Financial Reporting Fraud: Are Standards’ Setters and External Auditors Doing Enough?

Abstract

Following the fraud scandals in large companies like Enron, WorldCom, and Xerox, investors’ concern about fraud in general and fraudulent financial reporting in particular increased and is on the rise. In response to these concerns, auditing standards setters have issued fraud standards that have expanded what is required of the external auditors in relation to fraud detection. However, regardless of these efforts, academic research studies indicate that more efforts are still needed from audit regulators and external auditors. The current paper provides insights into two areas. Firstly, it explores the reasons behind the audit expectation gap, and secondly, it assesses the efforts of standards’ setters and external auditors to narrow the gap in relation to fraud detection. The paper provides a set of recommendations to regulators and external auditors in an effort to fight fraud.

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