Investigating the black box of external audit practice: the paradox of auditors' failure in detecting and reporting fraud

Abstract

PurposeThe study aims to explore the reasons behind external auditors' failure to detect and report fraud.Design/methodology/approachSemi-structured interviews were conducted with twenty-four experienced Big 4 auditors.FindingsThe present study reveals power issues within audit firms and how some dishonest audit partners deal with auditors' concerns at the higher echelons. It also shows how auditors are pressured and intimidated by audit clients when fraud-related issues are raised. Further, it sheds light on ethical, governance and regulatory issues inhibiting auditors’ ability to detect or report fraud.Research limitations/implicationsThis study advances the audit literature by adding practice-based evidence on why external auditors fail to discover fraud.Practical implicationsThe results draw policymakers' attention to the issues that inhibit external auditors' ability to discover fraud in practice which could help policymakers develop effective interventions. Additionally, it provides several recommendations which could aid policymakers and audit firms in designing effective audit reforms to resolve the fraud detection deficit.Originality/valueThis is the first study exploring external auditors' views on their failure to detect and report fraud and how the conflict of interests operates in the audit practice.