Can Audit (Still) be Trusted?

Abstract

This paper analyses audit as an exemplar of an expert system. The paper explores the premise that systemic trust in audit has been damaged and requires repair, looking specifically at the role of the institutionalised mechanism of the public inquiry. This is examined empirically in relation to the interaction between the Heads of the Big Four accounting firms in the UK and the House of Lords Economic Select Committee in the course of the recent parliamentary investigation into the UK Audit market, prompted by the global financial crisis. In particular, the paper seeks to understand how there can be transfer of trust, following Sztompka (1999), between different levels and between agents in a system. In this case, the Big Four-as privileged market participants-require re-legitimation from agents that are part of the political and legal apparatus. We therefore argue that relegitimation of the Big Four's privileged market position is dependent on transfer of trust.

Financial Statement Fraud: The Need for a Paradigm Shift to Forensic Accounting

“…Model (Ahmad & Omar, 2016; has made the financial statement the primary mechanism for monitoring the performance of a company by its shareholders (Cuervo, 2002). The audit which serves a vital economic purpose plays a very crucial role in controlling the performance of management in an agency relationship, thereby, reinforcing trust and confidence in the financial reporting process (ICAEW, 2005;Holm & Zaman, 2012;Mueller, et al, 2015).…”

“…Moreover, holding the narratives that the job of the auditor is not to detect fraud might no longer stand in the foreseeable future considering the high level of criticism that usually greeted any revelation of fraudulent financial reporting (Mueller, et al, 2015). The assertion of Lord Justice Lopes in the late nineteenth century that an auditor is a watchdog and not a bloodhound (Baxt, 1986) might no longer hold water in the st century.…”

“…The separation of ownership from control of corporations means that the financial statement is a crucial mechanism for shareholders to monitor the performance of management (Cuervo, 2002). Moreover, an audit which serves a vital economic purpose plays a crucial role in reinforcing trust (Mueller, et al, 2015) and confidence in the agency relationship that exists between principal and agent (shareholders and management respectively).…”

“…This was the case in Enron, WorldCom, and Toshiba. Financial statement fraud can also lead to loss of jobs and pension and could have a long-lasting effect on the economic growth of a country (Mueller, et al, 2015). It also jeopardises the going concern of a corporation (Black, 2010).…”

“…The accounting profession has struggled with this problem for so many years, and the inability of auditors to detect these fraud has compounded the problem for the profession, as the business community expects that auditors should be able to detect fraud in the financial statement (Koh & Woo, 1998). So, since auditors have not been able to detect these financial statement fraud, investor confidence in the financial reporting process and corporate governance have been declining (Hogan, et al, 2008;Mueller, et al, 2015).…”