Auditing Changes And Detecting Fraud With Auditors Vs Forensic Accounting Accounting Essay

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Abstract

There is a very high demand in the corporate world for forensic accounting and it continues to increase. When forensic accountants prevent and detect fraud they do a huge service for organizations. The focus of this research project will be on the techniques, tools and processes used in implementing internal audit controls (to prevent fraud from occurring in the first place), and forensic accounting (to identify techniques used to perpetrate fraud after the fact). This paper will determine if the methods used actually serve to deter fraud, however, in order to make such a determination, the areas that are susceptible to fraud must be identified before the procedures used to prevent fraud can be implemented.

Introduction

Due to the incidence of some infamous corporate accounting scandals, there has of late been both an increased demand for accounting fraud prevention and forensic accounting. Fraud prevention and forensic accounting have been left largely in the back office and their usefulness debated over time, even as executives with companies such as Kmart, Enron, and WorldCom have been investigated, indicted and in some cases, convicted of massive financial misconduct (Parsuris, 2002). Because of the legal aftermath of these high profile accounting scandals, forensic accounting has become an important feature for most businesses and corporations. Although in hindsight, it may seem that financial fraud is only uncovered after millions of dollars have been embezzled, it is safe to say that these are only the cases that make it to the newswire. Although some cases of fraud might be attributed to inadvertent technical error, in most cases, both the causes and effects of financial fraud are all too human.

The Statement of the Problem section is still absent.

Purpose of Study

The purpose of this paper is to determine the importance of fraud prevention via the internal audit function. Furthermore, this paper will evaluate the characteristics and the abilities required to accurately detect the occurrence of fraud before it occurs, and then be able to understand how fraud occurred via forensic accounting techniques, after the fact. This research evaluates two substantial processes for corporate governance: internal controls and forensic accounting. By evaluating the similarities between the two, this paper will examine the significance and importance of a strong internal audit function as fraud detection mechanism. Accounting fraud occurs when a corporation's desire to minimize cost of regulatory compliance conflicts with the pursuits and interests of employees who see their access to corporate accounting records as a way to accrue economic benefit themselves.

Forensic accounting analyzes the nature of the accounting fraud using economic principles and thereby leads to the construction of optimal and dynamic processes for the improvement of accounting fraud prevention. Forensic accounting also utilizes location analysis in order to determining the optimal allocation for investigatory resources, and the ideal punitive levels to be contained in accounting governance policies. Forensic accounting further provides policy recommendations on accounting fraud control (Cheng & Yang, 2009). Forensic Accounting is not new. However, it has certainly become very important and has been of serious interest post-Enron. When dealing with the public sector, unethical acts and other serious wrong doings are the main factors that support the requirement for fraud prevention through internal control systems and forensic accounting. Susan F. Weiss2292-01-28T00:32:00

You don't have to get into this "correlation between employee performance..". It is much too extensive to add into this study, and by the way where is the citation for that empirical study?

It is not something you have conducted yourself, as this would not be permitted.

You need to include the citation.

Although most occurrence of fraud are relatively small type of fraud is small in relation to the number of audits performed (Elliot and Jacobson, 1986), more cost effective methods are still needed to improve their detection and deterrence. However, the incidence and the amounts involved in financial fraud has sky rocketed over the last several years. Partially in response to calls by government's regulatory agencies, and professional bodies, external and internal auditors alike stress the significance of the fraud prevention via fully implemented and efficient internal control systems. There have been several empirical studies such as KPMG, Australia (2002) and Cain (1999) each of the respondents surveyed indicated that they believed fraud is a major business issues. A new study by the Committee of Sponsoring Organizations of Treadway Commission (COSO), fraudulent financial reporting by the U.S public companies has significant negative consequences for investors and executives. The study examined financial statement fraud allegations by the U.S Securities and Exchange over a ten-year period, found that news of an alleged fraud resulted in an average 16.7 percent abnormal stock price declined in the two days surrounding the announcement.(COSO,2010). The Study, Fraudulent Financial Reporting: 1998-2007 examined almost 350 alleged accounting fraud cases that were investigated by the SEC. It shows:

The median fraud was $12.1 million. More than 30 of the fraud cases each involved misstatements/misappropriations of $500 million or more.

Twenty six percent of the firms engaged in fraud change auditors during the period examined compared to 12 percent rate of no fraud-firms. (M, Beasley; D, Hermanson; T, Neal) 1999.

Susan F. Weiss2292-01-28T00:32:00

This entire section can be relocated to your Literature Review.

It is actually not the purpose.

Rationale

This section will evaluate the issue of corporate fraud and studies conducted to evaluate the relationship between the incidence of fraud and the level of corporate governance variables; furthermore, the significance of the inside audit function as the part of a company's corporation governance structure will be discussed,Susan F. Weiss2292-01-28T00:32:00

If you are discussing Significance, that is the section in which these points belong. including an evaluation of the consequences for the companies outsourcing their internal audit function. Hypotheses and research questions have been determined from the background. There have been many empirical studies done to show the importance of the forensic accounting and the audit procedureSusan F. Weiss2292-01-28T00:32:00

Same with this…importance is speaking to the Significance of the Study., such as the Javelin study (2010), which found that over 50% of respondents surveyed, agreed that fraud was a major business problem (Johnson 2010). Without additional detail on a particular alleged fraud, it's hard to know whether an internal-control audit would have uncovered the problems within an organization; however there has been a demand for improved audit performance.

In Statement of Accounting Standards (SAS) No. 82 the responsibility to plan, and perform that Susan F. Weiss2292-01-28T00:32:00

Specify what "that" is in particular.was placed with the auditor, such that reasonable assurance about whether financial statements are free of material misstatements could be provided by the business. In seeking to make a fraud determination, it is crucial that the auditor consider the forty one risk factors related to fraudulent financial reporting and the misappropriation of assets when designing an audit plan. When analyzing financial information, however, it is still necessary for auditors to use subjective judgment. An example of this is contained in 82 1997: 90: the auditor must use professional judgment in conducting an audit where the risk factors are present and must document those risk factors in the work papers (SAS 82 1997:90).

DuSusan F. Weiss2292-01-28T00:32:00

This is really where the Rationale starts.e to the increase in frauds for the last few years, the need to have a close look at the frauds in the organizations has increased considerably. Now the shareholders are lot more interested in determining whether the organization is engaged in any form of fraud or unethical acts. The shareholders have now become more aware and vigilant and want to know what the organization is doing with their money. They also want to know that the organization is doing the work according to the accounting standards or not.

If the standards for accounting are not followed then the shareholders want strict actions to be taken against all the organizations which are in default. There is a need to improve the methods of prevention of frauds as the frauds have become more secret and the organizations are also using different methods to get involved in the activities of fraud. The number and in the intensity of the frauds have also increased in the last few years (Silverstone & Sheets, 2007). In the last few years there have been various studies and surveys taken place which have shown the audit control, fraud detection and forensic accounting have gained importance and have become a necessity in the recent few years. Most of the people believe that the frauds are very serious problem and need to be checked as and when it arises. The success of the audit function in preventing the frauds depends on whether the audit control team has proper and complete information in the case of fraud.

There is definitely a need to improve the performance of auditing so that more Susan F. Weiss2292-01-28T00:32:00

More is adequate.frauds could be detected. There are various accounting principles and risk factors that are required to be checked by the auditor while checking and controlling the fraudSusan F. Weiss2292-01-28T00:32:00

This auditor 'checking and controlling the fraud' could be phrased more effectively. Talk about substantive testing requirements before you come to the conclusion.. When the auditor does the audit then the auditor should ask the organization to provide him/her with the best possible information which could prove that there is no case of fraud in the organizationSusan F. Weiss2292-01-28T00:32:00

The sentence omitted was repetitive.. Sometimes an auditor is not able to track the misappropriation of funds and the frauds; at that time the organization is able to cheat the shareholders. So, it is very important to track the frauds as quickly as possible. The auditor is required to use all his/her professional skills while doing the audit and in case s/he finds any case of fraud then s/he should report to the organization as quickly as possible.

The following sections belong here:

Research Questions

Significance of the Study

Methodology

I have provided direction to you above for some of the statements above that should be moved to the proper sections.

Forensic AccountantsSusan F. Weiss2292-01-28T00:32:00

These sections belong as part of your Literature Review and analysis.

The Forensic Accountants also have somewhat the same goals as the other auditors. The roles which the forensic accountants play is similar but still there is some difference in their roles. The difference is regarding the identification and prevention of errors and identification of fraud. These three functions are conducted by the internal auditor and the forensic accountants are focused on getting various kinds of claims such as insurance claims etcSusan F. Weiss2292-01-28T00:32:00

Compare this to the commentary directly above. Notice that here you specifically indicate the difference in auditing roles. You need to be consistent with the message. Hence, above it is important to distinguish auditors from internal auditors, etc..

Surveys for the frauds

Some surveys Susan F. Weiss2292-01-28T00:32:00

This needs to be more specific. For instance, "Silverstone and Davia (2005) conducted a survey…have been conducted for the purpose of determining the number and the intensity of the frauds. Silverstone and Davia (2005) conducted a survey revealing Susan F. Weiss2292-01-28T00:32:00

Use the past tense in APA.that there has been a considerable increase in the frauds and also their intensity. The survey only consisted of the frauds that have been detected. In the United States of America there have been various frauds which have not been detected but have an impact on the whole economy of United States of America and also the shareholders of respective organizations (Silverstone & Davia, 2005).

The frauds have a very bad impact on the shareholders, employees, suppliers, customers and the government officials. If a fraud is detected and the organization is found to be engaged in fraud then the level of confidence that the shareholders, customers, and the government officials decreases to a very large extent. After the fraud all the above stakeholders do not feel good about the organization and the organization loses its goodwill in the market.

It is not that the frauds only have a negative impact of the stakeholders of the organization. The organization itself suffers a lot of losses. The executives in the organizations who are found involved in the activities of fraud are punished for not following the principles of accounting and business ethics. There is a reduction in the reputation and the profits of the organization which is involved in the activities of fraud and misappropriation of funds.

Importance of Forensic Accountants

The kind of fraudulent activities that take place in these days requires some extra skill and diligence to ensure that the frauds are detected and prevented. To overcome the kind of frauds that take place today there is a need to for the accountants to have forensic skills in their work. If there is no forensic ability or the skill in the accountant then there can be some problem for him to deal with the case of fraud and detect the fraud.

The forensic accountants have that edge above the other persons in the accounting fields to detect and prevent the frauds in the field of accounts. It is necessary for the prevention of accounts that the frauds are detected before the other person detects the same. The forensic accountants have the skills and the capability to detect the fraud well in advance so that the same can be avoided properly.Susan F. Weiss2292-01-28T00:32:00

Generally, the two paragraphs above are similar in their statements. However, you do not go into what "special qualities" a forensic accountant must possess. What types of "forensic skills" do you mean? There is a necessity to have the increased knowledge for the prevention and detection of fraud and the forensic experts know all the same (Singleton & Singleton, 2010).

The organizations like Enron were involved in various frauds and because of those frauds Enron had suffered a lot of losses and damages and in the end the organization was closed. Due to all these kind of acts various laws were enacted to prevent the frauds. One of those acts was Sarbanes Oxley which has also made an increase in the accountability of the organizations in relation to the fraud.

Research QuestionSusan F. Weiss2292-01-28T00:32:00

Rearrange according to the above.

Farlex (2009) has defined Forensic accounting as an area of accounting that involves investigation techniques to determine and critique the accuracy of an organizations financial statement in a legal dispute. Forensic accountants are necessary in fraud investigations, disagreements, and breach of contract dispute, and other litigations that are relied on in a court of law. These accountants are normally retained by both parties in the suit to bolster their cases (Farlex, 2009). The focus of this paper is to determine whether forensic accounting is the most proactive way to detect and prevent fraud. Is a corporation more likely to detect and report fraud when strong internal audit controls are in place, or when only forensic accounting is available to them, or is the most effective method a combination of the two? Current research indicates that both Susan F. Weiss2292-01-28T00:32:00

From this point on, it appears that you are answering the research question by way of the Literature Review. Hence, make this part of your Literature Review, and stop here with the Research Questions.approaches may be effective. There is an increasing demand of forensic accounting within companies is a recognized feature. The occurrence of forensic accounting comes from the cause and effect of fraud and technical error made by individuals (Bologna&Lindquist, 1987). It has been debated for the past few years as companies in developed countries such as WorldCom, Inc, Kmart Corp, and Enron have been examined and proven fraudulent (Talh &S Shaikh, 2003). Forensic accounting may be one of the most efficient and effective ways to prevent and reduce accounting fraud. Forensic accountants share some of the same goals as auditors (Nieschewietz, 2000). However, they have different roles. The differences between the two are Error Identification, Error Prevention, and Fraud Identification. This falls under the internal audit control system. The duty of the auditor is to review the effectiveness of the internal control by sampling transactions, rather than reviewing all transactions. In the process, they may be able to uncover errors. Internal audit ensures that the controls are in place to establish and detect fraud as well as report it. These incidents have drastically increased the work and responsibility of the auditor. The auditor's responsibility was created under the SAS 109:

Understanding the entity and its environment and assessing the risk of the material misstatement. What this does is create the similarities between the risk of material misstatement and the entity of financial statement and the overall operating environment of an entity.

SAS 109 is the basis of the adage that 'you can't audit what you don't understand' (http://www.nysscpa.org/cpajournal/2007/207/essentials/p23.htm). SAS 109 stipulates that the auditors must understand the entity and environment far beyond the initial assessment of a company's accounting records. Past research on SAS 109 has shown that auditors must identify risk factors associated with operations and industry conditions, especially if such variables could lead to or result in material misstatements. Thus, auditors must be concerned with internal issues that impact the reliability of accounting in addition to risk management that could result in financial misstatement. With respect to audit effectiveness, SAS 109 recognized that controls were necessary in the generation, storage and processing of financial data if it was known to be subject to auditing procedures (e.g., controls related to financial data that auditors may use in analytical procedures including production statistics). SAS 109 further stipulates that controls pertaining to discovering noncompliance with policies and regulations, controls related to detecting noncompliance that have a "direct and material effect" on accounting statements (including compliance controls with income tax laws to determine income tax provision) may be important to such audits (SAS 109)

Fraud committed by accountants is an intentional management fraud that harms investors and creditors by providing misleading financial statements and information. The International Standards on Auditing (ISA) defined fraud as "unjust or illegal advantage" which differs considerably from SAS 109's definition. Additionally, the ISA is broader is unlike SAS 109 and PCAOB in that it does not limit fraud to "material misstatement in financial statements". Furthermore, the ASB will examine proposed alternative definitions and implement specific changes (Vogel, 2010). There is a reasonable difficulty in the assertion of research that has been performed and the data availability is limitedSusan F. Weiss2292-01-28T00:32:00

Elaborate on this…specifically, do you refer to the changes in SAS 109? Or, on financial statement material misstatements?. It has been determined that forensic accounting skills have become very important in determining complicated accounting situations that have been presented on accounting statements. Also it has been an issue of public demand for a change in action that has changed corporate governance. There has been a need for someone with more accounting skills that can identify, and prevent the low accountability in three important areas, flawed internal controls, terrible corporate governance, and misleading financial statements. Because of the scandals and the failures of Enron there has been a huge amount of research that has been done and they find that poor corporate governance is the number one reason for manipulated financial reports, and very disappointed stakeholdersSusan F. Weiss2292-01-28T00:32:00

OK, there is a huge amount of research on governance, but little on the subject you have indicated above.. It has been the expectation of the auditor to express their opinion on whether financial statements are presented in the accordance of the GAAP.

Actually the auditor does not have the power to uncover all fraud, even though SAS 99 states steps that are given to the auditor to take in order to determine fraud and those they have implemented their audits that are necessary to address fraud and its considerations. Also companies were experiencing high levels of legal regulation due to the Sarbanes -Oxley Act of 2002. Companies are spending an enormous amount of money examining the existing systems, and attempting to improve their internal controls and governance to meet the standards set by Sarbanes Oxley Act of 2002 sections 403 and 404.

Forensic accountants carry out research on investigative techniques in order to better prevent, discover, and deter fraud and other misrepresentations in financial data. There is such a high opportunity for economic fraud within organizations that it is necessary to have the forensic skill to detect fraud. However, how effective is Prevention, Detection, and Deterrence? Theoretically, there should be no way in which fraud can successfully perpetrated without some indication of malfeasance to the observant accountant. Forensic accountants have the skills necessary to detect financial fraud in the data before others see it. Forensic accountants use the Fraud Triangle - Rationalization, Pressure and Opportunity - to identify the elements of financial fraud in the records they are studying. Because of the increased knowledge of forensic accountants, financial fraud is more easily detected, prevented or the opportunity for a particular kind of fraud eliminated. In order for the fraud to be detected it is necessary to locate these signs and notice the indicators of the fraud triangle.

MetholodgySusan F. Weiss2292-01-28T00:32:00

The Methodology section refers to the methodology you personally are using for your research. This belongs in the Analysis section. In addition-and this is pervasive throughout-you need to cite more often.

Experiment

Experiment 1: an audit careSusan F. Weiss2292-01-28T00:32:00

?? was created by Asare and Wright (2004) and it featured a company that had provided financial statements that was fraudulent. In the first part, respondents were provided financial statements that were comparative and information about the organization. They were told to assume that they were helping in the creation of an audit plan for the recycle of the client.

There are two versions of the case. In the first one, all 16 respondents surveyed were given the audit group's primary risk assessments and then were told to select from a set of standards in the audit planning that they felt were necessary in the circumstances. In the second part the respondents were provided a checklist and they were asked to finish the checklist and assess inherent risk control and fraud risk on a 1-10 scale. Descriptive information about the plan is included in table 2, and table 3 provides the risk factors indentified. In both situations, the respondents were told to design an audit program based on the past years audit and changing as the needed the budgeted hours for the procedure categories' and any additions procedures they felt they needed to change. In conclusion Part 2 panels B and C and Table 5 provided descriptive Info about the audit program choices and the revision made by them. Once they were finished, they were given back to the researcher in an envelope.Susan F. Weiss2292-01-28T00:32:00

Requires more citations.

Participants

There were 31 fraud specialist, which included 2/3 males and 1/3 females, which completed the case. There were a portion that came from large accounting firms and the other part was from medium firms. 40% were partner, and 50% were senior manager or directors, and 10% were managers. Most of the subjects were 40 years old and had specialized fraud experience and or auditing experience. There were 20 respondents that had forensic accounting specialization. The respondents spent about 53% on fraud related activities and 36% on litigation activities.

What the research indicates fraud specialist estimated inherent risk similarly to Asare and Wrights auditors who completed the same task. However, the other participants that were surveyed rated control risk than Asare and Wrights. Those who completed part B of the case rated control risk and fraud risk higher than risk levels given in version A of the case.Susan F. Weiss2292-01-28T00:32:00

Requires citations.

Conclusion

My question was: is a corporation more likely to detect and report fraud when strong internal audit controls are in place, or when only forensic accounting is available to them, or is the most effective method a combination of the two?

I havSusan F. Weiss2292-01-28T00:32:00

How did you personally determine this without conducting research of your own??e found that forensic accountants' inherent risk judgments were not similar of the auditors that participated in the (Asare and Wright's 2004) research; however their control risk and fraud risk assessment were higher than those of the auditors. The two different projects of the case made the fraud specialist propose revisions to hours budgeted for analytical procedures and cutoff test. Two independent forensic specialist subjects' responses to the audit procedures and evaluated whether the procedures addressed items in Asare and Wright's (2004) Exhibit 3. Susan F. Weiss2292-01-28T00:32:00

Where is this Exhibit?What the research suggested was that a consultative role exists for fraud specialists when an audit team provides a summary risk assessment to fraud specialist may not result in as satisfactory an outcome as a participative role when the fraud specialist participates in the risk assessment process. Previous studies Susan F. Weiss2292-01-28T00:32:00

Which studies are these? Citations are required.have shown that auditors are able to indentify fraud risk factors, but can't translate the information in an audit plan that would effectively take the, into account and assist them with the chances to detect fraud. This finding suggested that consulting fraud specialists may not provide a satisfactory risk assessment outcome in comparison to a fraud specialist that fully participates in the process. Overall budget hour revisions in the standard audit program for the revenue cycle were dependent upon the possession of an IFA categorization. The specific specialist designation for a fraud specialist had a direct impact upon the the time that was allowed to budget and not included in the study. The second question explored the ability of fraud specialists to propose unique procedures when fraud risk was high. Susan F. Weiss2292-01-28T00:32:00

This font has a different color.

This also requires a citation. You discuss studies as if you had conducted them.My research has set context of rationale for more research in the importance of forensic accounting across America. It has shown the forensic accounting is used to investigate fraud on an occurrence and companies that have been accused for criminal and illegal activities. Forensic

Accountants are used by audit companies after audits have been completed to investigate a

Company's financial statement to outline fraudulent activities. Though it has been determined

Those forensic accountants are essential for all kinds of organizations for long term survival. It is

necessary to utilize a forensic accountant to help a company's performance. However, there is no indication that it deters fraud or misstatements in financial statements. A survey was conducted by Grambling and Schaxberg (2002) taking a forensic accounting course before and after the work was completed. It was determined that the forensic accounting students perceptions were close to the auditors after the coursework had been finished. The results have shown that auditors

are more likely to report and detect fraud than those who solely rely on a forensic accountant.

Benefits of the auditor are deterrence of fraud and the detection and the reporting (Grambling &Schaxberg, 2002). Organizations with an internal audit function should be able to detect and report fraud than those who do not. It also shows that if they use the help of a forensic accountant it can be more effective in reporting and detecting fraud. There will be other areas of future research from the issues that have been explored in my study.

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