These eroded financial statements are referred to as fraudulent financial reporting which can be defined in broad sense as deliberate misstatements or oversight of monetary values or disclosures in financial statements prepared to mislead financial statement users. Previous cases of fraud have left investors and regulators looking for answers like how can creative accounting be stopped, how it start and who is to blame when its revealed in their companies. Generally, these entire questions seem to be answered by putting liabilities to management for failure to comply with Generally Accepted Accounting Principles (GAAP). Again, failure to detect fraud can be a backlog of independent auditors for failure to apply Generally Accepted Auditing principles (GAAP) accordingly. To counteract these frauds, regulators, corporations and government have instituted various professional ethics and liability laws to reduce such cases.
Fraud detection and procedure
Fraud detection is not necessarily the duty and obligation of the obvious and recognized agents such as investors, SEC and the independent auditors; rather it is the obligation of community which includes the media, industry regulatory actors, and the company employees. According to the research conducted by the (Kuhn & Sutton, 2006) whistleblowers defer in their capacity to detect frauds. Essentially, the researches indicate that, under legal duties and obligations, the independent auditors and the security regulators are the primary detector agents, auditors can either be internal or external. A fraud can either be detected by an internal auditor or external auditor since both have mutual interests in regard to internal financial controls. The internal auditor is usually part of the company or organization; their roles are stipulated by their respective boards, management and the professional standards while external auditors are not part of the organization but in the line of duty they are engaged by the organization (Harrison 2002). Their roles are set by their client and primary statute for a purpose of providing an independent opinion toward the organization financial statement and this is done annually. Both external and internal auditors ought to meet and share common interest which are directly related to auditing Procedures that auditor needs to go through to discover fraud There are three main steps auditors go through in detecting fraud, these steps are planning, execution and reporting, these steps involve follow up actions that reflect the performance of the audit. In a normal audit, fraud detecting can be done during the planning and execution stage. The table below show procedures an auditor ought to go through in order to detect fraud. Overview of fraud and detection process during normal audit During planning, the auditors assess the risk of fraud; this involves discussions between auditors to consider how and where the financial entity is likely to be susceptible to fraud (Harrion 2002). This assessment involves known external and internal factors that affect the financial entity and also consider risk of management overrule of control, and how the auditor is likely to react to the susceptibility of the entity in regard to fraud. During planning, it is important to obtain information required to identify fraud. The auditors are supposed to get sufficient