Should Auditors be Blamed for The Fraud? (or Literally Everything)

Although it seemed like a rhetorical question in which every student who has taken their
obligatory Audit course during university are able to answer this, it turns out that there has been
a never-ending confusion about auditors responsibilities for detection of fraud. Commoners
would think that it is the auditors job to be responsible for fraud since they are responsible to
verify and analyze the company’s financial statements and investigate whether it is in
compliance with the appropriate standards. Not only commoners, those people on the top level of
management who do not thoroughly comprehend the actual meaning of audit would also blame
auditors for the fraud that occurs in their management. But, the real question is, should auditors
really be responsible for the fraud the missed and be given the blame?
Before we discuss deeper about whether auditors are the party that should take the blame
when the client is accused to have a fraud, it is important to acknowledge the definition of
auditors first. According to ISA 240 the Auditor’s Responsibilities Relating to Fraud in an Audit
of Financial Statements recognises that misstatement in the financial statements can arise from
either fraud or error. The distinguishing factor is whether the underlying action that resulted in
the misstatement was intentional or unintentional. It is indisputable that an auditor of financial
statements has a fraud detection responsibility, but, to prove that the fraud is actually occurred,
that is the responsibility of a country’s legal system.
Despite the crystal clear definition of auditors stated on ISA 240, there had occurred
several cases that the external auditors are being held liable for the fraud. It might be caused by
the existence of what the auditing profession calls the discrepancy between what investors expect
and what auditors do; or it could be called as“expectations gap.” In recent years, audit firms have
been attempting to close the gap by educating the public on their role. Audits are not designed to
detect fraud but still there has to be someone to take the blame. One of the most concrete
example is the Enron’s case and its auditor, Arthur Andersen and Company.
Enron’s case became famous when it comes to the discussion related to audit and fraud.
Arthur Andersen, as the independent auditor has been found guilty by the U.S. federal court
towards several allegations, such as improperly categorized hundreds of millions of dollars as
increases in shareholder equity, thereby misrepresenting the true value of the corporation. Arthur
Andersen also did not follow Generally Accepted Accounting Principles (GAAP) when it
considered Enron’s dealings with related partnerships. These dealings helped Enron to conceal
some of its losses. In this case, it is right to say that Arthur Andersen had to take the blame since
they were not in accordance with the audit standards which highlighted the responsible for
obtaining reasonable assurance that the financial statements as a whole are free from material misstatement, whether caused by fraud or error. It is not their job to breach the standards and
contributing in concealing the losses occurred in Enron’ company.
To conclude and response the initial question posed in this article;whether the auditor
should be held liable or not, the answer is still on the grey area and not as clear as it appears to
be. The common misconception is that external auditors – who are sometimes inaccurately
perceived as being some sort of account ‘detectives’ or ‘investigators’ – will likely be able to
uncover any fraudulent activity that may occur. That may be true to some extent but the very
nature of fraud is collusive, at times preventing even the most experienced professional from
uncovering its existence in a timely manner. The main idea is, as long as the auditor has a
professional skepticism and prevents the occurrence of conflict of interest among clients, unlike
what happens between Enron and Arthur Andersen, then it is fair to say that auditors does have
the full right to write off the responsibility for fraud.