Investigating the impact of audit features on money laundering. Evidence from Iranian stock exchange companies

Published date06 April 2020
DOIhttps://doi.org/10.1108/JMLC-09-2019-0072
Pages913-930
Date06 April 2020
AuthorShaban Mohammadi,Nader Naghshbandi,Zahra Moridahmadibezdi
Subject MatterAccounting & Finance,Financial risk/company failure,Financial compliance/regulation,Financial crime
Investigating the impact of audit
features on money laundering
Evidence from Iranian stock exchange
companies
Shaban Mohammadi
Department of Accounting, Vocational University of Khorasan
Nader Naghshbandi
Department of Accounting, Hakim Nezami Institution of Higher Education,
Quchan, Iran, and
Zahra Moridahmadibezdi
Department of Auditing, Hakim Nezami Institution of Higher Education,
Quchan, Iran
Abstract
Purpose The purpose of the present study is to investigatethe impact of audit features, including audit
quality,audit fees and auditor tenure on money laundering in Iranian stock companies.
Design/methodology/approach This research is descriptive-correlational and applied in terms of
purpose. To evaluate the audit features,variables including audit quality, audit fee and auditor tenure were
used. The statisticalpopulation of this study includes all companies listedin Tehran Stock Exchange and the
research period from 2012to 2018. A sample of 150 companies was selected by the screening method. In this
study, logisticregression and Eviews 10 software were used for data analysis and hypothesistesting.
Findings The results showed that variables includingaudit quality, normal audit fee and auditor tenure
have a signicanteffect on money laundering.
Originality/value Observing money laundering rules and regulations for businesses involves is a
critical issue. In auditing the nancial statements of the business units subject to these laws, the auditor
reviews their actions to obtain reasonable assurance of guaranteeingthe money laundering laws, evaluates
their effectiveness and gains approval of managers regarding observing laundering regulations. In this
regard, the auditor is required to report denitive or suspected money-laundering cases or its certain or
suspected evidence to the relevant authorities.Although the law prohibits the auditor from disclosing such
matters to the client, it is not necessary. It seems thateven if the auditors perform non-audit functions, they
should reportmoney laundering or suspicious operationsand transactions.
Keywords Audit fee, Money laundering, Auditor tenure, Audit quality
Paper type Research paper
1. Introduction
Money launderingis a global problem with devastating effects on the economyfor a number
of reasons such as economic sanctions,monetary instability, nancial system vulnerability,
increased corruption and social-economic instability (Drayton, 2002;Dowers and
Palmreuther, 2003). In the 1990s, several leading audit rms adopted a business risk-based
audit approach, which required a comprehensive understanding of customer industries,
business models, strategies and processes (Bell et al.,2008). Previous studies conrm that
Impact of audit
features
913
Journalof Money Laundering
Control
Vol.23 No. 4, 2020
pp. 913-930
© Emerald Publishing Limited
1368-5201
DOI 10.1108/JMLC-09-2019-0072
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1368-5201.htm
external auditors behavebased on the audit risk model; i.e. they expand their tests, increase
budget audits and audit costs for risk-taking clients as well (Johnstone and Bedard, 2001).
Money laundering can affect audit costs in two ways: rst, by reducing the quality of
nancial reporting, and second, by enhancing audit risk other than the quality of nancial
reporting. Money laundering increases the risks of nancial distortions and, therefore, calls
for additional audit efforts resulting in increased audit costs. If auditors feel that
management sector is more susceptible of, for example, conducting money-laundering
activities, they are more likely to engage in professional skepticism, thus requiring
additional audit efforts and increased audit costs (Call et al.,2017). Diekman (1999) stated
that ghting against corruption and money laundering is a global phenomenon that has a
positive impact on the economy and its prosperity in the long term. It feeds corruption and
organized crime, thereby disrupting nancial markets and, in general, negatively affecting
the welfare and well-being of society. In 2007,the Islamic Republic of Iran adopted the Anti-
Money Laundering Act. The bylaws passed in 2008 led to the implementation of the anti-
money laundering act as well as the establishment of the Anti-Money Laundering High
Council, the Executive Secretariat and the Financial Intelligence Unit. To ght against
money laundering, prevent nancing of terrorism and provide the necessary international
standards measures to implement the law on it. In this regard, the Society of Accountants
has approved and communicated the executiveinstruction of auditing of money laundering
by auditors in 38 articles and 15 notes. This auditdirective, which includes 24 articles and 7
notes, covers the ght against money launderingand nancing of terrorism in business and
non-prot organizations. Accordingto this directive, all formal auditors are not only bound
to observe notication rules but also report the suspected cases in the corporate nancial
information gathering system if they found any. The present study is the rst effort to
examine the impact of auditing on money laundering. Given the negative effects of money
laundering on different pillars of the economy, economic planners must prioritize serious
measures (Call et al., 2017). In the followingsections, some strategies proposed to deal with
this issue are presented. Because money laundering is an international activity, effective
coping requires applying appropriate tools and using international experiences; e.g. using
international institutions and their facilities to counter money laundering; using new
technologies to track suspicious money and transactions; using strict standards to issue
license for banks and nancial institutions; supervising monetary and nancial markets;
accurate identifying of customers in the monetary and nancial markets; creating
appropriate business elds to attract wandering funds; and taking thenecessary measures
to make the tax system more efcient and to cope with tax evasion. The auditor is
responsible for planning and executing the audit to reasonably assure that the nancial
statements are free of important distortion because of error or fraud. Thus, despite the
auditors responsibility to detect and disclose fraud in the past, for the present time, the
following reasonscan be presented for this claim by Glynn:
increasing the importance of the impact of fraud and its examples, including
corruption, money laundering and bribery on the economy of communities and, as a
result, an increasing need to deal with them;
asking auditors to help discovering fraud cases; and
the inability of auditors to properly and adequately investigate signicant nancial
fraud in nancial statements.
Although in nancial auditing, the principle of importanceis central to reporting, in the
ght against money laundering, this principle has not been dominant in disclosing
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