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Collusion In Auditing
Adja Diagne Comment by Nava Cohen: Adja, your paper has interesting ideas. You need to reorganize the sections of your paper. This is the structure I suggest: Introduction Situations of collusion Ways to address the risk of collusionConclusions
ACCT 754
Table of Contents
Abstract 3
Introduction 3
Background XXXXXXXXXX4
Research Methodology 4
Literature review 5
Findings and discussions 8
Recommendations 9
Conclusion 10
References 11
Abstract
The goal of this study is to look into probable scenarios of manager-auditor collusion, as well as the magnitude of the resulting distortion. The possibility of minimizing collaboration will also be investigated. Comment by Nava Cohen: You should not add bullet points in an abstract. Please reformulate. The abstract should contain your research question with a
ief overview of your findings
· What are the causes for the owner, manager, and auditor colluding?
· What are the possible circumstances for collusion?
· What influence does collusion have on businesses?
· What can be done to reduce the discrepancy between the manager and the auditor so that the financial report reflects accurate figures?
Introduction
Following the global financial crisis as well as the audit failures controversies of the largest corporations such as Tyco, Enron, and WorldCom in the early twenty-first century, everyone wants to improve the openness of company functions and the dependability of accounting records (Jones, XXXXXXXXXXShareholders, investors, and creditors make decisions based on publicly available financial statements. As a result of the pressure a lot of firms take it personal to meet financial oObjectives and management self-interest, there is a risk of collaboration between the owner, manager, and auditors, which has a direct impact on the financial report (Hu, 2015). Comment by Nava Cohen: Here add your research question. Is it the following: What is the manager-auditor collusion?
Background Comment by Nava Cohen: This paragraph should go in your introduction.
The concept of auditing has existed since ancient times, but due to controversies and fraud, auditing has received increased attention (Shamoo, XXXXXXXXXXAn audit is the examination of final reports by someone who is not affiliated with the organization, such as a balance sheet, income statement, stockholders' equity, and cash flow statement. It is critical that an auditor adhere to all of the government's standards (PwC Australia, XXXXXXXXXXThe leadership wants to demonstrate that their company is profitable and in good financial shape. Complicity between owners, managers or auditor is possible in this circumstance, resulting in collusion. The tern collusion refers to as "secret, extralegal agreements" between the three participants to behave in accordance that are not meant. For instance, collusion can exist between an owner and a manager, a manager and an auditor, or between three people: an owner, a manager, and an auditor (Strausz, 1997).
Research Methodology:
The word "research methodology" refers to the approach used in research to describe, gather, interpret, and predict phenomena. Primary and secondary research are the two types of research (Vickery, XXXXXXXXXXPrimary research is data that is gathered 'firsthand' by the researcher and is 'factual.' Secondary research, on the other hand, is when a researcher uses existing data on a topic to 'analyses and understand' it. It's also known as "document analysis" or "desktop research" (Kirsch & Sullivan XXXXXXXXXXA concept and evaluation of how investigation does or should process that is utilized as the foundation theory and analysis for secondary multisource research. Comment by Nava Cohen: There is no need to explain what are the primary and secondary research methods. You can simply say
This is secondary research because it was conducted utilizing multi-source document analysis. The This study collects pertinent data from secondary sources such as working papers, peer-reviewed journal publications, previous research papers, reports, newspapers, and official websites (Weinberg, 2002) Comment by Nava Cohen: This is also part of your introduction
Literature review Comment by Nava Cohen: I would suggest you to merge this three sections in order to have the following structure: Situations of collusion Ways to address the risk of collusion There are many repetitions among these three sections. So you will fewer sections but larger.
The examination, summary, and analysis of the accessible information relating to our study topic is known as a literature review (Veal, XXXXXXXXXXThe literature review is an important part of the research process. While researching a specific topic, literature reviews are used to provide an overview of sources. Comment by Nava Cohen: You can also remove this part.
Tirole XXXXXXXXXXinvestigates the various causes of collusion as well as possible solutions. In the three-level principal–supervisor–agent paradigm, each person is seen to have their own role. The principal's job is to keep an eye on the supervisor, while the supervisor's job is to keep an eye on the agent. In this model, he discovered how a little carelessness might cascade down a three-tier hierarchy: inappropriate rewards for the supervisor to screen supervisor led to low supervisory effort, which leads to low productive exertion at the bottom. In a principal-supervisor-agent hierarchy, he discovered that side payments might lead to collusion, resulting in a loss of efficiency. Long-term connections are often formed as a result of side payments in side contracts, which increase productivity while also providing potential for collusion. The cooperation occurs when the principal receives tampered with information as a result of his carelessness. There are three different ways to receive modified data. One of them is withholding information from one member in order to benefit another member, and then sharing that knowledge in able to profit both members. The second step is to disregard falsified data, such as minor thefts which might not be reported. To put it another way, assets are used for their own gain. Another option is to mislead the modified data, such as by changing job titles or adding bogus employees to the payroll.
Another example of collusion is when monetary
ibes are exchanged, secret discounts are given, and the auditor retains a stake in their customers. As a result, the owner should ensure that there have been strong internal controls in place and appoint an external auditor. The purpose of the auditor is to independently check the work, and it is vital to rotate auditors.
The numerous situations of collusion and its possible remedies were discovered in a study by Kofman and Lawa
ee XXXXXXXXXXThe likelihood of collaboration increases when the principle is self-interested and wishes to help companies thrive. Imperfect audit technology is the source of collaboration between auditors and managers. According to their research, auditors are only beneficial when they have accurate information and the manager's culpability is substantial. When a corporation has an internal auditor, there is a risk of cooperation and information manipulation. For example, if a manager is under pressure to fulfill financial targets, he may alter the financial information and subsequently
ibe the internal auditor. According to the study, hiring an external auditor to conduct the audit may be pricey, but there is a lower risk of collaboration since he would not have been aware of anyone in the organization.
One of the instances of cooperation depicted by Khalil & Lawa
ee XXXXXXXXXXis when a shareholder (principal) hires an auditor to examine his manager (agent). The director has access to confidential information and can use it to avoid paying an informational rent to the principal. The principle can hire an auditor with the end purpose of cutting off data asymmetry. The auditor's job is to verify the manager's claims concerning his data. The probability of a review can thus be included in an optimal agreement between the owner and the manager. The audit report now plays a role in the manager's conversation. Because of the risk of collusion, the utilization of such contracts is extremely sensitive to planned activity from all parties involved.
In large corporations, auditing collusion is becoming more common by the day. Long-term personnel of a corporation, such as management or auditors, who are highly trusted, might be the source of fraud and collusion. According to Cameran, Vincenzo, and Merlotti (2005), audit firm rotation is necessary to ensure audit independence. According to ASIC RG 187, s342A of the Corporations Act 2001, if a person works for an audit body or a company for 5 consecutive financial years, he is no longer eligible to work for that firm or company (ASIC Australia, 2007).
According to a study conducted by Waddell, Sharifzadeh, Mohammad, Aubey, and Brent (2012), Statement on Auditing Standards (SAS) No. 99 has a detailed description of three fraud situations, but collusion, another critical component of fraud, has received less attention. From 2003 to 2005, researchers studied the effect of collusive relationships in a mortgage fraud in a Midwestern community. During the sale of any property, collaboration is required, which leads to collusion in the mortgage origination network. Using experiments, the researchers discovered that fraud is still occu
ing as a result of collaboration. Collusion was usually the result of financial statement fraud extortion. It has been discovered that providing auditors with fresh experiences concerning collusion while also contributing to a beneficial social development can assist auditors in recognizing and avoiding fake financial statements, resulting in fewer future financial catastrophes for stakeholders. Furthermore, an independent third-party fraud investigator should be hired to do further inquiry, particularly if the board of directors of a firm is unsure about the management team's wrongdoing.
The significant shortcomings of Sa
anes-Oxley Section 404 Remediation are examined in Bedard, Hoitash, and Westermann's 2012 article. Internal control failures are the leading cause of fraud and corporate loss. The findings of the study show that there is a wide range of variation in Material weaknesses of remediation, such as organization asset accessibility, corporate administration quality (e.g., element level issues in compromise and statistics innovation, as well as record specific issues in income and tax).
According to research by Neu, Everett, and Rahaman (2013), $ 50 million out of $338 million given to the Canadian Sponsorship program in Quebec was gone. Further inquiry uncovered the involvement of politicians, top bureaucrats, and auditors in this huge case of co
uption that resulted in collaboration. Auditors were cognizant of the wrongdoing, but upper management, including politicians and senior bureaucrats, did not want them to reveal anything. All of this information was exposed when Ernst & Young's external auditors did a re-audit and discovered a number of non-compliant transactions.
Findings and discussions
· Internal controls are ineffective.
According to the literature analysis described in the preceding section, insufficient internal controls are the primary cause of collaboration between the owner, manager, and auditor. A failure of management, the board of directors, and the audit committee to do their duties to accomplish the two main goals of effectiveness and efficiency of