Can Audit Prevent Fraudulent Financial Reporting Practices? Study of Some Motivational Factors in Two Atlantic Canadian Entities

Abstract

Much as has been written and done to prevent Fraudulent Financial Reporting (FFR) practicesbut FFR is still exists in the corporate world. It is common to think about FFR practices in largecompanies for its greater amount of consequences, though such practises have negative consequencesin small companies as well. FFR practices raise questions about the legitimacy of contemporaryfinancial reporting process, roles of auditors, regulators, and analysts in financialreporting. This empirical study attempts to investigate the motivational factors of the preventionand detection of FFR through the auditing process. The interviewees were carried outwithin the entity and proprietary theoretical framework with some accounting related managementin two medium-sized organizations in Atlantic Canada in winter 2008. The findings ofthis research demonstrate that an audit is not enough to prevent and detect FFR. The auditstructure needs to be revised and employees need to be educated in order for them to betterunderstand their internal control process, and their own role. Companies need to evaluate theircontrols and internal audit process instead of relying on the yearly audit. This study found thatthe most common methods used for FFR are improper revenue recognition, understatement ofexpenses/liabilities, and overstated and misappropriation of assets. Copyright © www.iiste.org