R.H.G. Meuwissen

Fraud detection, redress and reporting by auditors

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.

The Audit Reporting Debate: Seemingly Intractable Problems and Feasible Solutions

While the audit reporting debate has a long history, a number of recent regulatory initiatives and policy reviews increase the likelihood of change in this area. The purpose of this study is to use this momentum and examine whether there is consensus between audit report users and auditors with regard to the form and content of the audit report. This seems necessary because past audit reporting reforms have failed due to a lack of common ground. Based on interviews with users and auditors, we conclude that reaching a level of consensus seems feasible. Using these insights, we propose an alternative audit reporting model that may significantly reduce the information gap between users and auditors and improve transparency on the quality of audit practice.

Towards the establishment of an internal market for audit services within the European Union

The central issue in this paper is the creation of an internal market for audit services within the European Union (EU). It provides an analysis of the impact of differences between national auditing regulations on intra-EU trade in audit services. To that end, the paper distinguishes three forms of intra-Union crossborder trade in audit services: (1) cross-border establishment as an auditor; (2) cross-border provision of audit services; and (3) cross-border control of an audit firm. The paper also distinguishes four categories of regulation of auditing: (I) regulation of the qualification as an auditor; (II) regulation of competition between auditors or audit firms; (III) regulation of control of audit firms; and (IV) other regulations. For each of the three forms of intra-Union trade the paper indicates the importance of each of the four categories of regulation as trade barriers. For each of the three forms of trade the current level of intra-EU trade is then discussed. The paper shows that there is little such trade and argues that given the intra-EU auditor regulation differences, audit markets within the EU are still separate markets. This is of course remarkable against the background of the drive towards more market integration in the EU in general. The paper then uses insights from audit market research to suggest which forms of national audit market regulations in EU Member States should be removed to increase intra-EU trade in audit services. The paper identifies existing national regulations of the control of audit firms as the most important barrier. The paper argues that removing these (strict) regulations is the most promising route towards more intra-EU trade in audit services.

The effects of national institutions on audit research: evidence from Europe and North America

Auditing is claimed to have become more and more a global discipline. As a result of the expansion of the international audit firm networks, and the proliferation of International Standards on Auditing, differences between national auditing practices seem to have diminished. Surprisingly, national audit research communities seem to develop rather independently, suggesting that national institutions still play an important role in the production of audit research. Therefore, the objective of this paper is to assess the effects of local institutions on audit research. To that end, evidence is provided on the production of audit research in two areas: Europe and North America. Europe is an area with high variation in auditing institutions, while North America is an area with low variation in auditing institutions. A content analysis is presented of the European and North American auditing papers published in accounting and auditing research journals in the period 1990–7. The findings of the output assessment show that, compared to North American audit research, descriptions of national auditing institutions and environments are a dominant topic of European auditing papers, and that the output in terms of journal articles is lower. Subsequently, the paper attempts to explain why the assessed European and North American auditing research differs. The paper argues that the substantial differences in national institutional environments within Europe have two effects on European auditing research. On the one hand, national differences in auditing institutions and environments are an important subject of study. On the other hand, these differences result in a segmentation of the European audit research market, which is lacking in the North American market. The existence of a large number of smaller national auditing research markets results in different incentives, output and performance measures of auditing researchers. The paper concludes with an assessment of the future of audit research as a global discipline.

The auditing profession in the Netherlands : From Limperg's principles to detailed rules

Auditing, Trust andGovernancewas published under the auspices of the European Auditing Research Network (EARNet). EARNet was formed in 2000 to ‘foster research and exchange ideas among auditing scholars and researchers at a European level’. This book represents a milestone towards accomplishing this objective. Motivation for the book evolved from the major corporate failures in the USA (e.g. Enron and Worldcom) and Europe (e.g. Ahold and Parmalat), and the resulting loss of trust and confidence in financial reporting and the auditing profession. The response by regulators to these events was the passage of the Sarbanes– Oxley Act in the USA and the revised Eighth Directive on Statutory Audit in the European Union. Auditing, Trust and Governance provides a detailed account of how a number of European countries responded to this crisis in confidence. The book contains 13 chapters written by leading auditing scholars. The first chapter sets up the book by presenting a general discussion of the main issues of trust, audit quality, regulation and corporate governance. This chapter was particularly helpful to me in understanding the extent of research on audit quality in Europe. The authors conclude ‘the evidence on audit quality differentiation in Europe is mixed and highly country specific’ (p. 8). The chapter provides a number of areas for future research studies in Europe on audit quality. The next 11 chapters are written from the perspective of each of the following countries:

Resource-partitioning processes in the audit industry

This article argues that organizational ecology would benefit from comparative studies since the trajectories of organizational populations depend on the resource conditions under which these dynamics unfold. By comparing different settings, the boundary conditions of theories are determined and explanations sharpened. The article reports the results of a comparative study that starts from resource-partitioning processes that explain the counter-intuitive association between market concentration and the rise of specialist organizations. The authors set up an empirical study in the Belgian audit industry, comparing the findings with those of a study of the Dutch audit industry. Contrary to the Dutch setting, this study finds that the failure rate of small (large) organizations increases (decreases) with market concentration in the Belgian setting. The findings suggest that the shape of the resource space and the strength of exploitation economies mould market structure dynamics in predictable ways, and clarify the conditions necessary to trigger resource-partitioning.

Abschlussprüfung und Beratung - Eine experimentelle Analyse der Auswirkungen auf Unabhängigkeitswahrnehmungen deutscher Aufsichtsräte

ZusammenfassungDie Verknüpfung von Prüfungs- und Beratungstätigkeiten gefährdet die Unabhängigkeit des Abschlussprüfers. Dadurch erhöhen sich mandantenspezifische Quasirenten und die Gefahr für Unabhängigkeitsbeeinträchtigungen steigt. Aus der bisherigen, anglo-amerikanisch dominierten Forschung lässt sich erkennen, dass gleichzeitige Beratung weniger die tatsächliche sondern eher die wahrgenommene Unabhängigkeit gefährdet. Die wenigen deutschen Studien erkennen dagegen mehrheitlich keinen negativen Einfluss auf Unabhängigkeitswahrnehmungen. Über eine experimentelle Studie wurde der Einfluss auf die Unabhängigkeitswahrnehmungen der Aufsichtsräte der DAX 30-, MDAX-, SDAX- und TechDAX-Unternehmen untersucht. Betrachtet wurden die Steuerberatung, die Personalberatung und die Beratung in Bezug auf Finanzinformationssysteme. Alle drei Leistungen entfalten eine negative Wirkung. Einzig die Personalberatung ist einem Abschlussprüfer einer kapitalmarktorientierten Gesellschaft in Deutschland nicht explizit untersagt. Ihr negativer Einfluss war aber am stärksten. Über univariate und multivariate Analysen ließ sich des Weiteren zeigen, dass das Ausmaß der Beeinträchtigung der wahrgenommenen Unabhängigkeit von der Art der Beratungsleistung abhängt. Ein generelles Beratungsverbot erscheint daher nicht als erforderlich. Zudem wurde deutlich, dass Unabhängigkeitswahrnehmungen umso stärker beeinflusst werden, je geringer die Erfahrungen der Aufsichtsräte und deren Vertrauen in Abschlussprüfer sind. Dagegen konnten keine Unterschiede zwischen den Wahrnehmungen von Aktionärs- und Arbeitnehmervertretern identifiziert werden.AbstractThe revised 8th EU directive restricts the provision of non-audit services to audit clients. The reason behind this is the idea that the simultaneous provision of audit and non-audit services to clients may endanger auditor independence. This is also indicated by previous research on the provision of non-audit services to audit clients. There is however little evidence on the perceptions of supervisory board members regarding this issue. This study therefore investigates the perceptions of supervisory board members on the effect of the simultaneous provision of non-audit services and audit services on auditor independence in Germany. The results show that the provision of non-audit services is perceived to have a negative effect on the independence of auditors. Furthermore, when we distinguish between various forms of non-audit services, human resource consulting is perceived to have the most influence on auditor independence. Finally, confidence in auditors and experience affect the perceptions of Supervisory Board Members regarding the effect of non-audit services on auditor independence.

Valuing Errors for Learning: Espouse or Enact?.

Purpose This study aims to investigate how organisations can discourage covering up and instead encourage learning from errors through a supportive learning from error climate. In explaining professionals’ learning from error behaviour, this study distinguishes between espoused (verbally expressed) and enacted (behaviourally expressed) values with respect to learning from errors. Design/methodology/approach As part of mandatory training sessions, 150 early-career auditors completed an online questionnaire measuring error orientation and help-seeking behavior after making an error as attitude- and behavior-based measures, next to measuring perceived organizational learning from error climate. Multiple mediation analysis is used to explore direct and indirect effects. Findings Covering up errors was negatively and learning from errors positively related to an organisation’s learning from error climate. For covering up, this relationship is an indirect one – espoused and enacted values need to match. For learning from errors, this relationship is direct: espoused values positively relate to learning behaviour after errors. Practical implications By designing a supportive learning from error climate in which members at all hierarchical levels role-model learning from errors behaviour, organisations can actively discourage covering up and encourage learning from errors. Originality/value This study applies the theory of espoused versus enacted values to learning from error using a triangulation of measures in an understudied research setting: auditing.