Based on interviews with four fraud experts and a review of the literature, we develop a framework comprised of four broad factors (and elements within these factors) that can affect auditors’ ability to detect fraudulent financial reporting (fraud): (1) the audit process, (2) auditor knowledge, training, and experience (KTE), (3) auditor incentives, and (4) institutional forces. We then ask 65 fraud examiners to rate the importance of these factors and elements in explaining why auditors did not detect the fraud on a recent fraud engagement. The fraud examiners rate the audit process, KTE and incentives as the most important inhibitors, while institutional forces are considered of lower importance. They also indicate that failure to effectively assess managements’ incentives and opportunities and to modify audit tests are the primary audit process drivers of failure. With respect to KTE, the primary drivers include lack of skepticism (i.e., auditors put undue trust in management), limited knowledge of fraud schemes, and a lack of appropriate fraud-detection training. The fraud examiners also note that GAAS audits are not designed to detect fraud and current auditing standards do not provide adequate guidance on how auditors should fulfill their fraud detection responsibilities. Our results suggest the need to reexamine and reengineer the audit process, auditors’ training and audit standards to better equip auditors to carry out this critical function.
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