Table II indicates significant differences at the 1 per cent level
among audit firms in discovering external or internal fraud. In audit firm E, for
example, 43 per cent of all cases of detected fraud concerned external fraud, while in
audit firm B this is only 8 per cent. Finally, more experienced audit partners detected
external fraud more often than did less experienced partners (42 versus 29 and
25 per cent – at the 10 per cent significance level).
Redress
Redress not requested 75 28 47 21 54** 56 19*** 0 24 51 47 23 14 6 4 27 12 28 35
% 24 24 24 16 29 22 32 26 23 23 29 28 25 7 29 23 22 25
Redress requested 242 90 152 108 134 198 36 8 69 173 156 56 36 18 50 65 40 97 105
% 76 76 76 84 71 77 61 74 77 77 71 72 75 93 71 77 78 75
Resignation
Resigned because of fraud 17 13 4* 16 1* 12 5 10 7** 13 4 4 2 3 4 3 6 8
% 5 11 2 12 1 5 8 11 3 6 5 8 8 6 4 6 5 6
Resigned because of lack 4 3 1 4 0 n.a. n.a. 3 1 3 1 1 1 0 1 n.a. n.a. n.a.
of redress (%) 27 43 13 36 0 n.a. n.a. 38 14 43 17 20 100 n.a. 100 n.a. n.a. n.a.
External notification
No. of not redressed 15 7 8 11 4 14 0 1 8 7 7 6 5 1 0 0 4 6 5
No. of should have been 7
reported in the sample
No. of actually reported in 2
the total population
Notes: Statistical significance at: *1, **5 and ***10 per cent levels (two-tailed test); athe data on redress are based on a subset of 309 cases out of the 317
cases; n.a. – data are not available
Fraud detection
management
Reporting to
Table III.
871
MAJ partners reported in writing more often than did less experienced partners (69, 48 and
25,9 40 per cent for extensive, average and limited experience, respectively). No significant
relationships were found between the frequency of written fraud reports to
management and the five categories of audit firms (A-E).
2. Reporting to the supervisory board. At the time the study was performed, auditing
standards explicitly required certain types of fraud to be reported in writing to the
872 supervisory board: cases of management fraud, cases of material fraud and cases
where management refuses to redress the fraud. Table III indicates that in 41 per cent
of the cases of management fraud and in 40 per cent of the cases of material fraud the
auditor actually reported to the supervisory board in writing. Reporting verbally to the
supervisory board tended to take place more often in cases of material fraud (39 versus
30 per cent for immaterial fraud), in cases of management fraud (43 versus 26 per cent
for employee fraud) and in cases of fraud detected during a statutory audit (38 versus
12 per cent for voluntary audits). The first difference is not statistically significant;
the other two are significant at the 1 per cent level. Verbal reporting to the supervisory
board was not significantly related to the external/internal dimension. Big Four
auditors reported verbally to the supervisory board more frequently than did non-Big
Four auditors (43 versus 8 per cent – significant at the 1 per cent level). Different
audit firms reported verbally to the supervisory board with significantly different
frequencies: audit firm B reported verbally most often (71 per cent) while audit firm
E did so least often (9 per cent). The data indicate that verbal reporting to the
supervisory board is not significantly related to the amount of audit partner experience,
although more experience seems to be consistent with more frequent reporting. When it
comes to reporting to the supervisory board in writing, material fraud, management
fraud and fraud encountered during a statutory audit were reported more often than
other types of fraud. Reporting to the supervisory board in writing appears to be
unrelated to the external/internal dimension. Big Four audit partners reported more
often to the supervisory board in writing than did non-Big Four auditors (40 versus
9 per cent). Again, differences among the different audit firms were significant at the
1 per cent level: audit firm C reported in writing most often (44 per cent) and audit firm E
did so least often (10 per cent). Auditors with high or medium experience issued more
written reports to the supervisory board than did audit partners with low experience
(37, 37 and 24 per cent, respectively, – significant at the 10 per cent level).
3. The redress process. When the auditor has detected fraud and management has
not yet taken appropriate steps to redress the effects of the fraud, the auditor is required
to demand that the fraud be redressed, i.e. the consequences of the fraud have to be
rectified as far as possible and recurrence needs to be prevented. In cases where
management has already taken appropriate action, the auditor does not demand
redress but verifies that the actions taken are satisfactory. At the time of the survey,
auditing standards required the auditor to demand redress of material fraud. If redress
was not accomplished, the auditor was required to withdraw from the engagement and,
when the engagement concerned a statutory audit, report this fact to a central
governmental agency[15]. The results show that in 76 per cent of the fraud cases, the
auditor demanded the entity to redress the fraud. It is possible that in the remaining
24 per cent of the cases the audit client had already taken sufficient measures to redress
the fraud on their own initiative; therefore, in those cases there was no need for the
auditor to demand redress. Table III indicates that redress was requested more often
in case of management fraud (84 versus 71 per cent for employee fraud), and fraud Fraud detection
discovered during a statutory audit (77 versus 61 per cent for voluntary audit).
Furthermore, demands for redress were significantly related to the audit firm: audit
firm C requested redress in 93 per cent of the cases, while audit firm D did so only
71 per cent of the time. Demands for redress were not related to the remaining
characteristics of fraud or to any other auditor characteristic.
Of the fraud cases in which redress was requested, redress was accomplished, 873
eventually, in 94 per cent of the cases. Redress more often took place in cases of employee
fraud in comparison with management fraud (97 versus 90 per cent) and more often
in cases of internal fraud than in cases of external fraud (96 versus 88 per cent).
Redress effectiveness was not significantly related to fraud materiality and to the
statutory-voluntary audit dimension. Respondents of Big Four audit firms tended
to achieve a higher redress effectiveness than those of non-Big Four audit firms
(96 versus 89 per cent), though this difference is not statistically significant. A significant
relationship did exist between redress effectiveness and audit firm: audit firm C
managed to achieve redress in all requested cases, while audit firm A achieved redress
least often (86 per cent). Redress effectiveness tended to decline with auditor experience,
but this relationship was not significant.
Furthermore, the auditor can achieve redress with or without putting pressure on
the auditee. Table III reveals that the auditor needed to use pressure more frequently in
the cases involving material fraud (22 versus 9 per cent), management fraud (25 versus
5 per cent) and external fraud (21 versus 11 per cent). Also, partners of audit firms D
and E needed to use pressure significantly more often than did partners of other audit
firms. Whether fraud was detected during a statutory or voluntary audit, by a Big Four
or non-Big Four audit partner or by an experienced or less experienced partner did not
seem to affect the need for pressure to achieve redress.
4. Auditor resignation. The auditing standards at the time of the study allowed the
auditor to resign from the assignment in case of fraud, but required the auditor to
resign if a case of material fraud was not redressed[16]. Results indicated that in
17 (5 per cent) of the 317 fraud cases the audit partner resigned. This occurred more
often in cases of external, management and material fraud than in other fraud cases.
Respondents indicated that in three out of these 17 resignations, resignation resulted
from the fact that redress had not taken place although the fraud was material.
The data in Table III, however, suggest that there were actually seven cases of material
fraud that were not redressed by management, and therefore, should have led to the
auditor’s resignation. Consequently, in four cases of non-redressed material fraud, the
auditor did not resign despite an obligation to do so.
5. External reporting of fraud. Finally, auditing standards state that when material
fraud discovered during a statutory audit has not been redressed by the audit client
within a reasonable time frame, the auditor is not only required to resign from the
engagement, but also to notify the dedicated governmental agency. The 296 respondents
in this study identified seven material fraud cases for the period 1995-2002 that had not
been redressed, all of which were discovered in the course of a statutory audit. This
means that in this sample seven cases should have been reported to the central reporting
agency. Given the fact that the initial sample of the top 30 audit firms covers the vast
majority of the population of Dutch auditors who perform statutory audits, the response
rate of 24 per cent (which is almost a quarter of the audit partners of the top 30 audit
MAJ firms) results in an expected number of about 28 cases (7 £ 4) for the entire population,
which should have been reported to the government agency[17]. In reality, the agency
25,9 was notified only twice in the period 1995-2002, indicating that external reporting of
fraud is less frequent than might be expected from the results of this study.
Conclusions
In this study, evidence has been presented on the volume and nature of fraud cases
detected by audit partners and the extent of these partners’ compliance with auditing
standards regarding redress of fraud and reporting fraud to a governmental agency.
Also, the study provides evidence on the experiences of auditors requesting redress
once they have encountered cases of corporate fraud.
The first conclusion to be drawn from this study is that fraud detection by auditors is a
relatively rare event; this result is consistent with previous research by Loebbecke et al.
(1989). On average, the audit partners in the sample detected 1.07 fraud cases in an
eight-year window. Furthermore, non-Big Four auditors seemed to detect the more
serious fraud cases (i.e. management fraud with an external scope) more often than did
Big Four auditors. These results indicate that most auditors have insufficient opportunity
to build expertise in the area of fraud detection, reporting and redress of detected fraud.
Notes
1. Professional ethics concerns the moral issues (e.g. fraud reporting) that arise because of the
specialist knowledge that professionals attain, and how the use of this knowledge should be
governed when providing a service to the public (Chadwick, 1998).
2. In a later study, Albrecht and Romney (1986) used the same dataset to extend this research.
3. The dataset used in Loebbecke et al. (1989) consisted only of fraud cases. Several later
studies have used the same dataset, expanding it with a set of non-fraud cases (Bell et al.,
1991; Hansen et al., 1996; Bell and Carcello, 2000).
4. Loebbecke et al. (1989) distinguished between management fraud and defalcations, privately
held or publicly held companies, fraud materiality, client industries, deceptive actions, levels
of client personnel involved, audit areas, auditing procedures first indicating the fraud and
number of prior audits of the client.
5. Currently, the responsibilities of auditors in the Netherlands with regard to corporate fraud
are set in the “Audit Firms Supervision Act” (2006), the “Decree on the Supervision of Audit
Firms” (2006) and Audit Standard COS 240 “The auditor’s responsibility to consider fraud in
an audit of financial statements.” This is a slightly different situation compared to the
moment the survey in this study was conducted. The current requirements are essentially
the same as the requirements in the situation before 2006 except for the fact that some
responsibilities are now set in a national act instead of in professional standards.
6. See DAS 240 and BLF, now: COS 240.93a.
7. See DAS 240 and BLF, now: COS 240.95b.
8. See DAS 240 and BLF, now: BTA 37.1.
9. See BLF Art. 3, now: COS 240.103. Note that COS 240.130 requires the auditor to consider
resigning whereas BLF Section 2 requires the auditor to resign.
10. See BTA, COS 240.102a.
11. The questionnaire is available from the auditors upon request.
12. Every received self-addressed envelope was opened by the notary in civil law in the absence
of the researchers; the date was put on the questionnaire and the questionnaire was marked
by the notary with a new code per auditing firm. This procedure made it possible for the
researchers to compare fraud experiences among auditing firms while still guaranteeing the
MAJ anonymity of the respondents and of the auditing firm involved. After recoding the
self-addressed envelopes, the notary destroyed the coding table.
25,9
13. With respect to non-response bias, a number of characteristics of early versus late
respondents have been tested. The corresponding t-tests have not indicated any significant
differences between both groups.
14. To compare the findings, the average number of fraud cases reported by Loebbecke et al.
878 was multiplied by 0.6, resulting in an average of 1.86 fraud cases per audit partner. To adjust
for the larger time frame of Loebbecke et al., we divided this number by the average auditing
experience of 19.5 years of the partners sampled in this research and then multiplied this
number by eight years, which is the window of the current study. After these adjustments,
the number of fraud encounters per audit partner in the Loebbecke et al. study is about 0.76,
which is more in line with the findings of the present study (1.07 fraud cases).
15. Note that in the current auditing standards in this situation the auditor only has to consider
withdrawing from the engagement but nevertheless he must report to a central
governmental agency.
16. See also BLF.
17. Of the total population of top 30 audit partners in The Netherlands, about a quarter
participated in this study. Of approximately 130,000 audits in The Netherlands in the period
1995-2002, about 1,250 instances of fraud would have been detected. In 1,000 of these cases
redress would have been requested by the auditor, of which 940 cases would have been
redressed eventually. Therefore, in 60 cases, no redress would have taken place, of which
28 cases would have been material fraud detected during a statutory audit. In 16 of these
instances, the auditor would have resigned, and 28 cases would have been reported to the
external reporting agency.
18. The reason for this removal was that only 15 per cent of this group had an opinion on the
auditor’s role in fraud redress; eight partners considered their role to be small, and
15 partners considered their role to be significant. The remaining 132 auditors who had no
experience with fraud detection did not have an opinion on the auditor role in the redress
process.
19. Under the old requirements, it was mandatory for auditors to report the fraud to the
governmental central reporting agency (BLF, Section 3) while under the current legislation
this is mandatory according to the Audit Firms Supervision Act, Article 26.
References
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Advances in Accounting, Vol. 3, pp. 323-33.
Arnold, D.F. Sr, Bernardi, R.A., Neidermeyer, P.E. and Schmee, J. (2005), “Personal versus
professional ethics in confidentiality decisions: an exploratory study in Western Europe”,
Business Ethics: A European Review, Vol. 14 No. 3, pp. 277-89.
Asare, S.K. and Wright, A.M. (2004), “The effectiveness of alternative risk assessment and
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Appendix Fraud detection
DAS 240
The main points were as follows. Before starting the audit as such, auditors are required to carry
out a pre-assessment, evaluating and documenting the likelihood of financial misstatements and
the presence of risk factors indicating an increased potential for fraud, and making inquiries to
better understand the company, its procedures and its management. Based on this
pre-assessment, the audit procedure should take into account the estimated level of inherent
and control risk, and may have to be adjusted or expanded if circumstances are encountered that 881
may indicate material misstatement. While conducting the audit, a written representation from
management should be requested including a statement that management feels obliged to detect
and deter the occurrence of fraud, and that the auditor has been informed about all relevant fraud
cases. If material errors are detected, the auditor should report this to management and may,
again, have to revise the audit procedures based on the new information. At the same time, the
integrity of management should be reconsidered, especially if there are indications of
management fraud. If there is fraud or an indication of fraud and the auditor believes that it is
therefore not possible to continue the audit, he should consider reporting to the entity (or, in some
cases, to regulatory authorities) or withdrawing from the engagement. The auditor needs to
terminate his appointment if the audit is impeded by any restrictions or limitations imposed by
the client, and should inform the appropriate level of management and the supervisory body
about his reasons for doing so.
BLF
The main points were as follows. The BLF came into force in 1994 and remained unchanged
throughout the period under study (1995-2002). Both the AS 240 and the Supervision of Auditors
Act (Wet toezicht accountantsorganisaties or WTA) were modified after this study was
completed. These regulations now contain the main points of the BLF, which then ceased to exist
as a separate auditing standard. However, there is one exception to the BLF, and that concerns
the provision that auditors must notify the supervisory body if management refuses to
redress the detected fraud. This step is not covered, either by the WTA or the accompanying
Decree on the Supervision of Auditors (Besluit toezicht accountantsorganisaties, or BTA).
The BTA requires that the competent government authority be notified when the audit client
fails to redress the fraud (whether this concerns management or the supervisory body), thus
omitting the intermediate step of informing the supervisory board.
Abbreviations:
BLF Dutch by-law on reporting on fraud.
BTA Dutch decree on the supervision of audit firms, 2006.
COS Dutch audit and other standards (as of 2007).
DAS Dutch Auditing Standards (until 2007).
ISA International standard on auditing.
Corresponding author
Harold Hassink can be contacted at: h.hassink@maastrichtuniversity.nl