Co-Regulation of Fraud — Detection and Reporting by Auditors in Australia: Criminology's Lessons for Non-Compliance
| Date | 01 June 1995 |
| DOI | 10.1177/000486589502800205 |
| Author | A Kapardis,M Kapardis |
| Published date | 01 June 1995 |
| Subject Matter | Articles |
Co-Regulation of Fraud - Detection and
Reporting by Auditors in Australia:
Criminology's Lessons for Non-Compliance
MKeperais: andAKeperdist
All
companies (other than exempt proprietary ones) are required by the
Corporations Law to have their books audited. For about 150 years there
has been acontroversy surrounding the auditors' role -whether they
shouldbe functioning as a watchdog'or a'bloodhound'. In recent years the
auditing profession in Australia has been experiencing acredibility crisis. A
spate of much publicised corporate collapses in the late 1980s at atime of
economic recession has been instrumental in: (i) the Australian Securities
Commission (ASC) adopting more heavy-handed ways of policing auditing
standards; (ii) rocketing audit fees; and (iii) the accounting bodies redefining
their role and revising auditing standards. This paper focuses on current
approaches to regulating the auditing profession, and discusses their
effectiveness, drawing on the criminological literature relevant to
professional advisers, white collar illegality, and deterrence.
Introduction
The Corporations Law (Pt 3.7) requires all companies, other than exempt
proprietary ones, to have their books audited. An audit provides an opinion on
whether a company's accounts are 'true and fair' and, also, whether a
company can reasonably be expected to be a going concern for another year.
At the same time it may be possible for auditors to play a crucial role in
detecting and reporting such white-collar crime as fraud, thus reducing the
harm done to the national economy as well as contributing to Australia's
commercial reputation and competitiveness internationally. The need for fraud
auditing covers both the public and the private sectors. The present paper is
concerned with the private sector.
Whilst auditors are in a position to 'exert a significant influence upon the
moral climate within which their clients operate' (Grabosky 1990:73), the
amount of fraud detected by auditors that becomes officially known is
constrained by a number of factors. First, there is the fact that the very nature
of audit tests does not guarantee detection of material misstatements arising as
a result of such irregularities as fraud and material error.
Secondly, as Gay and Pound (1989) pointed out, short of a breach of
s 332{10) of the Corporations Law, unlike their public sector counterparts,
auditors in the private sector have no obligation to report fraud if they are of
the opinion that the company's financial statements give a 'true and fair' view.
In fact, Statement of Auditing Practice AUPI6(13) states that the failure to
*ACA, M Bus(RMIT), Senior Lecturer in Accounting, Victoria University of Technology, St
Albans Campus, PO Box 14428, MMC Melbourne, Victoria, 3000.
tPhD (Camb), Senior Lecturer, School of Law and Legal Studies, La Trobe University,
Bundoora, Victoria, 3083.
193
194 (1995) 28 The Australian and New Zealand Journal of Criminology
detect irregularities such as frauddoes not necessarilyimply failure on the part
of the auditor. Thirdly, an auditor may well decide that an irregularity he/she
detects does not warrant reporting to the Australian Securities Commission
(ASC) or the audit committee. 1Finally, an auditor may be certain that an
irregularity should be reported to the ASC, for example, but decides against it
for reasons often best known to him/herself. (Criminological literature [eg
Grabosky, 1990; Tomasic & Bottomley 1993] relevant to auditors' morality as
a negotiated process and white-collar illegality is discussed below).
Volumes
of
'Statements of Auditing Practice' (AUP), issued and updated by
the Australian Accounting Research Foundation (AARF), provide guidance
and guidelines on audit work. AUPI6(11) provides that, while 'the primary
responsibility for the detection of irregularities rests with the governing body' ,
,
...
the auditor has a legal and professional duty to exercise reasonable skill
and care with respect to the planning and conduct of the audit so as to have
a reasonable expectation of detecting material misstatements arising as a result
of irregularities' (AUPI6(13)).
The argument that official criminal statistics in general do not accurately
depict the real volume of crime in society (Matka, 1990) applies especially in
the case of white-collar corporate fraud and other crimes of the powerful.
Such offences, in contrast to conventional crime committed. by low
socio-economic status offenders, tend to be excluded from crime victim
surveys (Brown & Hogg 1992).
Figures on fraud victimisation by companies vary. The KPMG's 1993
'International Fraud Report' found that, with an average company response
rate
of
35% across the six countries (Australia, Bermuda, Canada, Ireland,
Netherlands, USA), 44% of the 314 companies that responded to the survey
in Australia had recently experienced fraud such as misappropriation of cash
(21%) and cheque forgery (15%). The 'First Australian National Survey of
Crimes Against Businesses' reported a victimisation rate of 27.4% for at least
one fraud in 1992 (Walker 1994:5). A much higher figure of 76% has been
reported by the Deakin Australia (1994) survey of medium and large
companies in Victoria. Whilst differences in such victimisation figures reflect
differences in the methodology used by different surveys, the fact remains that
many companies (a) would be reluctant to publicise their experience with
fraud and (b) are unable to quantify such experiences. Consequently, the
self-reported victimisation figures reported most probably underestimate the
real volume of fraud against corporations.
According to Halstead (1992:1),
The cost of white collar crime [which includes both entrepreneurial and corporate
crime] to the Australian community is believed to be much greater than all forms of
other crime combined. White-collar offenders are generally at less risk of
apprehension or being convicted than other types of offenders, and on conviction
they are likely to incur a lesser penalty.
As far as the annual cost of fraud to Australian businesses is concerned,
KPMG (1993) put it at almost $200 million, representing an average loss of
$636,000 per company. This figure represents the second highest (after the
US) average loss for the six participating countries. Walker's (1994:7)
national figure was $235 million in 1992.
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