External Auditor’s use of professional scepticism to detect financial statement fraud and how an organisation can enable or hinder its application

Sharman, Kevin Mark (2012) External Auditor’s use of professional scepticism to detect financial statement fraud and how an organisation can enable or hinder its application. MSc dissertation, University of Portsmouth.

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    Abstract

    The demise of Arthur Andersen following the Enron fraud illustrated how financial fraud is synonymous with audit failure. Various researchers argue that applying scepticism could have prevented this. Arthur Andersen’s demise placed a focus on audit practice culture. Some arguing their dysfunctional culture contributed to their inability to detect the Enron fraud. An exploration of how an audit practice enables or hinders the use of scepticism provides insight into how culture has an impact.

    As an area subject to minimal research, I have undertaken a case study approach, focusing on one organisation, surveying and interviewing 18 individuals across various grades within an audit practice seeking to obtain an in depth understanding of how the organisation impacts on an auditor’s individual scepticism.

    I found that auditors work to a common definition of scepticism, but are flexible in its application depending on the situation to hand. Scepticism has positive and negative components and therefore a need for balance is required. Though deemed to be important in countering financial fraud, this organisation does not systematically evaluate or reward sceptical behaviour. I argue the organisation is unable to identify its sceptics and given that one of the main components for developing scepticism was on the job training, being unable to identify these key individuals could leave the organisation exposed to inconsistent development of an auditor’s scepticism.

    I found specific aspects of the organisation’s culture enabled scepticism, particularly the process by which auditors are appointed allowing commercial and public interests to be balanced. This culture disseminated to a project level in supporting audit teams to take sceptical action where required, which helped dissipate both time and client pressure arising in those situations.

    Item Type: Dissertation
    Departments/Research Groups: Faculty of Humanities and Social Sciences > Institute of Criminal Justice Studies
    Depositing User: Jane Polwin
    Date Deposited: 26 Feb 2013 11:55
    Last Modified: 28 Jan 2015 12:16
    URI: http://eprints.port.ac.uk/id/eprint/10672

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