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Fraud-errorTRANSCRIPT
FRAUD AND ERRORS IN AUDITING FINANCIAL
STATEMENTS
BY
CAN MAI HUONG
E0700241
BACHELOR OF BUSINESS (ACCOUNTING) HONS
HELP UNIVERSITY COLLEGE
OCTOBER, 2011
FRAUD AND ERRORS IN AUDITING FINANCIAL
STATEMENTS
BY
CAN MAI HUONG
E0700241
Graduation Project Submitted to the Department of Business Studies, HELP
University College, in Partial Fulfilment of the Requirements for the Degree of
Bachelor of Business (Accounting) Hons
OCTOBER, 2011
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Declaration of Originality and Word count
DECLARATION
I here by declare that this graduation project is based on my original work except for
quotations and citation that have been duly acknowledged. I also declare that it has
not been previously or concurrently submitted for any other courses/degrees at HELP
University College or other institutions. The word Count is words.
Can Mai Huong
October, 2011
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Acknowledgements
This project would not have been made possible without the assistance, support and
encouragement of many people. I wish to take this opportunity to thank all the people
who have helped me during the time of completing the dissertation.
Firstly, I would like to express my deep gratitude to my supervisor at the
International School – Vietnam National University Ha Noi (ISVNU). He has kindly
helped me and supported me all the way through. For that, I am very grateful. I also
would like to express my thank to and at Help University College, who initiated the
project and give so much instruction and support.
In addition, a huge thank for all managers, accountants, personnel who sacrificed
theirs time to answers my questionnaire.
CAN MAI HUONG
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ABSTRACT
FRAUD AND ERRORS IN AUDITING FINANCIAL
STATEMENTS
BY
CAN MAI HUONG
OCTOBER, 2011
Supervisor: PHAM DUC HIEU
During the audit, there are always fraud and errors which are not detected and falsify
financial statements. To reduce the risk of undetected fraud affecting seriously the
financial statements and to express a right opinion on financial statements, auditors
need to concern about fraud problem and the possibility of fraud during the audit. In
fact, there is always a difference between the expectations of users of financial
statements expected from auditors and what auditors can meet. Because the user
thinks that auditors absolutely ensure honest and reasonable financial statements
while it is very difficult for auditors to do this. To narrow this gap, auditors have to
not only explain the limitations and scope of the auditing industry to users of
financial statements but also continuously improve the professional capacity of
individuals to find out our fraud and errors falsifying financial statements seriously.
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Table of Contents
Declaration of Originality and Word count ....................................................................... II
Acknowledgements ........................................................................................................... III
ABSTRACT ................................................................................................................... IV
Table of Figures ............................................................................................................. VIII
List of Abbreviations......................................................................................................... IX
Chapter 1: INTRODUCTION ......................................................................................... 1
1.1 Research background ............................................................................................. 1
1.2 Problem statement .................................................................................................... 2
1.3 Research question ..................................................................................................... 3
1.3.1 Fraud and Errors in the worlds ................................................................................... 3
1.3.2 Fraud and Errors in Vietnam ...................................................................................... 5
1.3.3 Research statement .................................................................................................... 6
1.4 Thesis structure ..................................................................................................... 7
Chapter 2: LITERATURE REVIEW ............................................................................. 9
2.1 Definition of Fraud and Errors ............................................................................... 9
2.1.1 Definition of Fraud .................................................................................................... 9
2.1.2 Definition of Errors ................................................................................................ 10
2.1.3 Compare Fraud and errors ..................................................................................... 10
2.2 The Forms of Fraud .............................................................................................. 11
2.2.1 Forms of fraud ..................................................................................................... 11
2.2.2 Forms of errors ......................................................................................................... 11
2.3 Factors affecting the fraud and errors ................................................................... 11
2.4 Related Theory ....................................................................................................... 13
2.4.1 The Control Fraud Theory ...................................................................................... 13
2.4.2 The ―Fraud Created the Market‖ Theory ................................................................ 15
2.5 The common method to fraud in auditing financial statements ............................. 18
2.5.1 High declaration (or perjury) revenue ...................................................................... 18
2.5.1 High declaration (or perjury) revenue ...................................................................... 19
2.5.2 Note the year wrong ................................................................................................. 19
2.5.3 Conceal liabilities and expenses............................................................................... 19
2.5.4 Declare not enough information............................................................................... 19
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2.5.5 Apply underestimated method ................................................................................. 19
2.6 Motive for fraud and errors in financial statements of enterprises. ....................... 20
Chapter 3 : RESEARCH METHODOLOGY .............................................................. 22
3.1 Research method .................................................................................................. 22
3.1.1 Quantitative methodology ........................................................................................ 22
3.1.2 Qualitative methodology ......................................................................................... 22
3.2 Data source........................................................................................................... 23
3.2.1 Secondary data ........................................................................................................ 23
3.2.2 Primary data ............................................................................................................ 23
3.3 Research tool ........................................................................................................ 23
3.3.1 Internet tool ............................................................................................................. 23
3.3.2 Questionnaire .......................................................................................................... 24
Chapter 4: FINDING AND DISCUSSION .................................................................. 25
4.1 Questionnaire Results .......................................................................................... 25
4.1.1 Question 1: Among the following errors, please indicate types of errors that
you often see in auditing the Financial Statements? ......................................................... 25
4.1.2 Question 2: In your opinion, for which of the following reasons lead to act of
embezzlement? .................................................................................................................. 26
4.1.3 Question 3: In your opinion, for which of the following reasons lead to fraud
on the Financial Statements? ............................................................................................. 27
4.1.4 Question 4: In your opinion, which sectors or fields often occur high risk fraud: ............... 27
4.1.5 Question 5: You tell me about the person who implements fraud often holds
which position at the Company: ........................................................................................ 28
4.1.6 Question 6: In your opinion, in two age groups which groups often implement
fraud: ................................................................................................................................. 28
4.1.7 Question 7: During forms of revenue fraud, which the following form you
often face up to: ................................................................................................................. 29
4.1.8 Question 8: In terms of business management, in your opinion, which factor
plays a decisive role in preventing the frauds in the financial statements? ...................... 30
4.2 Interview results ................................................................................................... 30
Chapter 5 : CONCLUSION AND RECOMMENDATION ....................................... 35
5.1 Lessons for Vietnam .............................................................................................. 35
5.1.1 Enhance responsibilities of auditor for fraud and errors: ........................................ 35
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5.1.2 Regularly update auditing standards including standards related to fraud and
errors: ................................................................................................................................ 35
5.1.3 Should release guidance on procedures for fraud detection .................................... 35
5.2 To raise the responsibility of auditors for fraud and errors in the audit of
financial statements ...................................................................................................... 36
5.2.1 Ministry of Finance still performs a key role in releasing auditing standards: ....... 37
5.2.2 Take legal proceedings against the whole organizations of Vietnam association
of accounting and auditing ................................................................................................ 38
5.2.3 Always update released auditing standards: ............................................................ 38
5.2.4 Should release detailed guidance ............................................................................ 38
5.2.5 Attach special importance to human resource training to the regional level .......... 39
5.3 Solutions for auditing companies......................................................................... 40
5.3.1 Strengthen controlling the internal quality of auditing companies ......................... 40
5.3.2 Strengthen procedures for detecting fraud in auditing program.............................. 40
5.3.3 Improve the training quality of auditors .................................................................. 40
5.4 Conclusion ........................................................................................................... 41
APPENDICES ................................................................................................................. 44
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Table of Figures
Figure 1: compare between Fraud and Errors
Figure 2: Types of errors
Figure 3: Reasons lead to act of embezzlement
Figure 4: Reasons lead to fraud on the Financial Statements
Figure 5: Fields often occur high risk fraud
Figure 6: Person who implements fraud
Figure 7: Age groups often implement fraud
Figure 8: Forms of revenue fraud
Figure 9: Factor plays a decisive role in preventing the frauds
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List of Abbreviations
WTO: World Trading Organization
U.S: United Stated
BTCC: Bach Tuyet Cotton Corporation
A&C: Auditing and Consulting
ACCA: Association of Characted Certified Accountant
CEO: Chief Executive Officer
CFO: Chief Financial Officer
ACFE: Association of Certified Fraud Examiners
VACPA : Vietnam Association of Certified Public Accountants
ISA: International Standards on Auditing
KPMG: Klynveld Peat Marwick Goerdeler
E&Y: Ernst & Young
PwC: Price waterhouse Coopers
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Chapter 1: INTRODUCTION
1.1 Research background
There always exist hidden fraud and errors causing mistakes to financial statements.
To reduce risks of not discovering frauds which seriously affect financial statements
and to give right opinions about financial statements, auditors need to study fraud
and ability of fraud appearance during audit process. In fact, there always exists
difference between expectation of financial statements readers in auditor and what in
fact auditors meet their expectation as readers know that auditors must ensure the
absolute honesty and reasonability, but auditors cannot do that. To address with this
problem, besides explaining the scope and limitation of audit sector, auditors must
incessantly improve their competence and professional knowledge to discover fraud
and errors causing essential errors to financial statements.
Within the framework of the market economy, the demand of information receipt and
delivery, especially financial data which always plays an important role in making
business decisions. The transparency, truthfulness of financial data plays a key role
in stabilizing the securities market and the society.
Recently, a lot of big financial frauds have occurred in the world, producing a stir in
world opinion. People are surprised about not only economic losses due to fraud but
also the methods of fraud implementation. Except for employees and senior leaders
of the company, independent auditors are also involved in implementing a fraud in
which Enron fraud is a typical example.
In Vietnam, many frauds have occurred on the Financial Statements in recent years.
The failure to detect fraud is caused by many reasons in which must include the
responsibilities of auditor and auditing company. Because independent auditing
profession in Vietnam has just started for over 15 years, this period isn’t long enough
to have a professional staff of auditors corresponding to the world level. In addition,
the legal environment for auditing sector is taking steps to build and gradually
complete; therefore, it’s still inadequate.
Hence, improve the quality of independent auditing activities, strengthen the
responsibility of auditor in respect of detecting fraud and errors on the Financial
Statements is still a topical question with a view of enhancing the transparency,
reliability of financial data in making economic decisions.
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Therefore we should incessantly study fraud and errors in accounting and auditing.
To better understand such fraud and errors, I will present about the topic ―FRAUD
AND ERRORS IN AUDITING FINANCIAL STATEMENTS‖.
1.2 Problem statement
In order to better understand fraud and errors in auditing financial statements of
recent companies, we need to answer some following questions: What is fraud and
errors? In broad sense, fraud is illegal behaviors to cheat then to gain benefits.
There are three most common ways to make fraud, namely: appropriation,
defrauding and embezzlement.
In accounting aspect, according to international accounting standard No 10, fraud
and errors are defined as errors in calculation, in application of accounting policies,
unreal explanation, fraud or intentionally missing out.
In auditing aspect, according to international auditing standard No 240 in 2004,
fraud and errors are defined as follows:
Errors are non-intentional mistakes which affect financial statements such as missing
out an amount of money or not declaring information in financial statements.
Common examples about errors are errors during data collection and processing and
presenting it in financial statements, errors in accounting estimations, or application
of underestimated accounting principles.
The second question: Why are fraud and errors important in auditing financial
statement? In recent years, there have had much fraud in financial statements.
Inability to discover these frauds are due to many reasons including responsibility of
auditors and auditing companies. As the job as independent auditor has just been
present in Vietnam for more than 15 years, this time is not long enough for auditors
to have an international professionalism and competence. In addition, legal
environment for auditing sector has been step by step established and completed,
thus it still has many problems.
Therefore, improving quality of independent auditing activities and enhancing
responsibility of auditors in discovering fraud and errors in financial statements is a
topical question so as to improve transparency and reliability of financial information
in economic-related decision making. The thesis will focus on analyzing some
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popular fraud in financial statements in the world and in Vietnam, then to propose
effective approaches for auditors to discover fraud and errors in auditing financial
statements. In addition, the thesis also combines with macro solution group to
complete legal corridor for auditing profession.
The third question: Influences of fraud and errors in auditing financial statements
for enterprises in Vietnam? In the market economy, demand of giving and receiving
information, especially financial information plays a highly important role in making
business decisions.
Transparency and honesty of financial information has great importance in
stabilizing securities market and society.
In recent years, there occur many financial frauds which produce a stir in world
opinion. People are not only surprised about economic detriments caused by fraud
but also ways of making fraud. People making fraud are not only staffs and senior
managers of companies but also independent auditors.
1.3 Research question
1.3.1 Fraud and Errors in the worlds
Fraud appears together with the appearance of human society. Together with the
development of the society, fraud is more and more sophisticated and shown in
various forms. Source of fraud is the transformation in which each individual from a
separate life starts to live into community. The embryonic form of fraud is the
embezzlement of property in order to satisfy personal demands.
Fraud develops together with the birth and development of the economy. In the
industrial revolution, there appeared a series of enterprises with the separation
between ownership and management function. This separation gave birth to a new
form of fraud which was fraud between managers, staffs and their owner.
Manifestation of this form of fraud was embezzlement of property. By 20th
century,
rapid development of the world’s economy, especially the importance of securities
market – a most effective channel of capital mobilization of the world’s financial
market, lead to many new forms of fraud which are made by some members in board
of Directors of among staffs.
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At the end of the 20th
century, the bankruptcy of a series of world’s leading economic
groups brought about serious downturn of a whole sector. The society was once
surprised by a fact that there are more and more frauds in the society, in which the
most typical fraud at the end of 20th
century were of Enron, Worlcom, Xerox, Nicor
Energy LLC.
Enron: In 1990s of the 20th
century, Enron was one of world’s leading companies
doing business in energy. Its business had been highly efficient. However, at the end
of the 20th
century, its business results were more and more declining. The late 6
months in 1999, the company’s profit was 325 million dollars while the late 6
months in 2000 its profit was just 55 million dollars. To maintain trust of the public,
Enron had exaggerated its profit in its financial statements. The fraud was not only
made by one person or some people but it was the collusion of many people
including members in the Board of Management. The group making fraud was the
Governance of the Company and even the auditing company. To hide its declining
business, the Company had some ways such as:
- Use methods evaluating assets and debts according to market price. If this
method is used, there will appear in financial statements ―virtual‖ income which
cannot be converted into money;
- Hide its debts and costs: To do this, Enron has established a series of child
companies which act as buyer and seller to so that it can hide its debt and loss.
Although the financial statements announced loans which were declining, in fact
during early 9 month in 2000 its debt due increased dramatically. During that time,
Enron had borrowed additional 3.9 billion dollars, raising total debt by September of
13 billion dollars; ratio of due debt over total working capital accounts for 50%, in
stead of 39% in 1999.
Besides high declaration of its income and concealing its expenses, Enron also on its
own initiatives change information about energy market in Texas, in California and
bribe Government of foreign countries in wining energy contract in foreign
countries.
Worldcom: In Mart 2002, this Company was accused of making fraud though
capitalization of an operating cost of 3.8 billion dollars and thus making up a
respective profit by U.S Securities and Exchange Commission, public prosecutor in
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New York. In addition, there was an illegal fraud of its founder – Mr. Bernard Ebber
who had borrowed an amount of 400 million dollars which had not been recorded
and declared in its financial statements.
Xerox: In June 2000, U.S Securities and Exchange Commission accused Xerox of
declaring wrong information in its financial statements for 5 years, high declaring an
income of 1.5 billion dollars. To correct its fault, Xerox agreed to pay a fine of 10
million dollars for U.S Securities and Exchange Commission and re-prepared its
financial statements from the year 1997 honestly and transparently. Board of
Directors of the Company also committed to obey requirements of Securities Law
and ensure there would have no fraud and error in its financial statements.
Nicor Energy LLC: In July 2002, this Company made fraud in its financial
statements but the independent auditor had not discovered. Its fraud was mainly high
declaration of revenue and missing out costs. After that, Nicor Energy LLC adjusted
its financial statements and currently it has established a reliable accounting system.
Above fraud appeared in early the 21st century, this means that together with the
development of the economy, fraud techniques are more and more developed, more
sophisticated and made by collusion of many people. While before the year 2000,
fraud was mostly embezzlement made by some members in Board of Directors or
staff of company, in recent years there have emerged new forms of fraud which are
fraud in financial statements. People making fraud are not one person or some people
but a group of people including Board of Directors, Board of Management and
Auditing Companies. Adverse impacts of fraud are much greater and on many people
in the society.
1.3.2 Fraud and Errors in Vietnam
In recent years in Vietnam, a series of fraud in economy, commerce and financial
statements discovered have shown that fraud occurs in all form of enterprises: State-
owned enterprises, joint stock companies, private enterprises and in all sectors:
commerce, production, construction…Although these frauds are as not serious as in
other countries in the world, it exerts great influences on the economy and belief of
people in financial statements of companies, especially listed companies in securities
market. Typical examples of fraud in financial statements of listed companies are of
Bien Hoa Confectionery Corporation - Bibica, Bach Tuyet Cotton Corporation
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(BTCC) ), Ha Long Canned Food Stock Corporation, etc. In addition, according to
statistics of Stox.vn1, by 20
th April 2009, among 357 enterprises listed in securities
market, there have had at least 194 companies having disparity between results
before and after auditing, in which many enterprises have great disparity in business
results (more than 10%). And there have been 47 enterprises having difference in
business results before and after auditing of up to 50%.
Through fraud in financial statements of companies in recent time, we can conclude
their ways of making fraud as follows:
Companies have made up its revenue and income, and recorded decrease of costs.
Recording decrease of costs are often made through capitalization of cost, not full
depreciation of provisions, especially provisions for devaluation of financial
investment, provision for bad debts. Companies can also transfer some costs to next
year or change methods used in prime cost accounting, method of calculating
depreciation. For example, for Bibica, concealing its loss in financial statements in
2002 was made by recording 5,565 billion dong of business operation expense into
cost for construction in progress and making up income of 1,337 billion dong. Or for
financial statements of BBT, the company has not made depreciation for devaluation
of goods in stock, changed depreciation policies leading to decrease depreciation
expense of about 1,253 billion dong compared to that of 2004; not accounted product
advertisement expense which it has paid during the year.
Motive for fraud is because managers have to suffer from pressure in which they
have to reach a target about revenue, profit or company wants to maintain market
price of its shares while it is facing difficulties in business and financial state.
1.3.3 Research statement
According to Mr. Ho Van Tung, Manager of Auditing Division, Auditing and
Consulting Company Ltd (A&C): ―Auditing is a job which has many risks as when
Auditors give their opinions about financial statements which have been prepared
and presented by Board of Directors of the audited company, they can give wrong
opinions when there are fraud and errors in the financial statements which have not
1 Stox.vn – Intensive securities financial information. This is a website providing financial
information about all Vietnam’s enterprises listed in securities market.
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been discovered. On the other hand, the pressure of completing a great volume of
work in short time easily make mistakes. Thus auditing is a challenging job for
auditors. Therefore, this job not only requires auditors to have sufficient knowledge
and skills in auditing and accounting, ability to supervise their work, ability to make
judgments and discover auditing risks, but they also need to have good
understanding about relevant regulations and law, have experiences and through
understanding about business activities of customers‖. 2
Vietnam is on the first phase of market economy. Vietnam’s auditing sector has been
operating for 20 years, but it is still quite young compared to other countries. Thus,
knowledge I have learnt in the subject ACCA3 help me easily grasp changes in the
sector as well as new regulations about accounting and auditing. On the other hand,
knowledge and skills of the course also help me to improve professionalism in my job.
So why are fraud and errors important in auditing financial statements?
Influences of fraud and errors in auditing financial statements for Vietnam’s
enterprises?
In order to understand more about fraud and errors, this study will focus on fraud and
errors in auditing financial statements.
1.4 Thesis structure
The remainders of this research is organised as follow
Chapter 1: Introduction, conclusion, references and appendix.
Chapter 2 ―Literature review‖ starts with definition of fraud and errors in auditing
financial statements so that readers will have a general view about fraud and errors.
Some theories and researches related to fraud and errors concepts present through
different collections, summaries and discussion. Followed by parts: Forms of fraud
and errors, factor affecting fraud and errors, common ways to make fraud and errors
in financial statements, responsibilities of auditors for fraud and errors, relationship
2 Source: www.ftmsglobal.edu.vn
3 ACCA: (Association of Chartered Certified Accountants) is one of certificates issued by
Association of Chartered Certified Accountants of the U.K which is acknowledged and highly
appreciated in the world. ACCA is leading certificate in auditing – accounting – finance – banking in
the U.K and other developing countries in the world.
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between fraud and errors and ethic issue. At the end of this chapter, I myself will
give some of hypothesises hereof.
Chapter 3: Research method is presented with different parties such as, data source,
research tools.
Chapter 4 : The results of research, my findings through the questionnaire are
available in the fourth chapter. This chapter also presents the limitation during the
research.
Finally, Chapter 5 will give some implication for Government and Enterprises and
eventually the conclusion of this research.
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Chapter 2 : LITERATURE REVIEW
2.1 Definition of Fraud and Errors
2.1.1 Definition of Fraud
Fraud is behaviors which intentionally make mistakes to economic and financial
information implemented by many people in the organization or the third party,
exerting influences on audited subject.
In finance-accounting, fraud can simply be the behavior of intentionally violating
property, embezzling public funds, embezzlement and corruption, etc. Violating
property often attaches with distorting accounting information such as incorrectly
recording operations, faking or repairing vouchers, concealing documents and
covering up clue, etc.
For example: When checking the cutting down on sales revenue in some customers,
among selected operations, auditors have picked up an operation relating to revenue
from a customer; based on business evaluation of other auditing, the auditor
discovers that this customer is one main buyer. This operation is not often and
considered as being essential. Documents relating to this operation have been
collected, including evidence relating to payment of accounts receivable after the
closing date of financial statements of the year. However, document relating to
waterway delivery have not been given. After being analyzed, it proves that there is
no record about delivery process. Although there is evidence about payment, nothing
proves that goods had been delivered. So more analysis is done, auditor asks for
invoices of the company. Auditor has proved that some invoices for ―special
services‖ have been given to customer when they are paid. These invoices are less
detailed than other invoices in the document file and they cannot be clarified through
orders or documents receivable. These special invoices have shown that such sale
operation is absolutely doubtful. This problem is discussed with Financial Officer
who gives an incorrect explanation. After meeting Board of Management, the auditor
meets the Financial Officer again and informs that the problem is being investigated.
The Financial Officer has colluded with Managing Director to make plan to increase
sales so as to gain revenue target. As the Financial Officer wants to validate the
problem,, he chooses a main customer to involve in this. He will instruct directly the
customer to fill in the invoice and give it back within 30 days. After that he will
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coordinate and ―make up‖ virtual sale to company of the customer with respective
amount of money. Within 30 days paying this virtual sale, the customer will defer the
payment. At the end of accounting period, this dishonest sale will be recorded in to
revenue. This helps the Financial Officer to reach sales target.
2.1.2 Definition of Errors
Errors are non-intentional mistakes influencing on financial statements such as
missing out an amount of money or not declaring information in financial statements.
Common examples about errors are ones in data collection and processing and its
presence in financial statements, errors in estimations or application of
underestimated accounting principles. Errors can be very serious such as violating
regulations about finance and accounting, repeated errors or errors of big
scale…however they are non-intentional.
2.1.3 Compare Fraud and errors
Similarity: Both of them are mistakes, causing misleading information and
reflecting incorrectly fact.
Difference:
Point of
comparison Fraud Errors
Form
- Fraud is intentional behavior
with careful calculation to gain
benefits.
- Errors are non-intentional
behavior; they are just simple
missing out information or due
to limited competence and
carelessness in working…
causing mistakes.
Sophisticati
on
- As fraud is intentional behavior,
it is more sophisticated than errors.
When making fraud, people are
often well-prepared and have
careful calculation, thus it is
difficult to detect fraud than errors.
- As errors are non-intentional
behavior, they are as not
sophisticated as fraud and it is
easy to detect errors.
Essence - Fraud is always considered as
essential mistakes.
-Depends on scale and essence
of errors.
Figure 1: compare between Fraud and Errors
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2.2 The Forms of Fraud
2.2.1 Forms of fraud
Distort, fake voucher and documents
Repair accounting vouchers and documents
Embezzle property
Conceal or intentionally miss out economic information, document or
operation
Record economic operation incorrectly
Intentionally apply underestimated accounting standards, principles, methods
and system, financial policies.
Intentionally make incorrect mathematic calculations
2.2.2 Forms of errors
Make mistakes in mathematic calculation or record wrongly
Miss out or wrongly understand economic operations
Apply underestimated accounting standards, principles, methods and system,
financial policies non-intentionally
2.3 Factors affecting the fraud and errors
Limitations in designing and performing internal control system
Existing limitations of auditing activities
Issues relating to probity or competence of Board of Directors, such as;
Management is controlled by a person or a group of people, lacks effective
supervision of Board of Directors or Board of Management.
Organizational structure of audited company is complicated intentionally
Powerless in overcoming shortcomings of internal controlling system while
such shortcomings can be absolutely overcome.
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Frequently change chief accountant or responsible person in accounting and
finance division
Lack accounting staff in a long time
Arrange person who is not specialized in accounting or being restricted by
law to work as an accountant
Frequently change law consultant or auditor
Unusual pressure in the organization or from outside environment such as:
o It has difficulties in its fields of business
o Lack capital for doing business due to loss or too rapid expansion of company
scale
o Income declines
o Enterprise intentionally accounts increase in profit so as to magnify its
operation
o Too rapidly invest in new field of business or products which leads to
financial imbalance
o Enterprise is dependent on some products or some customers
o Financial pressure from investors or managing levels in the organization
o Pressure on staff to complete their work in short time
o Abnormal operations or economic events such as operations occur at the end
of accounting year have impacts on revenue, cost and results
o Complicated operations or accounting treatment methods
o Operations with related parties
o Costs are too high compared with provided services
Difficulties relate to sufficient collection of reasonable auditing evidence:
Accounting documents are insufficient or not provided promptly
Insufficient archive about economic events and operations.
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Great discrepancy between accounting book of the organization with
confirmation of the third party, conflicts of auditing evidence, in ability to
explain changes of operating indicators.
Board of Directors refuses to explain or their explanations do not meet
auditor’s requirements
Factors from informatics environment relate to above situations and events
such as:
In ability to get information from computer
There are changes in computer programs but documents have not been
saved, approved and tested.
Information and documents printed from computer are not compatible
with information in financial statements.
Information and documents printed from computer are different each time
of printing.
2.4 Related Theory
2.4.1 The Control Fraud Theory 4
Control fraud theory was developed in the savings and loan debacle. It explained that
the person controlling the S&L (typically the CEO) posed a unique risk because he
could use it as a weapon.
The theory synthesized criminology (Wheeler and Rothman 1982), economics
(Akerlof 1970), accounting, law, finance, and political science. It explained how a
CEO optimized ―his‖ S&L as a weapon to loot creditors and shareholders. The
weapon of choice was accounting fraud. The company is the perpetrator and a
victim. Control frauds are optimal looters because the CEO has four unique
advantages. He uses his ability to hire and fire to suborn internal and external
controls and make them allies. Control frauds consistently get ―clean‖ opinions for
financial statements that show record profitability when the company is insolvent and
unprofitable. CEOs choose top-tier auditors. Their reputation helps deceive creditors
and shareholders.
4 Source: http://bizcovering.com
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Only the CEO can optimize the company for fraud. He has it invest in assets that
have no clear market value. Professionals evaluate such assets-allowing the CEO to
hire ones who will inflate values. Rapid growth (as in a Ponzi scheme) extends the
fraud and increases the ―take.‖ S&Ls optimized accounting fraud by loaning to
uncreditworthy and criminal borrowers (who promised to pay the highest rates and
fees because they did not intend to repay, but the promise sufficed for the auditors to
permit booking the profits). The CEO extends the fraud through ―sales‖ of the
troubled assets to ―straws‖ that transmute losses into profits. Accounting fraud
produced guaranteed record profits-and losses.
CEOs have the unique ability to convert company assets into personal funds through
normal corporate mechanisms. Accounting fraud causes stock prices to rise. The
CEO sells shares and profits. The successful CEO receives raises, bonuses, perks,
and options and gains in status and reputation. Audacious CEOs use political
contributions to influence the external environment to aid fraud by fending off the
regulators. Charitable contributions aid the firm’s legitimacy and the CEO’s status.
S&L CEOs were able to loot the assets of large, rapidly growing organizations for
many years. They used accounting fraud to mimic legitimate firms, and the markets
did not spot the fraud. The steps that maximized their accounting profits maximized
their losses, which dwarfed all other forms of property crimes combined.
While agreeing that the S&L served as both a ―weapon‖ and a ―shield,‖ control fraud
theory cast doubt on those metaphors. Weapons and shields are visible; fraud is
deceitful. The better metaphors would be camouflage, or a virus. Control fraud
theorists rejected the economists’ metaphor, ―gambling for resurrection‖ (honest but
unlucky risk takers). Gambling cannot explain why control fraud was invariably
present at the typical large failure. There were over 1,000 felony convictions of
senior S&L insiders. Accounting fraud made control fraud a sure thing-not a gamble.
Control fraud theory predicts the pattern of record profits and catastrophic failure and
the business pattern of deliberately making bad loans. Both patterns are inconsistent
with honest gambling.
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2.4.2 The “Fraud Created the Market” Theory 5
In an August 16, 2010 opinion, the United States Court of Appeals for the Third
Circuit rejected use of the so-called ―fraud created the market‖ theory for securities
fraud claims. Malack v. BDO Seidman, LLP, No. 09-4475 (3d Cir. Aug. 16, 2010).
The ―fraud created the market‖ theory posits that a securities fraud plaintiff should
not have to prove individual reliance upon alleged misrepresentations if the plaintiff
can show that, absent the misrepresentations, the securities that the plaintiff
purchased would not have been offered for sale at all, on the premise that under such
circumstances the plaintiff’s reliance can be presumed. The Third Circuit’s ruling
adds to the split among the federal circuit courts of appeals on the viability of this
controversial theory, thus potentially presaging an eventual resolution of the issue by
the United States Supreme Court.
Background
The plaintiff in Malack had purchased notes issued by a subprime mortgage
originator. Those notes later became worthless after the decline of the subprime
mortgage sector. The plaintiff sued the accounting firm that allegedly provided clean
audit opinions that were used to obtain SEC registration of those notes, seeking
recovery on his own behalf as well as certification of a class of allegedly defrauded
purchasers of the notes.
The plaintiff did not allege that he had read, reviewed, or directly relied upon the
audit opinion that was the basis for his suit. Nor did he allege that the notes (which
did not trade on any securities exchange) traded in an ―efficient market,‖ such that
their price could be presumed to promptly reflect all relevant information available to
the investing public. Instead, in order to establish reliance upon the audit opinion,
the plaintiff alleged that ―without clean audit opinions, American Business would not
have been able to register the Notes with the SEC, the Notes would not have been
marketable, and Malack and the other investors would not have purchased the
Notes.‖
The United States District Court for the Eastern District of Pennsylvania denied class
certification, finding that Malack’s ―fraud created the market‖ theory lacked a legal
5 Source: www.chadbourne.com
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basis, and that without the theory, individual reliance issues rendered class
certification inappropriate. The Third Circuit agreed and affirmed.
The “Fraud Created the Market” Theory
The Third Circuit began its opinion by noting that a presumption of reliance has been
recognized by the United States Supreme Court in two circumstances. First, the
presumption has been recognized where a defendant failed to disclose material facts
despite having a duty to do so. Second, reliance may be presumed under a ―fraud on
the market‖ theory, which can be applicable when a plaintiff shows that the securities
at issue trade in an ―efficient market,‖ i.e., a market that can reasonably be presumed
to reflect the impact of false statements in the market price of securities, whether or
not the particular plaintiff ever saw or read such statements.
Some federal appeals courts, however, have recognized a third circumstance as being
appropriate for a presumption of reliance upon the alleged misstatements. Such
courts have recognized a ―fraud created the market‖ theory, which ―posits that the
securities laws allow an investor to rely on the integrity of the market to the extent
that the securities it offers to him are entitled to be in the market place.‖ Thus,
reliance should be presumed when a plaintiff shows that absent fraud, the securities
at issue would have been ―unmarketable,‖ and that the plaintiff ―purchased in
reliance on the market.‖ The theory assumes that investors are entitled to ―rely on a
security’s availability on the market‖ as an ―indication of its apparent genuineness.‖6
Other courts, though, have rejected the theory7.
The Third Circuit’s Analysis
The court analyzed the proposed ―fraud created the market‖ presumption by looking
to the factors that have traditionally led courts to create factual presumptions.
Presumptions, the court wrote, have traditionally been recognized where courts
conclude that the presumption is very likely to be accurate, such that it is ―sensible
6 This theory has been endorsed by the Fifth, Tenth, and Eleventh Circuits. See Shores v. Sklar, 647
F.2d 462 (5th Cir. 1981) (en banc); T.J. Raney & Sons, Inc. v. Fort Cobb, Oklahoma Irrigation Fuel
Auth., 717 F.2d 1330 (10th Cir. 1983); Ross v. Bank South, N.A., 885 F.2d 723 (11th Cir. 1989). 7 The theory has been rejected by the Seventh Circuit, see Eckstein v. Balcor Film Investors, 8 F.3d
1121 (7th Cir. 1993), and the Sixth, Eighth, and Ninth Circuits have declined to follow it in particular
cases without expressly ruling on whether it could never in any circumstances be viable. See
Ockerman v. May Zima & Co., 27 F.3d 1151 (6th Cir. 1994); In re NationsMart Corp. Sec. Litig., 130
F.3d 309 (8th Cir. 1997); Desai v. Deutsche Bank Sec. Ltd., 573 F.3d 931 (9th Cir. 2009).
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and timesaving‖ to apply a presumption. Presumptions have also, the court wrote,
been created to correct imbalances ―resulting from one party’s superior access to the
proof,‖ or in order to further congressional policy, or to avoid a ―factual impasse.‖
Creating a ―fraud created the market‖ presumption, the court held, was not warranted
in light of these considerations. Such a presumption would not be likely to
accurately reflect reality, because ―common sense‖ fails to support ―the idea that
securities on the market, by the mere virtue of their availability for purchase, are free
from fraud.‖ In particular, the court noted that a security’s availability on the market
should be taken as an indication of genuineness only if there were ―some entity
involved in the process of taking the security to market that acts as a bulwark against
fraud.‖ But to the contrary, the court wrote, all of the private actors involved in
bringing securities to market have incentives to act in a self-interested, and perhaps
dishonest, manner, so that it is not reasonable to assume that securities are free from
fraud simply because they have been brought to market.
Moreover, the court found that SEC approval of a securities registration statement
does not provide a reasonable basis to presume that the securities offered are free
from fraud, because the SEC’s role is limited to reviewing the registration statement
to ensure that it contains adequate disclosures. The court noted that the SEC does
not conduct ―merit regulation‖ of securities, seeking to determine whether the
offered securities are, in fact, a good investment. Nor does the SEC endorse offering
documents or vouch for their truthfulness.
The court further noted that even if a security were offered in a fraudulent manner,
disclosure of the truth will seldom render the security truly ―unmarketable,‖ since
―disclosure of adverse information may lower the price of a security, but it will not
prevent that security from going to market.‖ Finally, the court noted that unlike the
fraud-on-the-market theory, the ―fraud created the market‖ theory lacks a basis in
accepted economic theory.
The court additionally explained that policy considerations did not support
employing a ―fraud created the market‖ presumption. In particular, the court wrote,
such a presumption would actually reduce investors’ incentive to carefully read and
review the offering materials and fully research their investment, since with the
presumption they would be able to recover for any misstatements whether or not they
had reviewed the offering materials; ―moreover, an investor might seek rationally to
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avoid reading disclosures in order to preserve a possible claim‖ under the theory.
The court concluded that expanding the scope of private securities fraud actions is a
task that courts should not undertake without direction from Congress, and expressed
concern that recognizing the ―fraud created the market‖ theory could lead to a surge
in ―frivolous‖ securities fraud litigation and place excessive pressure on defendants
to settle meritless claims.
For these reasons, the court rejected the ―fraud created the market‖ presumption.
Thus, because without the presumption each plaintiff in the proposed class would
have to prove individual reliance, the court found class certification to be improper
and refused to recognize the case as a class action.
Implications of the Decision
The decision in Malack intensifies the circuit split among the federal courts of
appeals on, and thus increases the likelihood that the Supreme Court will be called
upon at some point to resolve definitively, the question of whether to adopt a ―fraud
created the market‖ presumption. The Third Circuit’s rejection of the presumption
will have the immediate effect of precluding plaintiffs within the Third Circuit
(which includes Pennsylvania, New Jersey, and Delaware) from relying on it. The
court’s analysis also serves as a reminder that reliance issues are sometimes the most
formidable barrier to class certification in securities cases, and that federal courts
increasingly have been skeptical of efforts to expand the scope and availability of
private securities class action lawsuits
2.5 The common method to fraud in auditing financial statements
2.5.1 High declaration (or perjury) revenue
One of results of ACFE is to summarize some common method to fraud in financial
statements through typical fraud. Some common methods to fraud are:
- High declaration of revenue;
- Difference in time;
- Not evaluating property sufficiently;
- Concealing liabilities and expenses;
- Not declaring sufficient information.
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2.5.1 High declaration (or perjury) revenue
High declaration of revenue is record in accounting book an unreal sale or services.
Usual technique is to create fake customers, make fake documents. High declaration
of revenue is also made through intentionally writing up parameters in invoices such
as quantity, selling price…or recording revenue when delivery conditions have not
been completed, ownership and risk responsibility for goods-services have not been
transferred to buyer.
2.5.2 Note the year wrong
Fraud in financial statements can also be done by wrongly noting the year in which
revenue or costs are not noted as right as at the time of its generation. Revenue or
cost of this year can be transferred to next year or previous year in order to gain
increase or decrease of income as they want.
2.5.3 Conceal liabilities and expenses
Conceal liabilities and expenses leading to expenses reduction is one of the most
common techniques to fraud in financial statements in order to highly declare
revenue. Before-tax profit will increase corresponding with concealed liabilities. This
is an easy method compared with the method of making up sales transactions. On the
other hand, it is difficult for auditors to discover this method as it often leave no
track. There are 3 main methods to conceal liabilities and expenses:
- Not note liabilities and expenses;
- Capitalize expenses;
- Sales return –deductions and warranty;
2.5.4 Declare not enough information
Declaration of not enough information is to limit analysis ability of financial
statements readers. Information which are often not declared sufficiently in Notes to
financial statements are potential liabilities, events after the closing date of the year,
information about relevant parties, changes in accounting policies.
2.5.5 Apply underestimated method
Application of underestimated method is very common technique to fraud.
Underestimations are often applied for following items: goods in stock, accounts
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receivable, purchased assets through business integration, fixed assets, not enough
capitalization of tangible expenses, not correct classification of assets.
2.6 Motive for fraud and errors in financial statements of enterprises.
Fraud in financial statements is one of hot topics nowadays, especially after the
bankrtupcy of a series of world’s leading companies at the beginning of 21st century.
Some bankrupted companies having fraud in financial statements are: Lucent, Xerox
, Rite Aid, Waste Management, Micro Strategy, Raytheon, Sunbeam, Enron,
Worldcom, Global Crossing, Adelphia, Qwest. Senior managers including Chief
Executive Officer (CEO) and Chief Finance Officer (CFO) of these companies are
said to involve in processing data to fraud in financial statements.
Discovering fraud in financial statements in big companies exerts a great concern on
the honesty, reasonability of financial statements. It is also great challenge for
managers as well as auditor in discovering fraud and mistakes in financial
statements. Therefore, fraud is always a topic gain much attention of many
researchers and various occupations.
Institute of Internal Auditor of US defines: fraud is unusual and illegal behavior so as
to cheat or give information incorrectly which that individual is fully aware that such
information is wrong or incorrect. People making fraud are fully aware of that their
behavior can bring illegal benefits for any individual or organization. Fraud can be
done by people inside or outside an organization.
Common forms of fraud include fraud in financial statements, embezzlement of
property and corruption.
Many studies have shown that staff will make frau when they have to suffer from
pressure, or when there is change and ability to rationalize/attitude.
Pressure or benefits are reasons for an individual to make fraud. Pressure and
benefits can be a bonus or financial award based on level of reaching financial target
of the company or of a division (for example, revenue growth, price of shares);
pressure of fulfilling analyzed indicators, maintaining the trend or obeying executive
board; personal loans exceeding control limit; family having people with serious
illness leading to mental and/or financial pressure.
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Opportunities will come when there is no controlling activity in the company or
inefficient controlling system leads to fraud. Inefficient control is reflected: executive
board abuses their power and ignores supervision methods; executive board
commands (for example, request their staff to fake documents); there is no
decentralization; there are essential shortcomings in constructing supervision
method; supervision methods do not operate as designed.
Ability to rationalize or attitude is the ability to defend the action of making fraud.
For example, people having fraud in causing discrepancy or increase data in financial
statements will defend themselves that their fraud is only short term, but it may
become true if business operation results or financial state of the company will be
better in next year, or they will defend that ―I only do as being requested‖. There will
be more likely to have fraud of that person is ―bad‖ who have attitude, characters or
ethics which make him have dishonest behaviors.
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Chapter 3 : RESEARCH METHODOLOGY
3.1 Research method
This research presents and discusses the summarized results of a baseline survey
conducted in the period January – September 2011 on the Fraud and errors in
auditing financial statements in Vietnam, combining quantitative and qualitative
methods. 20 medium-sized and large companies, both with Vietnamese, foreign or
mixed ownership structure have been analysed. The companies surveyed are both
public and private, from manufacturing, services, trade, IT and other sectors from all
over the country. These companies are randomly selected in order to have a
nationally representative survey.
3.1.1 Quantitative methodology
―Quantitative methods are research techniques that are used to gather quantitative
data — information dealing with numbers and anything that is measurable.‖ In this
study, quantitative methods are used to verify, which of such hypotheses, which were
proposed, are true. I used in this study statistics, tables and graphs to present the
results of these methods.
3.1.2 Qualitative methodology
―The qualitative method investigates the why and how of decision making, not just
what, where, when.‖ Qualitative methods are used in this project in order to produce
information only on the particular cases studied.
I interviewed one focus group with 3 participants who representatively manage Fraud
and errors actions in medium-sized and large companies. The objective was to
establish the understanding of Fraud and errors real situation, the motivations behind
it and the ways in which it is practiced, and the constraints and barriers before its
development in Vietnam. The represents interviewed are ones, whose enterprises
already have made or showed interest in detecting Fraud and errors behaviour in
auditing financial statements. Companies were questioned on their current
involvement in detecting Fraud and errors as well as their expectations of the
importance of limited Fraud and errors in the future.
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Moreover, after having received the results of the questionnaire, I realized that some
of my subjects weren’t motivated to give accurate answers. In fact, they could be
motivated to give answers that present themselves in a favourable light. So in
addition to the questionnaire, I interviewed a number of managers and accountants to
give them more information about the issue and also give them the chance to express
more about their thought.
3.2 Data source
In order to fulfill the accurate and reliable results for this study, it is necessary to use
both of secondary data and primary data.
3.2.1 Secondary data
Secondary data contents books, articles, researches, case studies and published texts
of different authors.
For this study, I tried by best to provide a wealth of background work, which means
that data have a pre-established degree of validity and reliability and the researchers,
who are re-using my data, don’t need too much time to revise or examine.
3.2.2 Primary data
After having gained some insight into the issue of this project by collecting
secondary data, I began searching primary data such as sending questionnaires, direct
observation and interviews to related people. One of the advantages of primary data
collections is to deliver the appropriate information that match the requirement of the
subject.
3.3 Research tool
3.3.1 Internet tool
In order to collect data, Internet is an indispensable tool, which provides a relatively
simple income source. Thank for this rapid information technology, the collection
has been done holding many advantages as time-saving and cost saving. Also method
chosen to communication was telephonically, especially via e-mail and by mail.
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3.3.2 Questionnaire
Between many methods of collecting data, I chose questionnaire method, which is
cheap and rapid. A nine-simple questionnaire survey was conducted with 60 auditors
from both public companies and private companies. Among those replies, there are 3
with a sorry for not able to answer my questionnaire. So in this part of my research, I
will present the results of 57 responses that I have received. The questionnaire
consists of a series of questions related to Fraud and errors in auditing financial
statements; most I didn’t create by my self but gathered from the first by the other
authors.
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Chapter 4: FINDING AND DISCUSSION
4.1 Questionnaire Results
I sent totally 82 emails to auditors in over 20 Vietnamese enterprises. But
unfortunately, there are only about 60 replies after 2 months. Among those replies,
there are 3 with a sorry for not able to answer my questionnaire. So in this part of my
research, I will present the results of 57 responses that I have received.
4.1.1 Question 1: Among the following errors, please indicate types of errors
that you often see in auditing the Financial Statements?
Results:
Contents Votes Ratio
Fraud on the Financial Statements 45 78%
Corruption 6 11%
Embezzlement 6 11%
Others 0%
Total 57 100%
Figure 2: Types of errors
In this situation, 78% of the auditors answered: the most common error in auditing
the Financial Statements is fraud on the Financial Statements, 11% of respondents
answered as corruption, 11% of remaining respondents answered as embezzlement,
and no auditor put forth any other error.
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4.1.2 Question 2: In your opinion, for which of the following reasons lead to
act of embezzlement?
Results:
Contents Votes Ratio
When the economy falls into crisis 0 0%
Under-appreciated capacity 25 44%
Not be paid salary satisfactorily 25 44%
There is a conflict between personal
interests and corporate ones
12 22%
Face up with financial difficulties 50 89%
Due to corruptibility 32 56%
Control procedures are ineffective 32 56%
Control environment is weak. 57 100%
Others (Please give details). 0 0%
Total 57 411%
Figure 3: Reasons lead to act of embezzlement
In this situation, 100% of the auditors answered that controlling environment is weak
leading to act of embezzlement, 89% answered that act of embezzlement is caused
by financial difficulties, 56% answered as corruptibility and ineffective controlling
procedures, 44% answered as Under-appreciated capacity and not be paid salary
satisfactorily and only 22% answered as conflict between personal interests and
corporate ones, no auditor put forth any other reason.
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4.1.3 Question 3: In your opinion, for which of the following reasons lead to
fraud on the Financial Statements?
Results:
Contents Votes Ratio
Economic crisis 12 22%
Suffer extraordinary pressures 32 56%
Suffer pressure on planned objectives 57 100%
Others 0 0%
Total 57 178%
Figure 4: Reasons lead to fraud on the Financial Statements
In this situation, 100% of the auditors answered that the common reason leading to
fraud on the Financial Statements was due to suffer pressure on planned objectives,
56% answered as suffer extraordinary pressures, and only 22% answered as
economic crisis, no auditor put forth any other reason.
4.1.4 Question 4: In your opinion, which sectors or fields often occur high risk fraud:
Results:
Contents Votes Ratio
Pharmaceuticals 6 11%
Consumer goods 32 56%
Chemicals 0 0%
Assembly 6 11%
Energy (electricity, petroleum, gas, etc…) 12 22%
Civil engineering 100%
Consultant, service 25 44%
Others 0 0%
Total 57 244%
Figure 5: Fields often occur high risk fraud
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In this situation, 100% of the auditors answered that civil engineering sector often
occurs high risk fraud, 56% answered as consumer goods, 44% answered as
consultant, service, 22% answered as energy, and only 11% answered as
pharmaceuticals and assembly, no auditor put forth any other sector of field other
than the above ones.
4.1.5 Question 5: You tell me about the person who implements fraud often
holds which position at the Company:
Results:
Contents Votes Ratio
Members of Board of Directors 44 78%
Members of Management Board 12 22%
Authorized staff 18 33%
Total 57 133%
Figure 6: Person who implements fraud
In this situation, 78% of the auditors answered that people who implement fraud are
members of Board of Directors, 33% answered as authorized staff, and only 22%
answered as members of Management Board.
4.1.6 Question 6: In your opinion, in two age groups which groups often
implement fraud:
Results:
Contents Votes Ratio
The younger 38 67%
The elder 18 33%
Total 57 100%
Figure 7: Age groups often implement fraud
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In this situation, 67% of the auditors answered that the age group often implementing
fraud is the young, and only 33% answered as the elder.
4.1.7 Question 7: During forms of revenue fraud, which the following form
you often face up to:
Results:
Contents Votes Ratio
Falsify documents. 25 44%
Change data on documents 18 33%
Establish subsidiaries for implementing
special transactions
32 56%
Conceal information on special sales
agreements
32 56%
Estimate revenue when selling price isn’t
determined
6 11%
Others (Please give details) 6 11%
Total 57 211%
Figure 8: Forms of revenue fraud
In this situation, 56% of the auditors answered that the common form in revenue
frauds is establish subsidiaries for implementing special transactions and conceal
information on special sales agreements, 44% answered as falsify documents, 33%
answered as change data on documents, only 11% answered as estimate revenue
when selling price isn’t determined and 11% answered as other forms.
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4.1.8 Question 8: In terms of business management, in your opinion, which
factor plays a decisive role in preventing the frauds in the financial statements?
Result:
Contents Votes Ratio
Good controlling environment 12 22%
Foundation and effective maintenance of the
controlling procedures 57 100%
No creation of the pressure for staff 6 11%
Regulations of the strict and clear reward and
sanction 25 44%
Other factors 0 0%
Total 57 178%
Figure 9: Factor plays a decisive role in preventing the frauds
In this situation, 100% questioned auditors answer that the factor which plays a
decisive role in preventing the frauds in the financial statements is foundation and
effective maintenance of the controlling procedures; 44% auditors answer that
regulations of the strict and clear reward and sanction is the decisive role; 22% select
the factor of good controlling environment; only 11% answer that the decisive factor
to prevent the frauds is no creation of the pressure for staff; and there are not any
auditors who give other factors beyond the above factors.
4.2 Interview results
4.2.1 Responsibilities of auditors for fraud and errors
The responsibilities of auditors for the mistakes of units begin from the target of
financial statements. Auditors are not responsible for detecting and preventing
mistakes in the unit. The responsibilities of auditors mainly relate to the expression
of their opinions on the audit statement, and to make that opinion auditors should
design and conduct an audit to ensure that financial statement does not have essential
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errors. With regard to fraud and errors, the main responsibility of auditors is to
consider the risks of having essential mistakes in the financial statement because of
fraud and errors. This responsibility is concretized through the following audit
procedures:
During the process of setting up the audit plan, auditors have to assess the risks of
fraud and errors, which can cause essential mistakes in the financial statement, and
have to interview the manager about any important fraud and errors detected. To
implement this, auditors need to research on the design and operation of internal
audit, simultaneously consider the conditions or events which increase the risks of
fraud and errors. For example, the complicity between the business and third person
can lead to distort the documents and can deceive auditors. Therefore, auditors do not
usually apply the special measures to the parts having errors, but they only focus on
clarifying the suspicion of fraud.
Based on risk assessments, auditors have to design and perform audit procedures to
ensure reasonable procedures which will detect mistakes because of fraud and errors
seriously affecting the whole financial statement. In other words, although audit has
latent restrictions as already stated, auditors always must have professional
scepticism.
When the above audit procedures provide evidences to show the ability of having
fraud and errors, auditors must assess their impacts to financial statements. If
auditors find that they can seriously affect financial statements, auditors must
perform the additional audit procedures.
After having performed the additional audit procedures, but there still are suspicions
about fraud and errors, auditors are supposed to:
+ Discuss the issues which need to be adjusted with the manager or announce in the
financial statement.
+ Consider the impacts of the event to the financial statement and audit statement.
+ Particularly for important errors and frau, auditors should consider their impacts to
other aspects of the audit, especially the reliability of directors’ explanations.
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Having suspicion of the fraud, auditors often have to notify the manager although the
fraud can not seriously affect the financial statement yet. Auditors also have to notify
of important errors or fraud really happened.
Unless every thing is too obvious, in general auditors do not think that the happened
fraud and errors are single and isolated. Because the essence of the errors is often
detected along the chain, auditors must be vigilant in detecting errors; the correlation
of these errors with other errors can lead to serious mistakes of the financial
statement.
When auditors suspect that the business managers relate to fraud, they need to
consider carefully the advantages and disadvantages of the parties, and should
consider that the revelation to whom is better. Auditor always has to remember that
the internal controlling system can become totally disable for the fraud of the
business managers, and the business managers can:
Ignore all the investigation, whereas they have the power to prevent the investigation
of the subordinates.
Order the subordinates to take notes the business dishonestly or suppress them.
Conceal the information relating to the business.
In the process of auditing, auditors are not absolutely necessary to show the
dishonesty of the managers, but auditors have to beware of the possibility of similar
cases:
The information is provided reluctantly or only provided after being delayed
unreasonably.
The business managers limit the scope of audit.
Auditors find out the important problems which had not been reflected in the audit.
If auditors suspect that certain members of the leader board of the business commit a
fraud, they have to implement the measures to verify or eliminate the suspicions.
When auditors believe in having frauds or can not eliminate the suspicions of the
business leaders’ fraud, they have to find other representatives to replace or find
other audit evidences. When top leaders of the business are suspected, auditors will
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have difficulty in choosing the alternative representatives and in collecting the audit
evidences. In this case, auditors can not fulfil their audit tasks and need to be
consulted legally to take actions in accordance with the reality.
In conclusion, if units do not have reasonable measures to the frauds, auditors have
to consider the possibility of withdrawing from the audit contract.
4.2.2 How to reduce fraud and errors in auditing financial statements.
In terms of independent auditing companies: audit companies should pay attention to
the development of treatment policy for the company staff better and better;
promulgate the specific regulations and sanctions relating to the handling of
violations of the company regulations, violations of auditors’ professional ethics;
build the processes of implementing tasks more specifically and closely, which is a
basis to control and evaluate the activities of the departments, sections and
individuals in the unit; focus on links with partners and audit groups in the
completion of the audit program, audit procedure, audit method, and training
updating knowledge, improving the qualifications of auditors; emphasis on the
rotation of officials and employees; survey the opinion of audit clients.
In terms of Ministry of Finance and career associations: they should speed up
drafting the Law on independent audit; build the roadmap of researching, drafting
and issuing the circulars on guiding the accounting standards, or at least the basic
audit standards; increase the annual quality control for audit companies (expand the
scope and duration of implementing the investigation); evaluate and rank audit
companies annually; issue regulations on the criteria of evaluating and grading the
quality of audits; step up to encourage the competition and election of typical audit
companies and talented individuals.
In terms of closely controlling the structure of non- audit services: non- audit
services, such as tax consultancy and investment consultancy, is a part of the
structure of service products which audit firms provide for customers, and is an
important basic to increase the quality of audit services. The balance of the
proportion of these non- audit services is very essential for the development of audit
services on the basis of increasing the actual quality that customers can feel from the
services of audit companies. The recent statistics show that now there is the
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phenomenon focusing on the audit services of financial statements or tax consultancy
with over 70% of revenue from these two activities. However, this imbalance will be
an underlying factor which increases the forms of audit services and reduces the
quality of audit services.
In terms of transparency of audit services: audit cost should be concretized by
transferring the package cost of audit into the cost which is easy to measure and
control (such as audit fees over time). Vietnam Association of Certified Public
Accountants (VACPA) or the State Securities Commission should have auditing
premium to compare and detect the abnormal fees. The audit companies also need
the transparency of audit expenses by the storage and presentation of data on
duration of conducting each audit and fees applied to the customers. In addition, the
audit companies also need to consider the factors affecting the cost of audit such as
the audit firm’s reputation, productivity and experience to conduct audits.
Somebody said that to avoid audit errors, people just hire auditors who have good
professional qualifications. However, it is impossible because auditors are often
controlled strongly by the external. Therefore, the leaders in audit sector should
understand it, which means that they have to grasp the nature of the problem, and
find the origin of audit errors and propose effective measures to avoid errors.
Naturally, it is not simple to propose specific measures to prevent audit errors,
especially in complex social situations, such as the personal relationships between
auditors and businesses audited, which are the origin of sophisticated errors. Enron
financial scandal is a typical example of the implicit relationships between a business
and some auditors.
Therefore, we need to build a mechanism so that in the view of the businesses,
auditors play a role similar to the role of tax officials rather than the role of partners
or consultants. It is a mechanism to determine the boundary between businesses and
audit companies and have effect to limit errors in auditing activities.
Without conducting a thorough reform of auditing field with the effective and
feasible solutions, it is very difficult to prevent the audit errors and to measure the
impacts of them.
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Chapter 5 : CONCLUSION AND RECOMMENDATION
5.1 Lessons for Vietnam
Based on research results and reality of fraud and fraud detection from a lot of
countries around the world, it can be inferred some lessons in Vietnam when
determining auditing procedures as well as responsibilities of auditor for fraud
detection during the process of auditing Financial Statements:
5.1.1 Enhance responsibilities of auditor for fraud and errors:
In the current context, fraud is a behavior occurred quite commonly and exerting a
great influence on the society. If it regards auditing standards as fundamental
principles of professional skill, not giving a demand of focusing on fraud and errors
won’t force auditor to comply with this demand. Thus, it should give a demand of
enhancing responsibilities of auditor for fraud and errors. In fact, many countries in
the world have a tendency to amend regulations on responsibilities of auditor for
fraud and errors towards enhancing responsibilities of auditor for fraud and errors.
5.1.2 Regularly update auditing standards including standards related to
fraud and errors:
Through researching the international auditing standards system and the US auditing
standards, it has shown that: As from the initial promulgation till now, standards are
always updated to be suitable to the economy’s change. For example, in the US: SAS
1 regulates responsibilities of auditor for fraud and errors, the US made 4
amendments for this standard: SAS 16 in 1977, SAS 53 in 1989, SAS 82 in 1997 and
most recently SAS 99 released in 2002 in stead of SAS 82. The International
Standards on Auditing (ISA) No. 240 in 1994 was also replaced by SAS 240 released
in 2004. While VAS 240 released in 2001 in Vietnam has been still based on the
international standards in 1994. Therefore, updating VAS 240 in conformity with the
world and the situation of fraud which has occurred complexly during past time is a
objective demand.
5.1.3 Should release guidance on procedures for fraud detection
Fraud is an non-destructive behavior that will have increasingly grown under more
delicate methods. Hence, in order to help auditors to have a thorough grasp of fraud
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and procedures for fraud detection, it should have a Committee specialized in
researching this matter and putting forth detailed guidance. The US is a pioneering
country in the field of fraud research, it has established Association of Certified
Fraud Examiners (ACFE) and totaled up common fraud techniques. The publication
of research results as well as summary of methods of implementing common fraud
and signs of fraud identification. Based on these results, auditor can establish
reasonable procedures in order to detect fraud. Therefore, the audit career should
have research works together detailed guidance with a view of assisting auditors to
make sharp professional judgments and perform an audit effectively.
5.2 To raise the responsibility of auditors for fraud and errors in the audit of
financial statements
In order to establish a perfect direction, it should pay attention to some
characteristics of Vietnam as follows:
Firstly, Ministry of Finance remains playing the key role in releasing auditing
standards till now. The economy of Vietnam is a socialist-oriented market economy.
So, Ministry of Finance remains playing the key role in releasing auditing standards
and relevant regulations till now. Although Ministry of Finance has recently made a
decision on transferring this authority to career association but the operations of
career association have still weak in both quantity and quality, Ministry of Finance
still plays a key role in releasing auditing regulations.
Secondly, the development of auditing careers in Vietnam has grown quickly: Up to
now, Vietnam independent auditing has just run over 15 years but developed quickly.
Quantity of auditing companies and auditors has interruptedly increased. Since
Decree 105 was released, quantity of subjects needed to audit has increased
considerably. Therefore, the auditing market has grown in both quantity and quality.
Thirdly, the gap between qualifications and experience of Vietnam and international
auditing companies is quite large.
The world’s leading auditing companies running in Vietnam have a long-standing
history and when entering into Vietnam market, they have had familiar customers
which are companies audited overseas by them. Thus, the remaining segments of the
market belong to new auditing companies of Vietnam. That is why Vietnam auditing
companies haven’t had opportunities to experience with international accounting
operations and apply modern auditing techniques.
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The fact also shows that Vietnam auditing companies hasn’t paid attention to invest
in training and building auditing programs like international ones. International
auditing companies has built a general auditing program, such as Deloitte with Audit
System II. The establishment of auditing programs requires a lot of costs and
investments in human resource, as well as contribution of experienced auditors.
Meanwhile the failure to build a standard auditing process of Vietnam auditing
companies is still popular. Vietnam auditing companies, especially small auditing
companies conduct an audit only depending on the judgments of auditors. Many
auditing companies use new graduate students to involve in the audit and take charge
of important parts of customers.
Starting from the above characteristics, in my opinion, the direction to enhance
responsibilities of auditor for fraud and errors should be:
5.2.1 Ministry of Finance still performs a key role in releasing auditing
standards:
In recent years, especially in the 21st century, the general trend of the world is that
the State starts to intervene into auditing and accounting operations. The experience
of the world’s countries shows that when career association can’t afford to maintain
auditing operations, the State intervention is inevitable.
Indeed, in some countries like France and Japan, due to the channel of mobilization
and financing the majority of capital to the economy is from banks or financial
organizations of the State, auditing operations are greatly controlled by the State.
Meanwhile, in countries like the US, from the start till the 21st century, auditing
association has operated strongly and ruled over most of auditing operations. Till
2002, the US Congress deeply intervened into auditing through releasing Sarbanes-
Oxley Act due to the bankruptcy of leading companies including the failure of
auditing companies. In brief, it can see that the State tending to deeply intervene into
auditing operations is the common trend in the world and it’s the development trend
of Vietnam in order to stabilize the economy’s operations for long-term. Therefore,
we think that in the future, Ministry of Finance will remain playing a key role in
auditing operations, releasing legal regulations as well as auditing standards.
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5.2.2 Take legal proceedings against the whole organizations of Vietnam
association of accounting and auditing
The association’s operation is a catalyst to help connect and build an image of
accounting in face of the public. If the State’s regulations are normally released upon
minimum standards which should be bound legally; i.e., if violate, shall be punished;
the association’s regulations focus on preserving and enhancing the stand of career to
the society and if violate, shall result in forms of member expel or disciplines. When
these properties combined together, they shall create a mutual and reciprocal
relationship. Therefore, take legal proceedings against the whole organizations of
Vietnam association of accounting and auditing is an essential demand.
5.2.3 Always update released auditing standards:
Auditing standards are regulations and guidance on auditing principles and
procedures to create a basis for auditors to perform their work and control quality of
auditing operations. So, in order to enhance the quality of auditing operations,
stabilize and develop securities market, auditing standards should be updated
continuously changes in the society.
Vietnamese Auditing Standards were firstly promulgated in 1999 on the basis of the
international auditing standards system built in 1994. From that till now, the
international auditing standards have been changed many times but Vietnam
standards haven’t still updated. As a result, a lot of Vietnam Auditing Standards are
backward; don’t catch up with the development of international standards. Even
some international standards were released for many years, but Vietnam hasn’t
promulgated these standards, such as auditing standards ISA 315 - Knowledge of
corporate environment and assessment of its main risks.
If you think that auditing standards are fundamental principles of professional skill,
not release or adequately update contents of standards concerning responsibilities of
auditor, this shall not force them to strengthen auditing procedures for detecting
fraud and errors.
5.2.4 Should release detailed guidance
Auditing standards are fundamental principles of professional skill; so in order to
help auditors to understand and apply easily in practice, it needs detailed guidance.
Countries around the world, apart from auditing standards, always have detailed
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guidance. In Vietnam, detailed guidance is very necessary due to a considerable
difference in qualifications and scale among auditing companies. It’s the condition to
help auditing companies supplement to their auditing program as well as assist
auditors to put them in practice.
5.2.5 Attach special importance to human resource training to the regional
level
Human is the most important factor for the general development and the
development of auditing in particular. Two important factors to evaluate the quality
of auditor staff: Professional ethics and qualifications.
Professional qualifications: In recent period, Ministry of Finance still regularly
maintains examinations of auditor certificate. Ministry of Finance has made great
effort to create a connection with international training organizations like the
Association of Chartered Certified Accountants (ACCA). However, auditor
certificate of Vietnam hasn’t widely recognized like certificates of ACCA, Singapore
accounting association, Australian accounting association or the US accounting
association. In respect of personal capacity, Vietnam’s auditors aren’t absolutely lack
of professional qualifications. In ACCA international examinations, Vietnam always
has candidates with high scores, ranked in 10-20 leading groups in the world. In
particular, some auditors (from international companies like PwC and E&Y)
achieved the world’s highest score. Recently, there are more 200 people granted
international auditor certificate including 130 people who have directly make great
contributions to the home auditing (Source: interview with Ms. Nguyen Phuong Mai -
Chief Representative of ACCA in Vietnam).
In spite of some encouraging achievements as above, there are, in fact, quite a lot of
auditors not qualified to international standards. One of main causes is language
barrier. This starts from training works in Vietnamese universities, foreign language
teaching and studying which are at basic level.
Moreover, Vietnamese auditing companies haven’t often pay much attention to train
employees like international auditing companies, even in updating – applying new
knowledge or building – maintaining a professional working environment.
Therefore, attach special importance to human resource training is one of solutions
for enhancing the qualifications of Vietnamese auditors. In other words, the trend of
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long-term development is to pay attention to train auditors, it is vital matter of
auditing companies in particular and auditing career in general.
5.3 Solutions for auditing companies
5.3.1 Strengthen controlling the internal quality of auditing companies
Control the internal quality of auditing companies has given for a long time, but it is
especially drawn attention after Enron - Arthur Andersen event. Control the internal
quality of auditing companies is increasingly attached special importance and
heightened in auditing career. Quality control not only complies with the legal
regulations but also actively builds a strict process in order to strengthen the auditor’s
responsibilities to improve its service quality.
5.3.2 Strengthen procedures for detecting fraud in auditing program
In order to guide auditors to detect fraud, auditing companies should deliver
procedures for detecting fraud in auditing program. Procedures for recognition of
fraud signs and fraud detection should be performed thoroughly and
comprehensively in all stages of an audit:
Planning stage: Require auditors to collect date on internal control system and
characteristics of business environment of customers. Apply models of business risk
assessment in order to detect fraud threats in the Financial Statements.
Implementation stage: Apart from carrying out procedures of detailed analysis and
inspection, should design auditing procedures in order to draw the attention of
auditor in studying the relationship between financial pressures of customers with
101 changes in policy or accounting estimates. Draw up a checklist mentioning the
fraud possibility for each part of accounting and require auditors to answer is also a
good solution for awaking and maintaining the doubtful attitude of auditors in face of
fraud threats in the Financial Statements.
5.3.3 Improve the training quality of auditors
In national auditing companies such as KPMG, E&Y, PwC, auditors and auditing
assistants are appointed to participate in famous training programs like ACCA or
CPA of the US. Those courses help auditors access to accounting and auditing
standards under international practices. This source of knowledge is extremely
necessary for auditors to maintain knowledge and put into practice. Hope that
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Vietnamese auditing companies will further make strong investments in human
resource training to reduce the quality gap with international auditing companies and
satisfy the demands of customers within the framework of current integration.
5.4 Conclusion
Fraud detection always is a big challenge for auditors within normal economic
conditions and becomes more difficult within economic crisises, while human
resource is cut down and managers suffer from pressure from the market and
shareholders. One of fraud behaviors which is difficult to detect is a fraud starting
from the management board of auditing unit. Auditor should collect additional
information on the truthfulness of management board during the process of auditing
through observing and evaluating corporate culture, leadership culture, working
environment, salary and bonus system and recruitment regime. Besides, they should
further collect information from subordinates, separately interview each member of
management board and compare what they provide whether there is any
incorrectness and contradiction or not.
In order to minimize economic damages due to fraud, companies should pay
attention to the quality of the internal control system. For the State and career
association, they should complete relevant regulations. Auditors should update
information on fraud and errors in order to improve auditing quality. Auditing
companies should attach special importance to train high-quality staff of auditors
professionally and make professional judgments.
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References
1. Vietnam Standards on Auditing.
2. Lessons from Enron, www.kiemtoan.com.vn, on 28/02/2006.
3. Audit services at the "threshold" of WTO - "Self- refresh" to integrate
www.kiemtoan.com.vn, on 25/07/2006.
4. Suspension of securities trading CAN, Ho Chi Minh City Securities Trading
Center, 2002.
5. The decision to sanction BIBICA No. 01/QĐ-TT of State Securities
Commission, on 4/7/2003.
6. The summary report of the results of the State Auditor in 2005
www.kiemtoan.com.vn, 2006.
7. Losses in capital construction investment – Who take the responsibility
www.mof.gov.vn, 25/07/2003.
8. Lawyer Nguyen Trong Hanh, Some measures to combat the fraud
phenomenon in deducting and refunding value added tax, Ho Chi Minh City
Bar Association, 2003.
9. The disreputable projects of PMU 18, www.vnexpress.net, 21/03/2006.
10. PMU 18 is the negative center of Ministry of Transport, www.vnexpress.net,
07/03/2006.
11. Millions of dollars in damages for business transaction of Boeing 777,
www.vnexpress.net, 2006.
12. Explaining the violations of Vietnam Airlines is not convinced,
www.vnexpress.net, 30/01/2007.
13. Inspect Vietnam Airlines Corporation, www.vnexpress.net, 29/05/2006.
14. Auditing textbook, Ho Chi Minh City University of Economics.
15. Dr.Tran Thi Giang Tan – Dr.Vu Huu Đuc, Lectures of advanced auditing,
2006.
16. Joseph T. Well, Principles of Fraud examination, John Wiley & Sons – Inc,
2004.
17. Biegelman Martin T, Sarbanes Oxley Act – Stopping U.S Corporate Crooks
from cooking the books, The White Paper, 2003.
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18. Albrecht - W.Steve – Gerald W. Wernz – Timothy L. Williams, Fraud
Bringing the light to the Dark side of Business, Irwin Professional
Publishing, 1995.
19. Rezaee Zabiollah, Financial Statement Fraud Prevention and Detection, NY
Wiley, 2002.
20. Kurt Pany & O. Ray Whittington, Auditing, Irwin Publisher, Second Edition.
21. International Standards of Auditing.
22. Luisa Beltran - Brett Gering and Alice Martin, Andersen Guilty, CNNMoney,
2002.
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APPENDICES
Questionnaire Sample
Question 1: From 1993 to 2003, Investigation Commission on frauds in the United
States conducted the largest survey in U.S history in order to review the total
damages caused by frauds for the U.S economy and summarize the common features
of economic frauds. In your opinion, should Vietnam conduct such a survey?
Yes
No
Question 2: If any, which agency will be competent enough to conduct this survey?
State Audit
Ministry of Finance
State Investigator
Ministry of Public Security
State Securities Commission
Other agencies (write specifically, please).
Question 3: Please show the meanings of the results of this survey (if any) with
yourselves and with the development of the auditing profession in Vietnam?
Question 4: In your opinion, which of the following motives often lead to the acts of
corruption?
When the economy falls into recession
The inadequately paid salary
Having the conflicts between personal interests and company interests
Having financial difficulties
Under pressures on the objectives of the plan
Because of the dishonest nature
Effective control procedures
The power focusing on a group of people
Other reasons (write specifically, please)
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Question 5: In your opinion, which of the following reasons often lead to the frauds
in financial statements?
When the economy falls into recession
Under the abnormal pressures
Under pressures on the objectives of the plan
Other reasons (write specifically, please)
Question 6: According to your experiences, which of the following frauds are usually
performed in financial statements?
Fraud in revenue recognition
Fraud from the time difference
Inadequate assessments of property
Hiding the payable costs and debts
No announcement of the full information
Others (write specifically, please)
Question 7: In your opinion, frauds due to inadequate assessments of property are
often performed in popularity in which of the following items:
Inventory
Receivables
Business combinations
Fixed assets
Other assets (write specifically, please)
Question 8: Which of the following problems often relate to no announcement of the
full information?
Willful neglect of debts
Events happening after the date of finishing the accounting period
Fraud in management
Transactions with related parties
Changes in accounting
Other forms (write specifically, please)