Factors Involved in Fraud Cases with External Auditors Essay

Factors Involved in Fraud Cases with External Auditors - Essay Example As financial statements represent the functioning of the management, it is essential to maintain authenticity and reliability for avoiding fraudulent actions, while preparing such reports. The auditors express their views associated with the maintenance of authenticity and transparency by the management. They have been given the authority to assess these financial statements of organizations in order to judge the transparency of such information. They gather evidences in order to assure that the figures appearing in financial statements do not include material misstatement. The credibility of such reports is incremented by means of the audit process carried out by the auditors. These reports audited by auditors have huge impact on the decisions of investors, bankers, creditors and other stakeholders. The economy is struggling hard for recovering from a tumultuous situation which is infested with severe corporate scandals associated with misconduct of the auditors which have resulted in losing investor’s confidence. Presently, greater emphasis is given on improving the credibility, accountability, transparency and trust associated with the information provided in financial statements (Romero, 2010). The present structure involved in the audit process seems to be very problematic. Most of the big organizations generally pay their auditors by means of a third party known as the ‘audit system’. There are cases where clients make these payments directly to the auditors. In such cases, there is an added incentive paid by the clients to the auditors for delivering favourable news. Now the question which arises is whether such actions affect the real performance of auditors or influence them to lose their independence (Cooper & Neu, 2006). Actually, it does affect the real performance of auditors, thereby reducing the transparency and authenticity of the information in their audit reports. The auditors manipulate the figures in these financial state ments in order to earn high incentives. This has become one of the most remarkable issues requiring urgent attention in the present scenario. The thesis would be conducted on the topic, ‘Factors involved in fraud cases with external Auditors’. It would be done by dividing the entire analysis into three segments. The study would highlight that the auditors are influenced in three different ways: conflict in interest, double positioning threat and finally, the familiarity threat. Analysis Conflict in Interest The auditor’s independence is the major area of concern in this study. It is known that the managers have an interest in misrepresenting, exaggerating or manipulating the information provided in the financial statements of organizations. It is expected that an independent audit report must provide unbiased and credible appraisal related to the financial status of an organization. The significance of the auditor’s independence has been shown in American Institute of Certified Public Accountants’ (AICPA’s) Code of Professional Ethics. It has been made mandatory by various legal decisions, which are provided by the Supreme Court of United States, in their opening quote. Recently, there was a series of events which has raised questions regarding the independence involved in the present practices related to accounting.