Professional Documents
Culture Documents
STATEMENTS
BY
CAN MAI HUONG
E0700241
OCTOBER, 2011
BY
CAN MAI HUONG
E0700241
DECLARATION
I here by declare that this graduation project is based on my original work except for
quotations and citation that have been duly acknowledged. I also declare that it has
not been previously or concurrently submitted for any other courses/degrees at HELP
University College or other institutions. The word Count is words.
- Page II -
Acknowledgements
This project would not have been made possible without the assistance, support and
encouragement of many people. I wish to take this opportunity to thank all the people
who have helped me during the time of completing the dissertation.
In addition, a huge thank for all managers, accountants, personnel who sacrificed
theirs time to answers my questionnaire.
- Page III -
ABSTRACT
FRAUD AND ERRORS IN AUDITING FINANCIAL
STATEMENTS
BY
CAN MAI HUONG
OCTOBER, 2011
Supervisor: PHAM DUC HIEU
During the audit, there are always fraud and errors which are not detected and falsify
financial statements. To reduce the risk of undetected fraud affecting seriously the
financial statements and to express a right opinion on financial statements, auditors
need to concern about fraud problem and the possibility of fraud during the audit. In
fact, there is always a difference between the expectations of users of financial
statements expected from auditors and what auditors can meet. Because the user
thinks that auditors absolutely ensure honest and reasonable financial statements
while it is very difficult for auditors to do this. To narrow this gap, auditors have to
not only explain the limitations and scope of the auditing industry to users of
financial statements but also continuously improve the professional capacity of
individuals to find out our fraud and errors falsifying financial statements seriously.
- Page IV -
Table of Contents
- Page VI -
5.1.2 Regularly update auditing standards including standards related to fraud and
errors: ................................................................................................................................ 35
5.1.3 Should release guidance on procedures for fraud detection .................................... 35
5.2 To raise the responsibility of auditors for fraud and errors in the audit of
financial statements ...................................................................................................... 36
5.2.1 Ministry of Finance still performs a key role in releasing auditing standards: ....... 37
5.2.2 Take legal proceedings against the whole organizations of Vietnam association
of accounting and auditing ................................................................................................ 38
5.2.3 Always update released auditing standards: ............................................................ 38
5.2.4 Should release detailed guidance ............................................................................ 38
5.2.5 Attach special importance to human resource training to the regional level .......... 39
5.3 Solutions for auditing companies......................................................................... 40
5.3.1 Strengthen controlling the internal quality of auditing companies ......................... 40
5.3.2 Strengthen procedures for detecting fraud in auditing program.............................. 40
5.3.3 Improve the training quality of auditors .................................................................. 40
5.4 Conclusion ........................................................................................................... 41
APPENDICES ................................................................................................................. 44
- Page VII -
Table of Figures
- Page VIII -
List of Abbreviations
WTO:
U.S:
United Stated
BTCC:
A&C:
ACCA:
CEO:
CFO:
ACFE:
VACPA :
ISA:
KPMG:
E&Y:
PwC:
- Page IX -
Chapter 1: INTRODUCTION
1.1
Research background
There always exist hidden fraud and errors causing mistakes to financial statements.
To reduce risks of not discovering frauds which seriously affect financial statements
and to give right opinions about financial statements, auditors need to study fraud
and ability of fraud appearance during audit process. In fact, there always exists
difference between expectation of financial statements readers in auditor and what in
fact auditors meet their expectation as readers know that auditors must ensure the
absolute honesty and reasonability, but auditors cannot do that. To address with this
problem, besides explaining the scope and limitation of audit sector, auditors must
incessantly improve their competence and professional knowledge to discover fraud
and errors causing essential errors to financial statements.
Within the framework of the market economy, the demand of information receipt and
delivery, especially financial data which always plays an important role in making
business decisions. The transparency, truthfulness of financial data plays a key role
in stabilizing the securities market and the society.
Recently, a lot of big financial frauds have occurred in the world, producing a stir in
world opinion. People are surprised about not only economic losses due to fraud but
also the methods of fraud implementation. Except for employees and senior leaders
of the company, independent auditors are also involved in implementing a fraud in
which Enron fraud is a typical example.
In Vietnam, many frauds have occurred on the Financial Statements in recent years.
The failure to detect fraud is caused by many reasons in which must include the
responsibilities of auditor and auditing company. Because independent auditing
profession in Vietnam has just started for over 15 years, this period isnt long enough
to have a professional staff of auditors corresponding to the world level. In addition,
the legal environment for auditing sector is taking steps to build and gradually
complete; therefore, its still inadequate.
Hence, improve the quality of independent auditing activities, strengthen the
responsibility of auditor in respect of detecting fraud and errors on the Financial
Statements is still a topical question with a view of enhancing the transparency,
reliability of financial data in making economic decisions.
- Page 1 -
Therefore we should incessantly study fraud and errors in accounting and auditing.
To better understand such fraud and errors, I will present about the topic FRAUD
AND ERRORS IN AUDITING FINANCIAL STATEMENTS.
1.2 Problem statement
In order to better understand fraud and errors in auditing financial statements of
recent companies, we need to answer some following questions: What is fraud and
errors? In broad sense, fraud is illegal behaviors to cheat then to gain benefits.
There are three most common ways to make fraud, namely: appropriation,
defrauding and embezzlement.
In accounting aspect, according to international accounting standard No 10, fraud
and errors are defined as errors in calculation, in application of accounting policies,
unreal explanation, fraud or intentionally missing out.
In auditing aspect, according to international auditing standard No 240 in 2004,
fraud and errors are defined as follows:
Errors are non-intentional mistakes which affect financial statements such as missing
out an amount of money or not declaring information in financial statements.
Common examples about errors are errors during data collection and processing and
presenting it in financial statements, errors in accounting estimations, or application
of underestimated accounting principles.
The second question: Why are fraud and errors important in auditing financial
statement? In recent years, there have had much fraud in financial statements.
Inability to discover these frauds are due to many reasons including responsibility of
auditors and auditing companies. As the job as independent auditor has just been
present in Vietnam for more than 15 years, this time is not long enough for auditors
to have an international professionalism and competence. In addition, legal
environment for auditing sector has been step by step established and completed,
thus it still has many problems.
Therefore, improving quality of independent auditing activities and enhancing
responsibility of auditors in discovering fraud and errors in financial statements is a
topical question so as to improve transparency and reliability of financial information
in economic-related decision making. The thesis will focus on analyzing some
- Page 2 -
popular fraud in financial statements in the world and in Vietnam, then to propose
effective approaches for auditors to discover fraud and errors in auditing financial
statements. In addition, the thesis also combines with macro solution group to
complete legal corridor for auditing profession.
The third question: Influences of fraud and errors in auditing financial statements
for enterprises in Vietnam? In the market economy, demand of giving and receiving
information, especially financial information plays a highly important role in making
business decisions.
Transparency and honesty of financial information has great importance in
stabilizing securities market and society.
In recent years, there occur many financial frauds which produce a stir in world
opinion. People are not only surprised about economic detriments caused by fraud
but also ways of making fraud. People making fraud are not only staffs and senior
managers of companies but also independent auditors.
1.3 Research question
1.3.1 Fraud and Errors in the worlds
Fraud appears together with the appearance of human society. Together with the
development of the society, fraud is more and more sophisticated and shown in
various forms. Source of fraud is the transformation in which each individual from a
separate life starts to live into community. The embryonic form of fraud is the
embezzlement of property in order to satisfy personal demands.
Fraud develops together with the birth and development of the economy. In the
industrial revolution, there appeared a series of enterprises with the separation
between ownership and management function. This separation gave birth to a new
form of fraud which was fraud between managers, staffs and their owner.
Manifestation of this form of fraud was embezzlement of property. By 20th century,
rapid development of the worlds economy, especially the importance of securities
market a most effective channel of capital mobilization of the worlds financial
market, lead to many new forms of fraud which are made by some members in board
of Directors of among staffs.
- Page 3 -
At the end of the 20th century, the bankruptcy of a series of worlds leading economic
groups brought about serious downturn of a whole sector. The society was once
surprised by a fact that there are more and more frauds in the society, in which the
most typical fraud at the end of 20th century were of Enron, Worlcom, Xerox, Nicor
Energy LLC.
Enron: In 1990s of the 20th century, Enron was one of worlds leading companies
doing business in energy. Its business had been highly efficient. However, at the end
of the 20th century, its business results were more and more declining. The late 6
months in 1999, the companys profit was 325 million dollars while the late 6
months in 2000 its profit was just 55 million dollars. To maintain trust of the public,
Enron had exaggerated its profit in its financial statements. The fraud was not only
made by one person or some people but it was the collusion of many people
including members in the Board of Management. The group making fraud was the
Governance of the Company and even the auditing company. To hide its declining
business, the Company had some ways such as:
-
Use methods evaluating assets and debts according to market price. If this
method is used, there will appear in financial statements virtual income which
cannot be converted into money;
-
Hide its debts and costs: To do this, Enron has established a series of child
companies which act as buyer and seller to so that it can hide its debt and loss.
Although the financial statements announced loans which were declining, in fact
during early 9 month in 2000 its debt due increased dramatically. During that time,
Enron had borrowed additional 3.9 billion dollars, raising total debt by September of
13 billion dollars; ratio of due debt over total working capital accounts for 50%, in
stead of 39% in 1999.
Besides high declaration of its income and concealing its expenses, Enron also on its
own initiatives change information about energy market in Texas, in California and
bribe Government of foreign countries in wining energy contract in foreign
countries.
Worldcom: In Mart 2002, this Company was accused of making fraud though
capitalization of an operating cost of 3.8 billion dollars and thus making up a
respective profit by U.S Securities and Exchange Commission, public prosecutor in
- Page 4 -
New York. In addition, there was an illegal fraud of its founder Mr. Bernard Ebber
who had borrowed an amount of 400 million dollars which had not been recorded
and declared in its financial statements.
Xerox: In June 2000, U.S Securities and Exchange Commission accused Xerox of
declaring wrong information in its financial statements for 5 years, high declaring an
income of 1.5 billion dollars. To correct its fault, Xerox agreed to pay a fine of 10
million dollars for U.S Securities and Exchange Commission and re-prepared its
financial statements from the year 1997 honestly and transparently. Board of
Directors of the Company also committed to obey requirements of Securities Law
and ensure there would have no fraud and error in its financial statements.
Nicor Energy LLC: In July 2002, this Company made fraud in its financial
statements but the independent auditor had not discovered. Its fraud was mainly high
declaration of revenue and missing out costs. After that, Nicor Energy LLC adjusted
its financial statements and currently it has established a reliable accounting system.
Above fraud appeared in early the 21st century, this means that together with the
development of the economy, fraud techniques are more and more developed, more
sophisticated and made by collusion of many people. While before the year 2000,
fraud was mostly embezzlement made by some members in Board of Directors or
staff of company, in recent years there have emerged new forms of fraud which are
fraud in financial statements. People making fraud are not one person or some people
but a group of people including Board of Directors, Board of Management and
Auditing Companies. Adverse impacts of fraud are much greater and on many people
in the society.
1.3.2 Fraud and Errors in Vietnam
In recent years in Vietnam, a series of fraud in economy, commerce and financial
statements discovered have shown that fraud occurs in all form of enterprises: Stateowned enterprises, joint stock companies, private enterprises and in all sectors:
commerce, production, constructionAlthough these frauds are as not serious as in
other countries in the world, it exerts great influences on the economy and belief of
people in financial statements of companies, especially listed companies in securities
market. Typical examples of fraud in financial statements of listed companies are of
Bien Hoa Confectionery Corporation
- Page 5 -
Research statement
- Page 6 -
been discovered. On the other hand, the pressure of completing a great volume of
work in short time easily make mistakes. Thus auditing is a challenging job for
auditors. Therefore, this job not only requires auditors to have sufficient knowledge
and skills in auditing and accounting, ability to supervise their work, ability to make
judgments and discover auditing risks, but they also need to have good
understanding about relevant regulations and law, have experiences and through
understanding about business activities of customers. 2
Vietnam is on the first phase of market economy. Vietnams auditing sector has been
operating for 20 years, but it is still quite young compared to other countries. Thus,
knowledge I have learnt in the subject ACCA3 help me easily grasp changes in the
sector as well as new regulations about accounting and auditing. On the other hand,
knowledge and skills of the course also help me to improve professionalism in my job.
So why are fraud and errors important in auditing financial statements?
Influences of fraud and errors in auditing financial statements for Vietnams
enterprises?
In order to understand more about fraud and errors, this study will focus on fraud and
errors in auditing financial statements.
1.4
Thesis structure
Source: www.ftmsglobal.edu.vn
ACCA: (Association of Chartered Certified Accountants) is one of certificates issued by
Association of Chartered Certified Accountants of the U.K which is acknowledged and highly
appreciated in the world. ACCA is leading certificate in auditing accounting finance banking in
the U.K and other developing countries in the world.
3
- Page 7 -
between fraud and errors and ethic issue. At the end of this chapter, I myself will
give some of hypothesises hereof.
Chapter 3: Research method is presented with different parties such as, data source,
research tools.
Chapter 4 : The results of research, my findings through the questionnaire are
available in the fourth chapter. This chapter also presents the limitation during the
research.
Finally, Chapter 5 will give some implication for Government and Enterprises and
eventually the conclusion of this research.
- Page 8 -
Chapter 2 :
LITERATURE REVIEW
2.1
2.1.1
Definition of Fraud
coordinate and make up virtual sale to company of the customer with respective
amount of money. Within 30 days paying this virtual sale, the customer will defer the
payment. At the end of accounting period, this dishonest sale will be recorded in to
revenue. This helps the Financial Officer to reach sales target.
2.1.2
Definition of Errors
Fraud
Errors
Errors
are
non-intentional
Form
to
limited
carelessness
competence
in
and
working
causing mistakes.
- As fraud is intentional behavior, - As errors are non-intentional
it is more sophisticated than errors. behavior,
they
are
as
not
on
Essence
of errors.
Embezzle property
- Page 11 -
- Page 12 -
There are changes in computer programs but documents have not been
saved, approved and tested.
Information and documents printed from computer are different each time
of printing.
Source: http://bizcovering.com
- Page 13 -
Only the CEO can optimize the company for fraud. He has it invest in assets that
have no clear market value. Professionals evaluate such assets-allowing the CEO to
hire ones who will inflate values. Rapid growth (as in a Ponzi scheme) extends the
fraud and increases the take. S&Ls optimized accounting fraud by loaning to
uncreditworthy and criminal borrowers (who promised to pay the highest rates and
fees because they did not intend to repay, but the promise sufficed for the auditors to
permit booking the profits). The CEO extends the fraud through sales of the
troubled assets to straws that transmute losses into profits. Accounting fraud
produced guaranteed record profits-and losses.
CEOs have the unique ability to convert company assets into personal funds through
normal corporate mechanisms. Accounting fraud causes stock prices to rise. The
CEO sells shares and profits. The successful CEO receives raises, bonuses, perks,
and options and gains in status and reputation. Audacious CEOs use political
contributions to influence the external environment to aid fraud by fending off the
regulators. Charitable contributions aid the firms legitimacy and the CEOs status.
S&L CEOs were able to loot the assets of large, rapidly growing organizations for
many years. They used accounting fraud to mimic legitimate firms, and the markets
did not spot the fraud. The steps that maximized their accounting profits maximized
their losses, which dwarfed all other forms of property crimes combined.
While agreeing that the S&L served as both a weapon and a shield, control fraud
theory cast doubt on those metaphors. Weapons and shields are visible; fraud is
deceitful. The better metaphors would be camouflage, or a virus. Control fraud
theorists rejected the economists metaphor, gambling for resurrection (honest but
unlucky risk takers). Gambling cannot explain why control fraud was invariably
present at the typical large failure. There were over 1,000 felony convictions of
senior S&L insiders. Accounting fraud made control fraud a sure thing-not a gamble.
Control fraud theory predicts the pattern of record profits and catastrophic failure and
the business pattern of deliberately making bad loans. Both patterns are inconsistent
with honest gambling.
- Page 14 -
Source: www.chadbourne.com
- Page 15 -
basis, and that without the theory, individual reliance issues rendered class
certification inappropriate. The Third Circuit agreed and affirmed.
The Fraud Created the Market Theory
The Third Circuit began its opinion by noting that a presumption of reliance has been
recognized by the United States Supreme Court in two circumstances. First, the
presumption has been recognized where a defendant failed to disclose material facts
despite having a duty to do so. Second, reliance may be presumed under a fraud on
the market theory, which can be applicable when a plaintiff shows that the securities
at issue trade in an efficient market, i.e., a market that can reasonably be presumed
to reflect the impact of false statements in the market price of securities, whether or
not the particular plaintiff ever saw or read such statements.
Some federal appeals courts, however, have recognized a third circumstance as being
appropriate for a presumption of reliance upon the alleged misstatements. Such
courts have recognized a fraud created the market theory, which posits that the
securities laws allow an investor to rely on the integrity of the market to the extent
that the securities it offers to him are entitled to be in the market place. Thus,
reliance should be presumed when a plaintiff shows that absent fraud, the securities
at issue would have been unmarketable, and that the plaintiff purchased in
reliance on the market. The theory assumes that investors are entitled to rely on a
securitys availability on the market as an indication of its apparent genuineness.6
Other courts, though, have rejected the theory7.
The Third Circuits Analysis
The court analyzed the proposed fraud created the market presumption by looking
to the factors that have traditionally led courts to create factual presumptions.
Presumptions, the court wrote, have traditionally been recognized where courts
conclude that the presumption is very likely to be accurate, such that it is sensible
6
This theory has been endorsed by the Fifth, Tenth, and Eleventh Circuits. See Shores v. Sklar, 647
F.2d 462 (5th Cir. 1981) (en banc); T.J. Raney & Sons, Inc. v. Fort Cobb, Oklahoma Irrigation Fuel
Auth., 717 F.2d 1330 (10th Cir. 1983); Ross v. Bank South, N.A., 885 F.2d 723 (11th Cir. 1989).
7
The theory has been rejected by the Seventh Circuit, see Eckstein v. Balcor Film Investors, 8 F.3d
1121 (7th Cir. 1993), and the Sixth, Eighth, and Ninth Circuits have declined to follow it in particular
cases without expressly ruling on whether it could never in any circumstances be viable. See
Ockerman v. May Zima & Co., 27 F.3d 1151 (6th Cir. 1994); In re NationsMart Corp. Sec. Litig., 130
F.3d 309 (8th Cir. 1997); Desai v. Deutsche Bank Sec. Ltd., 573 F.3d 931 (9th Cir. 2009).
- Page 16 -
and timesaving to apply a presumption. Presumptions have also, the court wrote,
been created to correct imbalances resulting from one partys superior access to the
proof, or in order to further congressional policy, or to avoid a factual impasse.
Creating a fraud created the market presumption, the court held, was not warranted
in light of these considerations.
accurately reflect reality, because common sense fails to support the idea that
securities on the market, by the mere virtue of their availability for purchase, are free
from fraud. In particular, the court noted that a securitys availability on the market
should be taken as an indication of genuineness only if there were some entity
involved in the process of taking the security to market that acts as a bulwark against
fraud. But to the contrary, the court wrote, all of the private actors involved in
bringing securities to market have incentives to act in a self-interested, and perhaps
dishonest, manner, so that it is not reasonable to assume that securities are free from
fraud simply because they have been brought to market.
Moreover, the court found that SEC approval of a securities registration statement
does not provide a reasonable basis to presume that the securities offered are free
from fraud, because the SECs role is limited to reviewing the registration statement
to ensure that it contains adequate disclosures. The court noted that the SEC does
not conduct merit regulation of securities, seeking to determine whether the
offered securities are, in fact, a good investment. Nor does the SEC endorse offering
documents or vouch for their truthfulness.
The court further noted that even if a security were offered in a fraudulent manner,
disclosure of the truth will seldom render the security truly unmarketable, since
disclosure of adverse information may lower the price of a security, but it will not
prevent that security from going to market. Finally, the court noted that unlike the
fraud-on-the-market theory, the fraud created the market theory lacks a basis in
accepted economic theory.
The court additionally explained that policy considerations did not support
employing a fraud created the market presumption. In particular, the court wrote,
such a presumption would actually reduce investors incentive to carefully read and
review the offering materials and fully research their investment, since with the
presumption they would be able to recover for any misstatements whether or not they
had reviewed the offering materials; moreover, an investor might seek rationally to
- Page 17 -
avoid reading disclosures in order to preserve a possible claim under the theory.
The court concluded that expanding the scope of private securities fraud actions is a
task that courts should not undertake without direction from Congress, and expressed
concern that recognizing the fraud created the market theory could lead to a surge
in frivolous securities fraud litigation and place excessive pressure on defendants
to settle meritless claims.
For these reasons, the court rejected the fraud created the market presumption.
Thus, because without the presumption each plaintiff in the proposed class would
have to prove individual reliance, the court found class certification to be improper
and refused to recognize the case as a class action.
Implications of the Decision
The decision in Malack intensifies the circuit split among the federal courts of
appeals on, and thus increases the likelihood that the Supreme Court will be called
upon at some point to resolve definitively, the question of whether to adopt a fraud
created the market presumption. The Third Circuits rejection of the presumption
will have the immediate effect of precluding plaintiffs within the Third Circuit
(which includes Pennsylvania, New Jersey, and Delaware) from relying on it. The
courts analysis also serves as a reminder that reliance issues are sometimes the most
formidable barrier to class certification in securities cases, and that federal courts
increasingly have been skeptical of efforts to expand the scope and availability of
private securities class action lawsuits
2.5 The common method to fraud in auditing financial statements
2.5.1 High declaration (or perjury) revenue
One of results of ACFE is to summarize some common method to fraud in financial
statements through typical fraud. Some common methods to fraud are:
- High declaration of revenue;
- Difference in time;
- Not evaluating property sufficiently;
- Concealing liabilities and expenses;
- Not declaring sufficient information.
- Page 18 -
receivable, purchased assets through business integration, fixed assets, not enough
capitalization of tangible expenses, not correct classification of assets.
2.6 Motive for fraud and errors in financial statements of enterprises.
Fraud in financial statements is one of hot topics nowadays, especially after the
bankrtupcy of a series of worlds leading companies at the beginning of 21st century.
Some bankrupted companies having fraud in financial statements are: Lucent, Xerox
, Rite Aid, Waste Management, Micro Strategy, Raytheon, Sunbeam, Enron,
Worldcom, Global Crossing, Adelphia, Qwest. Senior managers including Chief
Executive Officer (CEO) and Chief Finance Officer (CFO) of these companies are
said to involve in processing data to fraud in financial statements.
Discovering fraud in financial statements in big companies exerts a great concern on
the honesty, reasonability of financial statements. It is also great challenge for
managers as well as auditor in discovering fraud and mistakes in financial
statements. Therefore, fraud is always a topic gain much attention of many
researchers and various occupations.
Institute of Internal Auditor of US defines: fraud is unusual and illegal behavior so as
to cheat or give information incorrectly which that individual is fully aware that such
information is wrong or incorrect. People making fraud are fully aware of that their
behavior can bring illegal benefits for any individual or organization. Fraud can be
done by people inside or outside an organization.
Common forms of fraud include fraud in financial statements, embezzlement of
property and corruption.
Many studies have shown that staff will make frau when they have to suffer from
pressure, or when there is change and ability to rationalize/attitude.
Pressure or benefits are reasons for an individual to make fraud. Pressure and
benefits can be a bonus or financial award based on level of reaching financial target
of the company or of a division (for example, revenue growth, price of shares);
pressure of fulfilling analyzed indicators, maintaining the trend or obeying executive
board; personal loans exceeding control limit; family having people with serious
illness leading to mental and/or financial pressure.
- Page 20 -
- Page 21 -
Research method
This research presents and discusses the summarized results of a baseline survey
conducted in the period January September 2011 on the Fraud and errors in
auditing financial statements in Vietnam, combining quantitative and qualitative
methods. 20 medium-sized and large companies, both with Vietnamese, foreign or
mixed ownership structure have been analysed. The companies surveyed are both
public and private, from manufacturing, services, trade, IT and other sectors from all
over the country. These companies are randomly selected in order to have a
nationally representative survey.
3.1.1
Quantitative methodology
Quantitative methods are research techniques that are used to gather quantitative
data information dealing with numbers and anything that is measurable. In this
study, quantitative methods are used to verify, which of such hypotheses, which were
proposed, are true. I used in this study statistics, tables and graphs to present the
results of these methods.
3.1.2
Qualitative methodology
The qualitative method investigates the why and how of decision making, not just
what, where, when. Qualitative methods are used in this project in order to produce
information only on the particular cases studied.
I interviewed one focus group with 3 participants who representatively manage Fraud
and errors actions in medium-sized and large companies. The objective was to
establish the understanding of Fraud and errors real situation, the motivations behind
it and the ways in which it is practiced, and the constraints and barriers before its
development in Vietnam. The represents interviewed are ones, whose enterprises
already have made or showed interest in detecting Fraud and errors behaviour in
auditing financial statements. Companies were questioned on their current
involvement in detecting Fraud and errors as well as their expectations of the
importance of limited Fraud and errors in the future.
- Page 22 -
Moreover, after having received the results of the questionnaire, I realized that some
of my subjects werent motivated to give accurate answers. In fact, they could be
motivated to give answers that present themselves in a favourable light. So in
addition to the questionnaire, I interviewed a number of managers and accountants to
give them more information about the issue and also give them the chance to express
more about their thought.
3.2
Data source
In order to fulfill the accurate and reliable results for this study, it is necessary to use
both of secondary data and primary data.
3.2.1 Secondary data
Secondary data contents books, articles, researches, case studies and published texts
of different authors.
For this study, I tried by best to provide a wealth of background work, which means
that data have a pre-established degree of validity and reliability and the researchers,
who are re-using my data, dont need too much time to revise or examine.
3.2.2
Primary data
After having gained some insight into the issue of this project by collecting
secondary data, I began searching primary data such as sending questionnaires, direct
observation and interviews to related people. One of the advantages of primary data
collections is to deliver the appropriate information that match the requirement of the
subject.
3.3
3.3.1
Research tool
Internet tool
- Page 23 -
3.3.2
Questionnaire
- Page 24 -
Questionnaire Results
Votes
Ratio
45
78%
Corruption
11%
Embezzlement
11%
Others
0%
Total
57
100%
- Page 25 -
4.1.2
act of embezzlement?
Results:
Contents
Votes
Ratio
0%
Under-appreciated capacity
25
44%
25
44%
22%
50
89%
Due to corruptibility
32
56%
32
56%
57
100%
0%
Total
57
411%
- Page 26 -
4.1.3
Votes
Ratio
Economic crisis
12
22%
32
56%
57
100%
Others
0%
Total
57
178%
Question 4: In your opinion, which sectors or fields often occur high risk fraud:
Results:
Contents
Votes
Ratio
Pharmaceuticals
11%
Consumer goods
32
56%
Chemicals
0%
Assembly
11%
12
22%
Civil engineering
100%
Consultant, service
25
44%
Others
0%
Total
57
244%
In this situation, 100% of the auditors answered that civil engineering sector often
occurs high risk fraud, 56% answered as consumer goods, 44% answered as
consultant, service, 22% answered as energy, and only 11% answered as
pharmaceuticals and assembly, no auditor put forth any other sector of field other
than the above ones.
4.1.5
Question 5: You tell me about the person who implements fraud often
Votes
Ratio
44
78%
12
22%
Authorized staff
18
33%
Total
57
133%
implement fraud:
Results:
Contents
Votes
Ratio
The younger
38
67%
The elder
18
33%
Total
57
100%
- Page 28 -
In this situation, 67% of the auditors answered that the age group often implementing
fraud is the young, and only 33% answered as the elder.
4.1.7
Votes
Ratio
Falsify documents.
25
44%
18
33%
32
56%
sales
32
56%
11%
11%
Total
57
211%
special transactions
Conceal
information
on
special
agreements
determined
- Page 29 -
4.1.8
factor plays a decisive role in preventing the frauds in the financial statements?
Result:
Contents
Votes
Ratio
12
22%
57
100%
11%
25
44%
Other factors
0%
Total
57
178%
Interview results
- Page 30 -
errors. With regard to fraud and errors, the main responsibility of auditors is to
consider the risks of having essential mistakes in the financial statement because of
fraud and errors. This responsibility is concretized through the following audit
procedures:
During the process of setting up the audit plan, auditors have to assess the risks of
fraud and errors, which can cause essential mistakes in the financial statement, and
have to interview the manager about any important fraud and errors detected. To
implement this, auditors need to research on the design and operation of internal
audit, simultaneously consider the conditions or events which increase the risks of
fraud and errors. For example, the complicity between the business and third person
can lead to distort the documents and can deceive auditors. Therefore, auditors do not
usually apply the special measures to the parts having errors, but they only focus on
clarifying the suspicion of fraud.
Based on risk assessments, auditors have to design and perform audit procedures to
ensure reasonable procedures which will detect mistakes because of fraud and errors
seriously affecting the whole financial statement. In other words, although audit has
latent restrictions as already stated, auditors always must have professional
scepticism.
When the above audit procedures provide evidences to show the ability of having
fraud and errors, auditors must assess their impacts to financial statements. If
auditors find that they can seriously affect financial statements, auditors must
perform the additional audit procedures.
After having performed the additional audit procedures, but there still are suspicions
about fraud and errors, auditors are supposed to:
+ Discuss the issues which need to be adjusted with the manager or announce in the
financial statement.
+ Consider the impacts of the event to the financial statement and audit statement.
+ Particularly for important errors and frau, auditors should consider their impacts to
other aspects of the audit, especially the reliability of directors explanations.
- Page 31 -
Having suspicion of the fraud, auditors often have to notify the manager although the
fraud can not seriously affect the financial statement yet. Auditors also have to notify
of important errors or fraud really happened.
Unless every thing is too obvious, in general auditors do not think that the happened
fraud and errors are single and isolated. Because the essence of the errors is often
detected along the chain, auditors must be vigilant in detecting errors; the correlation
of these errors with other errors can lead to serious mistakes of the financial
statement.
When auditors suspect that the business managers relate to fraud, they need to
consider carefully the advantages and disadvantages of the parties, and should
consider that the revelation to whom is better. Auditor always has to remember that
the internal controlling system can become totally disable for the fraud of the
business managers, and the business managers can:
Ignore all the investigation, whereas they have the power to prevent the investigation
of the subordinates.
Order the subordinates to take notes the business dishonestly or suppress them.
Conceal the information relating to the business.
In the process of auditing, auditors are not absolutely necessary to show the
dishonesty of the managers, but auditors have to beware of the possibility of similar
cases:
The information is provided reluctantly or only provided after being delayed
unreasonably.
The business managers limit the scope of audit.
Auditors find out the important problems which had not been reflected in the audit.
If auditors suspect that certain members of the leader board of the business commit a
fraud, they have to implement the measures to verify or eliminate the suspicions.
When auditors believe in having frauds or can not eliminate the suspicions of the
business leaders fraud, they have to find other representatives to replace or find
other audit evidences. When top leaders of the business are suspected, auditors will
- Page 32 -
have difficulty in choosing the alternative representatives and in collecting the audit
evidences. In this case, auditors can not fulfil their audit tasks and need to be
consulted legally to take actions in accordance with the reality.
In conclusion, if units do not have reasonable measures to the frauds, auditors have
to consider the possibility of withdrawing from the audit contract.
4.2.2 How to reduce fraud and errors in auditing financial statements.
In terms of independent auditing companies: audit companies should pay attention to
the development of treatment policy for the company staff better and better;
promulgate the specific regulations and sanctions relating to the handling of
violations of the company regulations, violations of auditors professional ethics;
build the processes of implementing tasks more specifically and closely, which is a
basis to control and evaluate the activities of the departments, sections and
individuals in the unit; focus on links with partners and audit groups in the
completion of the audit program, audit procedure, audit method, and training
updating knowledge, improving the qualifications of auditors; emphasis on the
rotation of officials and employees; survey the opinion of audit clients.
In terms of Ministry of Finance and career associations: they should speed up
drafting the Law on independent audit; build the roadmap of researching, drafting
and issuing the circulars on guiding the accounting standards, or at least the basic
audit standards; increase the annual quality control for audit companies (expand the
scope and duration of implementing the investigation); evaluate and rank audit
companies annually; issue regulations on the criteria of evaluating and grading the
quality of audits; step up to encourage the competition and election of typical audit
companies and talented individuals.
In terms of closely controlling the structure of non- audit services: non- audit
services, such as tax consultancy and investment consultancy, is a part of the
structure of service products which audit firms provide for customers, and is an
important basic to increase the quality of audit services. The balance of the
proportion of these non- audit services is very essential for the development of audit
services on the basis of increasing the actual quality that customers can feel from the
services of audit companies. The recent statistics show that now there is the
- Page 33 -
- Page 34 -
Chapter 5 :
5.1
Based on research results and reality of fraud and fraud detection from a lot of
countries around the world, it can be inferred some lessons in Vietnam when
determining auditing procedures as well as responsibilities of auditor for fraud
detection during the process of auditing Financial Statements:
5.1.1
In the current context, fraud is a behavior occurred quite commonly and exerting a
great influence on the society. If it regards auditing standards as fundamental
principles of professional skill, not giving a demand of focusing on fraud and errors
wont force auditor to comply with this demand. Thus, it should give a demand of
enhancing responsibilities of auditor for fraud and errors. In fact, many countries in
the world have a tendency to amend regulations on responsibilities of auditor for
fraud and errors towards enhancing responsibilities of auditor for fraud and errors.
5.1.2
Fraud is an non-destructive behavior that will have increasingly grown under more
delicate methods. Hence, in order to help auditors to have a thorough grasp of fraud
- Page 35 -
To raise the responsibility of auditors for fraud and errors in the audit of
financial statements
In order to establish a perfect direction, it should pay attention to some
characteristics of Vietnam as follows:
Firstly, Ministry of Finance remains playing the key role in releasing auditing
standards till now. The economy of Vietnam is a socialist-oriented market economy.
So, Ministry of Finance remains playing the key role in releasing auditing standards
and relevant regulations till now. Although Ministry of Finance has recently made a
decision on transferring this authority to career association but the operations of
career association have still weak in both quantity and quality, Ministry of Finance
still plays a key role in releasing auditing regulations.
Secondly, the development of auditing careers in Vietnam has grown quickly: Up to
now, Vietnam independent auditing has just run over 15 years but developed quickly.
Quantity of auditing companies and auditors has interruptedly increased. Since
Decree 105 was released, quantity of subjects needed to audit has increased
considerably. Therefore, the auditing market has grown in both quantity and quality.
Thirdly, the gap between qualifications and experience of Vietnam and international
auditing companies is quite large.
The worlds leading auditing companies running in Vietnam have a long-standing
history and when entering into Vietnam market, they have had familiar customers
which are companies audited overseas by them. Thus, the remaining segments of the
market belong to new auditing companies of Vietnam. That is why Vietnam auditing
companies havent had opportunities to experience with international accounting
operations and apply modern auditing techniques.
- Page 36 -
The fact also shows that Vietnam auditing companies hasnt paid attention to invest
in training and building auditing programs like international ones. International
auditing companies has built a general auditing program, such as Deloitte with Audit
System II. The establishment of auditing programs requires a lot of costs and
investments in human resource, as well as contribution of experienced auditors.
Meanwhile the failure to build a standard auditing process of Vietnam auditing
companies is still popular. Vietnam auditing companies, especially small auditing
companies conduct an audit only depending on the judgments of auditors. Many
auditing companies use new graduate students to involve in the audit and take charge
of important parts of customers.
Starting from the above characteristics, in my opinion, the direction to enhance
responsibilities of auditor for fraud and errors should be:
5.2.1
standards:
In recent years, especially in the 21st century, the general trend of the world is that
the State starts to intervene into auditing and accounting operations. The experience
of the worlds countries shows that when career association cant afford to maintain
auditing operations, the State intervention is inevitable.
Indeed, in some countries like France and Japan, due to the channel of mobilization
and financing the majority of capital to the economy is from banks or financial
organizations of the State, auditing operations are greatly controlled by the State.
Meanwhile, in countries like the US, from the start till the 21st century, auditing
association has operated strongly and ruled over most of auditing operations. Till
2002, the US Congress deeply intervened into auditing through releasing SarbanesOxley Act due to the bankruptcy of leading companies including the failure of
auditing companies. In brief, it can see that the State tending to deeply intervene into
auditing operations is the common trend in the world and its the development trend
of Vietnam in order to stabilize the economys operations for long-term. Therefore,
we think that in the future, Ministry of Finance will remain playing a key role in
auditing operations, releasing legal regulations as well as auditing standards.
- Page 37 -
5.2.2
level
Human is the most important factor for the general development and the
development of auditing in particular. Two important factors to evaluate the quality
of auditor staff: Professional ethics and qualifications.
Professional qualifications: In recent period, Ministry of Finance still regularly
maintains examinations of auditor certificate. Ministry of Finance has made great
effort to create a connection with international training organizations like the
Association of Chartered Certified Accountants (ACCA). However, auditor
certificate of Vietnam hasnt widely recognized like certificates of ACCA, Singapore
accounting association, Australian accounting association or the US accounting
association. In respect of personal capacity, Vietnams auditors arent absolutely lack
of professional qualifications. In ACCA international examinations, Vietnam always
has candidates with high scores, ranked in 10-20 leading groups in the world. In
particular, some auditors (from international companies like PwC and E&Y)
achieved the worlds highest score. Recently, there are more 200 people granted
international auditor certificate including 130 people who have directly make great
contributions to the home auditing (Source: interview with Ms. Nguyen Phuong Mai Chief Representative of ACCA in Vietnam).
In spite of some encouraging achievements as above, there are, in fact, quite a lot of
auditors not qualified to international standards. One of main causes is language
barrier. This starts from training works in Vietnamese universities, foreign language
teaching and studying which are at basic level.
Moreover, Vietnamese auditing companies havent often pay much attention to train
employees like international auditing companies, even in updating applying new
knowledge or building maintaining a professional working environment.
Therefore, attach special importance to human resource training is one of solutions
for enhancing the qualifications of Vietnamese auditors. In other words, the trend of
- Page 39 -
5.3.1
Control the internal quality of auditing companies has given for a long time, but it is
especially drawn attention after Enron - Arthur Andersen event. Control the internal
quality of auditing companies is increasingly attached special importance and
heightened in auditing career. Quality control not only complies with the legal
regulations but also actively builds a strict process in order to strengthen the auditors
responsibilities to improve its service quality.
5.3.2
signs
and
fraud
detection
should
be
performed
thoroughly
and
In national auditing companies such as KPMG, E&Y, PwC, auditors and auditing
assistants are appointed to participate in famous training programs like ACCA or
CPA of the US. Those courses help auditors access to accounting and auditing
standards under international practices. This source of knowledge is extremely
necessary for auditors to maintain knowledge and put into practice. Hope that
- Page 40 -
- Page 41 -
References
1. Vietnam Standards on Auditing.
2. Lessons from Enron, www.kiemtoan.com.vn, on 28/02/2006.
3. Audit services at the "threshold" of WTO - "Self- refresh" to integrate
www.kiemtoan.com.vn, on 25/07/2006.
4. Suspension of securities trading CAN, Ho Chi Minh City Securities Trading
Center, 2002.
5. The decision to sanction BIBICA No. 01/Q-TT of State Securities
Commission, on 4/7/2003.
6. The summary report of the results of the State Auditor in 2005
www.kiemtoan.com.vn, 2006.
7. Losses in capital construction investment Who take the responsibility
www.mof.gov.vn, 25/07/2003.
8. Lawyer Nguyen Trong Hanh, Some measures to combat the fraud
phenomenon in deducting and refunding value added tax, Ho Chi Minh City
Bar Association, 2003.
9. The disreputable projects of PMU 18, www.vnexpress.net, 21/03/2006.
10. PMU 18 is the negative center of Ministry of Transport, www.vnexpress.net,
07/03/2006.
11. Millions of dollars in damages for business transaction of Boeing 777,
www.vnexpress.net, 2006.
12. Explaining the violations of Vietnam Airlines is not convinced,
www.vnexpress.net, 30/01/2007.
13. Inspect Vietnam Airlines Corporation, www.vnexpress.net, 29/05/2006.
14. Auditing textbook, Ho Chi Minh City University of Economics.
15. Dr.Tran Thi Giang Tan Dr.Vu Huu uc, Lectures of advanced auditing,
2006.
16. Joseph T. Well, Principles of Fraud examination, John Wiley & Sons Inc,
2004.
17. Biegelman Martin T, Sarbanes Oxley Act Stopping U.S Corporate Crooks
from cooking the books, The White Paper, 2003.
- Page 42 -
- Page 43 -
APPENDICES
Questionnaire Sample
Question 1: From 1993 to 2003, Investigation Commission on frauds in the United
States conducted the largest survey in U.S history in order to review the total
damages caused by frauds for the U.S economy and summarize the common features
of economic frauds. In your opinion, should Vietnam conduct such a survey?
Yes
No
Question 2: If any, which agency will be competent enough to conduct this survey?
State Audit
Ministry of Finance
State Investigator
Ministry of Public Security
State Securities Commission
Other agencies (write specifically, please).
Question 3: Please show the meanings of the results of this survey (if any) with
yourselves and with the development of the auditing profession in Vietnam?
Question 4: In your opinion, which of the following motives often lead to the acts of
corruption?
When the economy falls into recession
The inadequately paid salary
Having the conflicts between personal interests and company interests
Having financial difficulties
Under pressures on the objectives of the plan
Because of the dishonest nature
Effective control procedures
The power focusing on a group of people
Other reasons (write specifically, please)
- Page 44 -
Question 5: In your opinion, which of the following reasons often lead to the frauds
in financial statements?
When the economy falls into recession
Under the abnormal pressures
Under pressures on the objectives of the plan
Other reasons (write specifically, please)
Question 6: According to your experiences, which of the following frauds are usually
performed in financial statements?
Fraud in revenue recognition
Fraud from the time difference
Inadequate assessments of property
Hiding the payable costs and debts
No announcement of the full information
Others (write specifically, please)