Fraud

Fraud

Fraud Detection Overview

From late 2001 throughout much of 2002, the U.S. was rocked by a series of corporate scandals that were unprecedented in scope. From the collapse of energy-sector giant Enron Corp. to the bankruptcy of telecommunications behemoth WorldCom Inc., the nation saw a succession of U.S. firm's fall from the great heights of the 1990s economic boom. Driving the scandals was a wave of revelations and admissions by some of the U.S.'s most prominent companies that they had engaged in financial misconduct and fraud to deceive investors and regulators about their economic performance (Golden, 2008).

In Enron's case, the company's management was revealed to have falsified accounts, doctored records and engaged in insider trading, among other misdeeds. Long a favorite among investors and Wall Street firms, Enron had in fact been in serious debt but, through improper accounting methods, had made itself look highly profitable. When its manipulations started coming to light, it did not take long for the company to collapse. Enron had assets of $64 billion when it declared bankruptcy in December 2001. It was at the time the biggest corporate bankruptcy in U.S. history (Wessel,2002).

Just seven months later, another company claimed that dubious distinction. WorldCom, the second-largest telecommunications company in the nation, in June 2002 announced that it had hidden $3.8 billion in expenses through accounting tricks and fraud in a bid to inflate the company's stock price. A month later, WorldCom, which had assets of $107 billion, declared bankruptcy. Although Enron and WorldCom were the biggest names in the wave of corporate scandals, they were by no means the only ones. Companies like Adelphia Communications Corp., the country's sixth-largest cable provider; Arthur Andersen LLP, one of the "Big Five" accounting firms; telecommunications firm Global Crossing Ltd. and manufacturing conglomerate Tyco International Ltd. were among the businesses revealed to have engaged in shady, even criminal, practices (Wessel,2002).

Assessment of Potential Effects on Risk Factors for Fraud

The risk did not detect errors if the fraud is greater than that observed from material misstatement, whether due to fraud or may be associated with the process of care provided to hide the facts, for example, misrepresentation, or deliberate failure to recognize the transaction report. These events are very difficult to detect when there is a mystery that could lead the auditor to believe that the evidence is valid, even if it is false (Hilzenrath,2001). The ability of auditors to detect fraud depends on factors such as competition of the charlatan, the frequency and extent of fraud, collusion by the level of fraud, the relative amounts of, or experience of the players. Although the auditor may identify potential opportunities for fraud, is difficult to determine the assessment of violations of judgment, such as accounting, fraud or error.

Unpredictable Audit Tests

Planning the audit, the auditor should discuss with other members of the audit team of the exhibition if the company recognized the value of the misconceptions in the financial statements due to fraud or error. In planning the audit, the auditor should make inquiries ...