An Assesment of the Role of the Auditor in Fighting Corruption in an Organization Essay

CHAPTER TWOLITERATURE REVIEW2.1 IntroductionReliable bill and pecuniary opusing issued by analyzeors do presidencys in allocating resources from the society in an efficient manner. Although the primary coil intention of an organisation is profit making and to allocate limited capital resources to the production of goods and services for which societys demand is great, a highly complex phenomenon which is depravity poses a threat to those goals and services. However, most organisations spend ample sums of money adopting strategies to fight corruption (Whittington et al., 2004). 2.2 History of scrutiniseingThe word Audit originated from the Latin word auditus which means, a earreach. In the earlier days, whenever there was suspected corruption in a line of business arrangement, the owner of the business would appoint a person to check the accounts and require hearing the explanations given by the person prudent for keeping the accounts and funds. In those days, the audit was done to find out whether the payments and receipts were properly accounted or non accounted for (http//www.eHow.com). During the advent of the Industrial Revolution, from 1750 to 1850, auditing evolved into a field of dissimulator detection and pecuniary accountability. Until then, Auditing existed primarily as a method to maintain governmental accountancy and record-keeping. The incidence of the revolution resulted in businesses expanding thereby resulting in increase job positions in the midst of owners to customers.Resultantly, commission was hired to operate businesses in the owners absences, and owners found an increasing need to superintend their monetary activities both for accuracy and fraud pr take downtion. (http//www.eHow.com). In the early 20th century, the insurance coverage practice of he arrs, which mired submitting reports of their duties and findings, was standardized as the Independent Auditors Report. The increase in demand for attendees led to th e ontogeny of the testing mental process for accuracy and fraud prevention. Auditors developed a way to strategically selecting key cases as representative of the fraternitys performance. This was an affordable alternative to examining ein truth case in detail, required slight time and a good tool for reducing fraud (http//www.eHow.com). 2.3 Overviewof AuditingAuditing is a systematic examination of the books and records of a business or the organization in order to ascertain or verify and to report upon the facts regarding the monetary operation and the result thereof (Montgomery, 2010,p.6). Again, Loughran (2010, p.5), defines auditing as, the process of investigating information that is prep atomic make sense 18d by someone else to go through whether the information is fairly stated. On the other hand, Arens et al. (2006, p.7), defines auditing as the accumulation of demonstrate about information to checker and report on the degree of correspondence between the informat ion and established criteria. Auditing is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between the assertions and established criteria and communication the results to interested users(Robertson et al., 2002,p.7).According to Knechel (2001,p.42), auditing is the process of providing assurance about the reliability of the information contained in the financial statements cookd in accordance with principally Accepted Accounting Principles. 2.4 Types of AuditThere are various ways in which the guide performed by the attendant has been classified or categorized. Each classification or causa of audit is unique in that, each type of audit has its own perspective, objective and business organisation. Irrespective of the type of audit beingness conducted, the basic processes, guidelines and standards are basically the same. However, Hall (2005) classifies the type s of audits that auditors perform into four-spot 2.4.1 beative AuditThe Institute of Internal Auditors defines ingrained audit as an independent function established within an organisation to examine and evaluate the audit activities as a service to the organisation. Internal audits are conducted by auditors who work for the organization (Ibid). 2.4.2 Information Technology AuditThis is associated with auditors who use technical skills and knowledge toaudit through the electronic computer system, or leave audit services where processes or data, or both, are embedded in technologies. Hence, IT audit involves the auditing of information technology, computer system and the like. IT audit allows auditors to audit through the database and computer (Ibid).2.4.3 Fraud AuditThis is the newest knowledge domain of auditing, arising out of both rampant employee theft of assets and major financial frauds. In such audits, materiality is irrelevant, and the primary goal is an investigation of anomalies not to give assurance. Hence, fraud audit aims at gathering evidence of fraud and where sufficient evidence exist, fraud audit leads to conviction (Ibid). 2.4.4 Financial AuditAlso referred to as outer audits, this involves auditors who work independent of the organisation being audited. The audit objective is to give an opinion on the financial statements (Ibid). 2.5 Types of AuditorsThere are a number of different types of auditors however, they can be classified under four headings immaterial auditors, internal auditors, government auditors, and forensic auditors. One important requirement of each type of auditor is independence, in some manner, from the entity being audited (Robertson et al., 2002). 2.5.1 External AuditorsExternal Auditors are often referred to as independent auditors or certified man accountants (CPAs). Such auditors are called external because they are not employed by the entity being audited. However, external auditors audit financial stateme nts for publicly traded and semiprivate companies, set forthnerships, municipalities, individuals, and other type of entities. An external auditor may practice as a sole proprietor or as a member of a CPA firm (Robertson et al., 2002). On the other hand, Boynton et al. (2001), describes external auditors as independent having education, training, and thus by lawfulness of their experience, external auditors are qualified to perform each of the types of activities being the operating(a) audit natural process, the audit compliance, and the financial statements audit performance.Operational audit activity has to do with obtaining and evaluating evidenceabout the efficiency and effectiveness of an entitys operating activities in relation to specified objectives. Furthermore, compliance audit activity has to do with obtaining and evaluating evidence to pay back whether certain financial or operating activities of an entity conform to specified rules, or regulations (Boynton et al., 2001).Finally, the financial statements audit activity has to do with obtaining and evaluating evidence about an entitys financial statements for the purpose of expressing an opinion on whether the financial statements are presented fairly in conformity with established criteria-usually Generally Accepted Accounting Principles (Boynton et al.,2001). 2.5.2 Internal AuditorsInternal auditors are auditors employed by individual companies, partnerships, government agencies, individuals, and other entities (Messier et al., 2008). Additionally, internal auditors are also employed extensively by government and nonprofit organisations with the principal goal of investigating and appraising the activities with which the various organisational units of the company are carrying out their assigned functions (Whittington et al., 2004). However, in addition to the provision of consulting services to the organisation, internal auditors pay much vigilance to the study of internal control. Again, internal auditors are primarily involved with compliance and operational audit activities. With the operational audit activity having to do with the obtaining and evaluating evidence about the efficiency and effectiveness of an entitys operating activities in relation to specified objectives (Boynton et al., 2001).Furthermore, the compliance audit activity having to do with the obtaining and evaluating evidence to determine whether certain financial or operating activities of an entity conform to specified conditions, rules, or regulations (Boynton et al., 2001). 2.5.3 Government AuditorsGovernment auditors are employed by federal, state, and local agencies. They generally can be considered a subset of the broader category of internal auditors. At the federal take, ii agencies use auditors extensively the Government Accountability Office and the Internal Revenue Service. The Internal Revenue Agents prolong their responsibility of enforcing tax laws as defined by congress of parli ament and interoperated by the courts. However,the government auditors soak up in a wide range of audit activities, including financial statements audit activity, the compliance audit activity and the operational audit activity (Messier et al., 2008). Financial statements audit activity has to do with the obtaining and evaluating evidence about an entitys financial statements for the purpose of expressing an opinion on whether they are presented fairly in conformity with established criteria-usually Generally Accepted Accounting Principles. The compliance audit activity having to do with the obtaining and evaluating evidence to determine whether certain financial or operating activities of an entity conform to specified conditions, rules, or regulations. Finally, the operational audit activity having to do with the obtaining and evaluating evidence about the efficiency and effectiveness of an entitys operating activities in relation to specified objectives (Boynton et al., 2001).2. 5.4 rhetorical AuditorsForensic auditors are employed by corporations, government agencies, public accounting firms, and consulting and investigative services firms. They are develop in detecting, investigating, and deterring fraud and corruption (Boynton et al., 2001). 2.6 economic consumptions of the AuditorThe role of both the internal and external auditor in the business and economic life of the society is very important. Modern business opening moves are quite epic and mostly in corporate form wherein shareholders do not necessarily engage in the caterpillar track of the management team to run the business on behalf of the shareholders. As a result, management is required to prepare and submit accounts of their stewardship to reflect the true financial position of the entitys activities (Yiadom, 2009). The Role of the Auditor in the Internal ControlInternal control is broadly defined as a process, executed by an entitys board of directors, management, and other personnel, designed to provide reasonable assurance regarding the pass onment of objectives in the following internal control categories 1.Effectiveness and efficiency of operations.2.Reliability of financial reporting.3.Compliance with laws and regulations.Management is responsible for internal control. Managers establish policies and processes to help the organization succeed specific objectives in each of these categories. Auditors perform audits to evaluate whether the policies and processes are designed and operating effectively and provide recommendations for improvement (Messier et al., 2008). The Role of the Auditor in Corporate GovernanceCorporate governance is a combination of processes and organizational structures implemented by the Board of Directors to inform, direct, manage, and monitor the organizations resources, strategies and policies towards the achievement of the organizations objectives. The internal auditor is often considered one of the four pillars of corporate gov ernance, the other pillars being the Board of Directors, management, and the external auditor(Business mesh (online) 2006 http//www.allbusiness.com).A primary focus area of internal auditing as it relates to corporate governance is helping the Audit military commission of the Board of Directors (or equivalent) perform its responsibilities effectively. This may include reporting critical internal control problems, informing the delegation privately on the capabilities of key managers, suggesting questions or topics for the Audit Committees meeting agendas, and coordinating with the external auditor(Business web (online) 2006 http//www.allbusiness.com). Role of the Auditor in Risk ManagementAuditing professional standards require the function of the auditor to monitor and evaluate the effectiveness of the organizations risk management processes. Risk management relates to how an organization sets objectives, then identifies, analyzes, and responds to those risks that could potential ly impact its ability to realize its objectives. Management performs risk assessment activities as part of the ordinary course of business in each of these categories. Examples include strategic planning, marketing planning, capital planning, budgeting, hedging, inducement payout structure, and credit/lending practices. Sarbanes-Oxley regulations alsorequire extensive risk assessment of financial reporting processes (Business web (online) 2006 http//www.allbusiness.com). Corporate legal counsel often prepares comprehensive assessments of the current and potential litigation a company faces. Internal auditors may evaluate each of these activities, or focus on the processes used by management to report and monitor the risks identified.For example, internal auditors can advise management regarding the reporting of forward-looking operating measures to the Board, to help identify emerging risks (Business web (online) 2006 http//www.allbusiness.com). In larger organizations, major strat egic initiatives are implemented to achieve objectives and drive changes. As a member of senior management, the Chief Audit Executive may enroll in status updates on these major initiatives. This places the Chief Audit Executive in the position to report on many of the major risks the organization faces to the Audit Committee, or ensure managements reporting is effective for that purpose (Business web (online) 2006 http//www.allbusiness.com). 2.7 Overview of CorruptionAlthough there is no universal or comprehensive exposition as to what constitutes corrupt behaviour, most definitions share a common emphasis upon the abuse of public indicator or position for personal ad reward (Boadi, 2002 vol.4 no.2).The Oxford Unabridged Dictionary defines corruption as perversion or destruction of integrity in the discharge of public duties by bribery or favour. Websters collegial Dictionary defines it as inducement to wrong by improper or unlawful means (as bribery). A succinct definition of c orruption used by the World Bank is the abuse of public duty for private gain.Corruption is a complex multi-faceted social phenomenon with innumerable manifestations.It takes place as an outcome of deficiencies in the existing public administration apparatuses and systems as well as cultural, economic, political and social factors. Differences of opinion mum exist as to the meaning of the term corruption. This is primarily because individuals look at corruption from their own vantage points influenced by surrounding environment (Khan, 2004). Coherently, Swain& Dininio (2000), explains corruption as the abuse of public office for private gain. It encompasses unilateral abuses by government officials such as embezzlement and nepotism, as well as abuses linking public and privateactors such as bribery extortion, influence peddling, and fraud. 2.8 Corruptive Issues in an OrganisationCorruptive issues come in an organization where both employers and employees embark on any act classif ied as corruption (Balkaran, 2000). 2.8.1 Causes of CorruptionKhan (2004), defines corruption as a phenomenon that takes place due to the presence of a number of factors. An understanding of such factors requires, among other things, a kind of general framework for a clearer understanding of the causes of corruption, particularly from a broader perspective. However, Goudie & Strange (2000), explained that the genesis of corruption can be looked at from three levels being the inter interior(a), the national and the individual institutional level.Competitiveness of foreign markets provides multinational companies of various sizes with an incentive to offer bribes to gain an payoff over competitors. At the national level basic development strategy of any government moulds opportunities and incentives for corruption. At the same level three relationships between the government and the civil service, between the government and the judiciary and between the government and the civil so ciety also affect the nature and discussions of corruption. Three areas of government activity customs duty administration, business regulation and management of foreign aid act as sources of corruption at the level of individual institutions (Goudie & Strange, 2000). 2.8.2 Forms of CorruptionCorruption takes many forms acceptance of money and other rewards for awarding contracts, violation of procedures to further personal interests, kickbacks from developmental programmes or multi-national corporations, pay-offs for legislative support, diversion of public resources for private use, overlooking illegal activities, step in in the justice process, nepotism, common theft, overpricing, establishing non-existing projects and tax collection and tax assessment frauds (Khan, 2004). 2.9 The Auditors Role in Fighting Corruption in an Organisation Auditors are the first set of gatekeepers in chip corruption in an organisation (Harding,2000,p.12).Auditors ensure that transactions are v alid, at arms-length, captured, and properly recorded fit in to establishedstandards which contributes to the fight of corruption. Secondly, As professionals with a duty to protect the public interest, auditors are bound by rigorous codes of professional and personal ethics calling for the highest levels of integrity and objectivity. Again, with key strategic positions within an enterprise or organization whether in an internal position or as an external position, mean that auditors very often have access to highly privileged and confidential information (Harding, 2000). Furthermore, as Balkaran (2000), puts it, the auditor helps in fighting corruption in an organisation through the performance of the respective functions on the bases of national and international standards of practice which have clear guidelines identifying, for instance, indicators of fraud and other irregularities, and reporting these to the highest levels of authority.Scaling down to the types of auditors, Balk aran (2000), outlines that, the revised receipt of internal auditing, places more responsibility on internal auditors in helping to fight corruption. After all, as the eyes and ears of management, they are there year-round, understand the operations of a business, and are bound by even more in-depth standards of performance and conduct. Moreover, the work of the internal auditor is often relied upon by the external (independent) auditors and therefore subject to more stringent requirements.