Why Audit will Continue to Fail!

Background The Wirecard


Background
The Wirecard €1.9 billion missing cash and 3.2 billion debt scandals have ignited the conversation about audit complacency in the financial reporting process.Financial statement fraud, audit failures and the sudden collapse of companies without any warning signs have increased in size and occurrence recently, and Wirecard is another example of this.While we were still anguishing on the Wirecard scandals and the inability of their auditor to pick up this material fraud, then came Lookers, the UK car dealership company, and the revelation of it overstating its profitability by £25.5 million (Campbell, 2020).
Financial statement fraud is not new.This list is unending when we talk about financial statement fraud.Management has always deployed different techniques to portray a good outlook for their companies through manipulations of financial statements.This can be dated back to the Royal Mail Steam Packet Company scandal of 1931, to Equity Funding scandal 1973, down to Polly Peck 1990. Enron happened in 2001, Madoff in 2008, Olympus 2011, Tesco 2014, Toshiba 2015, and Patisserie Valerie in 2018(Awolowo, 2019).
This kind of occurrence is a severe threat to the integrity of financial reporting and corporate governance systems (Hogan, et al., 2008;Smith & Crumbley, 2009;Bhasin, 2013) and often results in a loss of confidence in the financial reporting process by investors and other stakeholders (Hogan, et al., 2008;Smith, 2015).
The impact of financial statement fraud of any scale is enormous on the stakeholders, and related losses are in billions of dollars.The Association of Certified Fraud Examiners report to the nation on occupational fraud and abuse (2020) estimated that the median loss to financial statement fraud is $954,000.
The negative impact of financial statement fraud is not only threatening the going concern of the company but also impacting other stakeholders in various ways including, but not limited to, loss of jobs and pensions, reduction in stock prices and shareholders' values, and corporate reputational damage (Colby, 2013).Furthermore, financial statement fraud was a significant contributor to the global financial crisis of 2008 (Black, 2010).Financial statement fraud threatens both debt and capital markets' efficiency, liquidity, and safety (Black, 2010).
Fraudulent reporting will most likely increase in occurrence due to the global pandemic caused by COVID19 as companies try to portray a good outlook and, in the process, may "sugarcoat" their annual report.
Financial statement fraud is a form of "occupational fraud" (ACFE, 2016), which involves the "deliberate misrepresentation of the financial condition of an enterprise accomplished through the intentional misstatement or omission of amounts or disclosures in the financial statements to deceive financial statement users" (ACFE, 2018).
The aftermath of the Enron accounting scandal saw the Chair of the Board and President of the American Institute of Certified Public Accountants issued the following joint statement: "Our profession enjoys a sacred public trust and for more than one hundred years has served the public interest.Yet, in a short period, the stain from Enron's collapse has eroded our most important asset: Public Confidence" (Castellano & Melancon, 2002, p. 1).
Sadly, for the past 500 years, accounting and auditing concepts have not changed (Silverstone, et al., 2012).In this age of information revolution, the accounting profession still relies on an audit technique that was utilised before the industrial period.The reliance on this industrial age audit technique has resulted in an unrelenting series of embarrassing financial statement fraud and audit failures.

Auditing Profession is in Denial
The auditing profession's prevailing wisdom is a complete denial of the responsibility to detect fraud in the financial statement.This denial is evident in the International Standard on Auditing (ISA) 240, which places the responsibility for preventing and detecting fraud solely on those charged with the management and governance of entities.This denial makes one wonder what auditors' role is in reducing information asymmetry, which is evident in an agency relationship between shareholders and the management (Awolowo, 2019).
Nevertheless, this denial has not stopped financial statement fraud from occurring.Neither has it prevented the profession from being heavily criticised and questioned by stakeholders