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This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License
Article
Fraud Detection and Prevention: A Review of the Latest Developments in U.K. Audit
Author(s)
Neil Fletcher, Ifedapo Francis Awolowo, Nigel Garrow
Full-Text PDF
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DOI:10.17265/1548-6583/2021.01.001
Affiliation(s)
ABSTRACT
Proposed reforms to U.K. audit are reviewed from a fraud detection and prevention perspective. A holistic four-actor model that encompasses: the directors, auditor, shareholders, and the regulator, is used to frame the discussion. Focus is drawn to the mediating role of the Audit and Assurance Policy. The paper argues that the proposed reforms have some potential to reduce the audit expectations gap. However, the problem of agency costs and the advisory nature of shareholder voting on the Audit and Assurance Policy significantly limit the possible effectiveness of the reforms from a fraud detection and prevention perspective. Suggestions for future research are made.
KEYWORDS
fraud, audit, expectations gap, agency costs, corporate governance, advisory voting
Cite this paper
Journal of Modern Accounting and Auditing, January 2021, Vol. 17, No. 1, 1-13 doi: 10.17265/1548-6583/2021.01.001
References
Awolowo, I. F. (2019). Financial statement fraud: The need for a paradigm shift to forensic accounting. Sheffield: Sheffield Hallam University.
Awolowo, I. F., Garrow, N., Clark, M., & Chan, D. (2018). Accounting scandals: Beyond corporate governance. Journal of Modern Accounting and Auditing, 14(8), 399-407.
BEIS. (2021). Restoring trust in audit and corporate governance. London: OGL.
Brydon, D. (2019). Report of the independent review into the quality and effectiveness of audit. London: OGL.
Chen, Y., & Vann, C. E. (2017). Clawback provision adoption, corporate governance, and investment decisions. Journal of Business Finance & Accounting, 44(9-10), 1370-1397.
Clarence-Smith, L. (2021). Funder back claims against KPMG over Carillion. The Times. Retrieved from https://www.thetimes.co.uk/article/funder-backs-claim-against-kpmg-over-carillion-kns2l0twt
CMA. (2019). Statutory audit services market Study. London: Competition and Market Authority.
Companies Act. (2006). Retrieved from https://www.legislation.gov.uk/ukpga/2006/46/part/15/chapter/9
Conyon, M., & Sadler, G. (2010). Shareholder voting and directors’ remuneration report legislation: Say on pay in the U.K. Corporate Governance: An International Review, 18, 296-312.
Crumbley, L. D. (2009). So what is forensic accounting? Retrieved from https://abfa.us/wp-content/uploads/2018/03/So-What-is-Forensic-Accounting-SITE.pdf
Dedman, E., Kausar, A., & Lennox, C. (2014). The demand for audit in private firms: Recent large-sample evidence from the U.K. European Accounting Review, 23, 1-23.
DiGabriele, J. A. (2008). An empirical investigation of the relevant skills of forensic accountants. Journal of Education for Business, 83(6), 331-338.
Donelson, D. C., Ege, M. S., & McInnis, J. M. (2017). Internal control weaknesses and financial reporting fraud. Auditing: A Journal of Practice & Theory, 36(3), 45-69.
Enbgestrom, Y., Miettinen, R., & Punamaki, R. (1999). Perspectives on activity theory. Cambridge: Cambridge University Press.
FRC. (2014, May 21). Audit quality thematic review: Fraud risk and laws and regulations. Financial Reporting Council. Retrieved from https://www.frc.org.uk/getattachment/ab5168f8-b735-4057-b180-eb6c10584e0e/FRC-AQR_Fraud-Risk-and-Laws-and-regulations-Jan-2014.pdf
Garrow, N., & Awolowo, I. F. (2018). Palmer & Harvey: A case of governance and audit failure. Journal of Modern Accounting and Auditing, 14(7), 390-398.
Harvey, C., Maclean, M., & Price, M. (2020). Executive remuneration and the limits of disclosure as an instrument of corporate governance. Critical Perspectives on Accounting, 69, 102089.
Hostak, P., Lys, T., & Yang, Y. G. (2013). An examination of the impact of the Sarbanes-Oxley Act on the attractiveness of U.S. capital markets for foreign firms. Review of Studies in Accounting, 18, 522-559.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behaviour, agency costs, and ownership structure. Journal of Financial Economics, 3, 305-360.
Kingman, J. (2018). Independent review of the Financial Reporting Council. London: OGL.
Nikkinen, J., & Sahlström, P. (2004). Does agency theory provide a general framework for audit pricing? International Journal of Auditing, 8, 253-262.
O’Dwyer, M. (2021). U.K. auditors ordered to tighten standards ahead of shake-up. Financial Times. Retrieved from https://www.ft.com/content/550a24c1-f9b8-41c9-a631-fd684c407ff9
Ruhnke, K., & Schmidt, M. (2014). The audit expectation gap: Existence, causes, and the impact of changes. Accounting and Business Research, 44, 572-601.
Simunic, D. A. (1980). The pricing of audit services theory and evidence. Journal of Accounting Research, 18, 161-190.
Ugrin, J. C., & Odom, M. D. (2010). Exploring Sarbanes-Oxley’s effect on attitudes, perceptions of norms, and intentions to commit financial statement fraud from a general deterrence perspective. Journal of Accounting and Public Policy, 29(5), 439-458.
UK CGC. (2018). The U.K. Corporate Governance Code. London: Financial Reporting Council.
Wolosky, H. W. (2004). Forensic accounting to the forefront. The Practical accountant, 37(2), 22-28.
Awolowo, I. F., Garrow, N., Clark, M., & Chan, D. (2018). Accounting scandals: Beyond corporate governance. Journal of Modern Accounting and Auditing, 14(8), 399-407.
BEIS. (2021). Restoring trust in audit and corporate governance. London: OGL.
Brydon, D. (2019). Report of the independent review into the quality and effectiveness of audit. London: OGL.
Chen, Y., & Vann, C. E. (2017). Clawback provision adoption, corporate governance, and investment decisions. Journal of Business Finance & Accounting, 44(9-10), 1370-1397.
Clarence-Smith, L. (2021). Funder back claims against KPMG over Carillion. The Times. Retrieved from https://www.thetimes.co.uk/article/funder-backs-claim-against-kpmg-over-carillion-kns2l0twt
CMA. (2019). Statutory audit services market Study. London: Competition and Market Authority.
Companies Act. (2006). Retrieved from https://www.legislation.gov.uk/ukpga/2006/46/part/15/chapter/9
Conyon, M., & Sadler, G. (2010). Shareholder voting and directors’ remuneration report legislation: Say on pay in the U.K. Corporate Governance: An International Review, 18, 296-312.
Crumbley, L. D. (2009). So what is forensic accounting? Retrieved from https://abfa.us/wp-content/uploads/2018/03/So-What-is-Forensic-Accounting-SITE.pdf
Dedman, E., Kausar, A., & Lennox, C. (2014). The demand for audit in private firms: Recent large-sample evidence from the U.K. European Accounting Review, 23, 1-23.
DiGabriele, J. A. (2008). An empirical investigation of the relevant skills of forensic accountants. Journal of Education for Business, 83(6), 331-338.
Donelson, D. C., Ege, M. S., & McInnis, J. M. (2017). Internal control weaknesses and financial reporting fraud. Auditing: A Journal of Practice & Theory, 36(3), 45-69.
Enbgestrom, Y., Miettinen, R., & Punamaki, R. (1999). Perspectives on activity theory. Cambridge: Cambridge University Press.
FRC. (2014, May 21). Audit quality thematic review: Fraud risk and laws and regulations. Financial Reporting Council. Retrieved from https://www.frc.org.uk/getattachment/ab5168f8-b735-4057-b180-eb6c10584e0e/FRC-AQR_Fraud-Risk-and-Laws-and-regulations-Jan-2014.pdf
Garrow, N., & Awolowo, I. F. (2018). Palmer & Harvey: A case of governance and audit failure. Journal of Modern Accounting and Auditing, 14(7), 390-398.
Harvey, C., Maclean, M., & Price, M. (2020). Executive remuneration and the limits of disclosure as an instrument of corporate governance. Critical Perspectives on Accounting, 69, 102089.
Hostak, P., Lys, T., & Yang, Y. G. (2013). An examination of the impact of the Sarbanes-Oxley Act on the attractiveness of U.S. capital markets for foreign firms. Review of Studies in Accounting, 18, 522-559.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behaviour, agency costs, and ownership structure. Journal of Financial Economics, 3, 305-360.
Kingman, J. (2018). Independent review of the Financial Reporting Council. London: OGL.
Nikkinen, J., & Sahlström, P. (2004). Does agency theory provide a general framework for audit pricing? International Journal of Auditing, 8, 253-262.
O’Dwyer, M. (2021). U.K. auditors ordered to tighten standards ahead of shake-up. Financial Times. Retrieved from https://www.ft.com/content/550a24c1-f9b8-41c9-a631-fd684c407ff9
Ruhnke, K., & Schmidt, M. (2014). The audit expectation gap: Existence, causes, and the impact of changes. Accounting and Business Research, 44, 572-601.
Simunic, D. A. (1980). The pricing of audit services theory and evidence. Journal of Accounting Research, 18, 161-190.
Ugrin, J. C., & Odom, M. D. (2010). Exploring Sarbanes-Oxley’s effect on attitudes, perceptions of norms, and intentions to commit financial statement fraud from a general deterrence perspective. Journal of Accounting and Public Policy, 29(5), 439-458.
UK CGC. (2018). The U.K. Corporate Governance Code. London: Financial Reporting Council.
Wolosky, H. W. (2004). Forensic accounting to the forefront. The Practical accountant, 37(2), 22-28.