The Role of Auditors in Preventing, Detecting, and Reporting Fraud: The Case of the United Arab Emirates (UAE)

• Author: Sawsan Saadi Halbouni
• Published date: 01 July 2015
• Date: 01 July 2015
• DOI: http://doi.org/10.1111/ijau.12040

The Role of Auditors in Preventing, Detecting, and Reporting Fraud: The Case

of the United Arab Emirates (UAE)

Sawsan Saadi Halbouni

University of Sharjah

The primary objective of this study is to investigate internal and external auditor perceptions regarding their

responsibilities related to preventing, detecting, and reporting fraud. Moreover, the study explores the procedures

that internal and externalauditors follow to detect fraud during an audit. This study featuresa survey of 53 auditors

in the United Arab Emirates. The results indicate that internal auditors are primarily responsible for identifying

incidents of fraud. The results also demonstrate thatthe procedures followed by external auditors are slightly more

rigorous than those followed by internal auditors. The principal contribution is that internal auditors are primarily

responsible for identifying fraud and are consequently more concerned about reporting incidents related to fraud.

The results provide empirical support for the notion that external auditors should increase the degree to which

they seek to detect and report incidents of fraud as well.

Key words: Auditors, fraud detection, United Arab Emirates

1. INTRODUCTION

Because auditing is used to attest to the accountability

and stewardship of a company’s management, the need

for auditing can be considered a response to the agency

problem (Stirbu et al., 2009). As defined by the

International Standards of Audit (ISA 240), fraud is

‘an intentional act by one or more individuals

among management, those charged with governance,

employees, or third parties, involving the use of

deception to obtain an unjust or illegal advantage.’

Similarly, the Statement ofAudit Standards (SAS) defines

fraud as ‘an intentional act that results in a material

misstatement in financial statements that are the subject

of an audit’ (AICPA, SAS No. 99, p. 6). Finally, the

Association of Certified Fraud Examiners (ACFE)

conceptualised fraud as the use of one’s occupation for

personal enrichment through the deliberate misuse or

misapplication of the employing organisation’sresources

or assets (ACFE, 1996, p. 4).

Hemraj (2004) has also described fraudulent behaviour

as a deliberate step made by one or more individuals to

deceive or mislead with the objective of misappropriation

of assets, distorting an organisation’s apparent financial

performance or strength to outsiders, or otherwise

obtaining an unfair advantage. Hemraj (2004) argued that

this definition of fraud encompasses white-collar crime,

defalcation, irregularities and embezzlement.

Regardless of the way in which it is defined, fraud is

considered a crime that affects all types of companies

(Hillison et al., 2000). As an indication of its pervasiveness

and severity, Chau and Yuen (2011) found that users of

financial statements consider the primary objective of an

audit to be the detection of fraud. Page (2014, p. 1) argued

that the confidence that an auditor attains is subjective

and serves as the basis for offering an audit opinion. He

added: ‘An auditor cannot attain absolute confidence

because of numerous factorsarising, among other things,

from the limitations of audit evidence, the impracticality

of examining all evidence and uncertainties as to the

future.’ An ‘expectations gap’ is a discrepancy between

how non-auditors expect auditors to act and auditors’

expectations about their own actions (Sidani, 2007;

Zhang, 2007).

In an attempt to eliminate the audit expectations gap,

accounting scholars and practitioners have identified its

causes and adopted certain auditing standards that are

collectively referred to as the ‘Consideration of Fraud in

a Financial Statement Audit’. These standards (SAS No.

53, 54, 58, 59, 82 and 99) explicitly recognise higher

levels of auditor responsibility. Moreover, in 2002, the

International Auditing and Assurance Standards Board

(IAASB) of the International Federation of Accountants

(IFAC) issued ISA 240, ‘The Auditors’ Responsibility to

Consider Fraud in an Audit of Financial Statements’. The

IAASB has revised and redrafted ISA 240 multiple times

(in 2004, 2006, 2008 and 2009). Their latest draft, ‘The

Auditors’ Responsibilities Relating to Fraud in an Audit

of Financial Statements’ was made effective on 15

December 2009.

Despite extensive research on fraud in developed

countries (e.g., Rezaee, 2004; Alleyne & Howard, 2005;

Bierstaker, Brody & Pacini, 2006; Hassink, Meuwissen &

Bollen, 2010; Holm, Langsted & Seehausen, 2012), there

has been no empirical research on fraud in the United

Arab Emirates (UAE), an emerging economy within the

Gulf Cooperation Council (GCC) in the Middle East.

Because of differences in their economic, cultural, social,

legal and institutional contexts, the extensive findings

that have been found related to fraud in developed

nations maynot be applicable in emerging nations. Given

this deficiency in the literature, the main objective of this

study is to investigate auditor perceptions related to the

existence of fraud in the UAE. In addition,this study also

features an investigation of internal and external auditor

perceptions regarding their responsibilities in detecting

and preventing accounting fraud.Finally,this study seeks

to investigate the degree to which internal and external

auditors in the UAE are proactive in identifying fraud

during an audit. To achieve these objectives, the current

study seeks to answer three interrelated research

questions. First, to what extent do internal and external

auditors in the UAE perceive fraud to exist in Emirati

firms? Second, how do internal and external auditors

Correspondence to: Dr. Sawsan Saadi Halbouni, Assistant Professor of

Accounting, University of Sharjah, College of Business Administration,

Accounting Department, P.O. Box 27272, Sharjah, UAE. Email:

sawsanhalb@sharjah.ac.ae

International Journal of Auditing doi:10.1111/ijau.12040

Int. J. Audit. 19: 117–130 (2015)

© 2015 John Wiley & Sons Ltd ISSN 1090-6738