An Investigation of Auditors Responsibility For Fraud Detection in Taiwan

Asian
n Journal of F
Finance & Acccounting
ISSN 19946-052X
2013, Vol. 5, No. 1
An Investiigation of Audditors Respon

R nsibilityy for Frraud
Detecttion in Taiwan
T n
Ch
hih-Shun Hssu (Correspo
onding auth
hor)
Departm
ment of Acccounting, Tamkang
T Un
niversity
New T
Taipei City, Taiwan
E-mail: csshsu@mail.tku.edu.tw
Faan-Hua Kun
ng
Departm
ment of Acccounting, Tamkang
T Un
niversity
New T
Taipei City, Taiwan
E-mail: kuung@mail.ttku.edu.tw
K
Kieran Jamees
Schooll of Accounnting, Econo
omics and Finance,
F
University
U oof Southern
n Queensland
Toow
woomba, Au
ustralia
E-mail: jjamesk@ussq.edu.au
Receiveed: June 28,, 2012 Accepted:

A S eptember 13, 2012 Published: June 1, 201
13
doi:10.55296/ajfa.v55i1.2020 URL: hhttp://dx.doii.org/10.529
96/ajfa.v5i1 .2020
Abstract
Purposse Corporrate fraud iss an issue thhat has becoome increassingly prevaalent in the western
countriees and Taiw
wan as well. As a resultt, external auditors in th
hese countriries continuaally face
widesprread mistruust and critiicism. It iss premised that this iss a manifesstation of th he audit
expectaation gaptthe gap betw ween the ussers expecttations of auuditors andd their actuaal role in
detectinng corporatee fraud, as perhaps evvidenced in audited fin nancial state
tements. Thhis study
investiggates how auuditors and users perceeive the aud
ditors respo
onsibility foor fraud deteection in
Taiwan.
Design//methodoloogy/approa ach A tottal 964 resspondents were
w surveyyed regarding their
perceptions on frauud, using qu
uantitative aanalysis app
proach.
30 www.macrothiink.org/ajfa
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Findinggs The findings

f ind
dicate that a gap exiists on aud ditors respoonsibility to
o detect
corporaate fraud. Thhe auditors strongly diisagreed thaat they weree responsibble for deteccting the
materiaal fraud duuring an au udit, compaared with thet non-auditor groupps which strongly
believedd that audittors should be responsiible. Howev ver, there was
w a generaal consensu us by the
surveyeed groups thhat auditors should woork to detectt fraud that materially affects the true and
fair view
w of financcial statements, or for ffraud detecting only when
w the auddit was specifically
designeed for such detection.
d
Originaality/value The find dings have iimportant implicationss for auditoors and the users in
Taiwan, especiallyy company y directors and manaagers, finan ncial analyssts, investoors, and
bankerss. This papeer fills a voiid in researcch in this area and mak
kes an interresting conttribution
to our uunderstandinng of fraud in Taiwan.
Keywords Audit expectation
e gap, Auditoors responssibilities, Fraud detectioon, Taiwan
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ISSN 19946-052X
2013, Vol. 5, No. 1
Introdu
uction
The role of auditinng had not, until 1920, been to giv ve an opinio
on on the trruth and faiirness of
the finaancial statem
ments. This is now regaarded as thee major objeective, wherreas the imp portance
of fraudd detectionn as an aud dit objectivee is indeedd downplayeed (Brown,, 1962; Leee, 1970;
Porter, 1997). Thee phenomen non of downnplaying au uditors resp
ponsibilitiess by the acccounting
professiion resultedd from its pu
ursuit of proofessional (and financial) interestss and its atteempts to
managee the interrplay betweeen its ow wn (financial and braand-name) interests and a any
competing public duties
d and obligations
o ((Humphrey and Moizer, 1990; Pow wer 1995).
Sikka eet al. (1998) argued thatt there is noo possibility
y to eliminatte the auditiing expectaation gap
becausee the sociaal context of auditinng changess continuou usly througgh interactiion and
negotiattion and thee meaning of audit is cchanging. Public
P criticcism of the professions denial
of respoonsibility foor detecting
g fraud has stirred the auditing
a pro ofession intto activity since
s the
1980s. Efforts havve been maade to narroow the expectation gap by setting ng up comm missions,
such ass the US Cohen
C Comm mission by AICPA (1978) and the Treadwaay Commisssion by
AICPA A (1987); UK K Davison Report and Benson Co ommittee by y AICAW ((1985a and 1985b);
and Maacdonald Coommission by b CICA (11988) in Caanada (1988 8). These wworking partties have
indeed suggested thatt auditorrs have an iimportant ro ole in deteccting corporrate fraud and
a they
recommmended a grradual increease in frauud detection n and reporrting. It is nnoted that they still
emphassize less thee issue of auditors
a dettecting frau
ud as opposed to audittors reportin ng fraud
(Porter,, 1997).
This stuudy is focused on the auditors reesponsibilitiies to detecct fraud durring the timme of the
audit. U
Under the cuurrent Taiwwanese audiiting standard, SAS 43: The Audittors Respo onsibility
to Conssider Fraudd in an Audiit of Financ ial Statemeents, the deteection respoonsibility reests with
manageement, but the
t auditor is required to maintain n an attitudee of professsional skeptticism in
order too have a reeasonable assurance
a oof detectingg material misstatemen
m nts in the financial
f
statemeents arising from errorr or fraud. Although the accoun nting professsion has gradually
g
recogniized the auditors deteection respoonsibility, the
t rather vague
v meanning of reaasonable
assurannce is not understanda
u able or satiisfactory to the users of financial al statementts or the
oday are stilll facing serious criticiism for failling to detecct major
public iin general. Auditors to
corporaate fraud duuring the au
udit process . It has also
o been supp posed that tthis problem m facing
auditorss is caused by a lack of
o satisfactoory explanaations of theeir role in ssociety (Huumphrey,
1997).
Internattional literaature contrib
butes muchh on the ex xpectations gap, especiially on thee debate
about thhe auditorss responsibilities of fraaud detectioon and the publics peerception off her/his
duties ((i.e., Beck, 1973; Steeen, 1990; H Humphrey, Moizer,
M andd Turley, 19993a; Porteer, 1993;
Koh andd Woo, 20001; Leung and a Chau, 20001; Lin an nd Chen, 2004; Fadzly and Ahmad d, 2004).
Howeveer, few em mpirical surv vey studiess in Taiwan n are availaable on funndamental auditing
issues ssuch as the responsibillity to detecct and repo ort fraud, allthough incrreasing atteention is
now beiing paid to the legal liaability issuee associated
d with auditor negligennce and audiit failure
(Huangg et al, 19998; Tung, 1998; and Liu, 2002)). Nevertheeless, the ddebate on auditors a
responssibilities andd the develoopment of eexpectation ns gaps in western
w counntries, especially in
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the UKK and US, over the last

l two deecades are relevant to
o the grow
wth of the auditing
professiion in Taiwan.
The purrpose of thee study is to provide addditional eviidence on thhe audit exppectation gaap. To be
precise,, the main focus
f of thee study is too investigatee whether th
here is suchh a gap in Taiwans
T
businesss environmment. The sttudy attemppts to surveey the Taiw wanese audditors and users of
financiaal statemennts and compare theiir perceptio ons on w what auditorrs should be held
responssible for. Such
S compaarison intennds to exam mine whether there is an audit exp pectation
gap exiisting amonngst Taiwan ns users. TThe findings contributee to our unnderstanding g of the
auditors duty to detect
d frauds and relateed audit pro ocedures. Fu urthermore,, the study findings
can be compared with the reesults of thee relevant studiess carrried out in other coun ntries. In
other w
words, we caan undertakee an internaational comp parison of audit
a expecttation gaps.
The stuudy is structtured as folllows. The ssecond secttion providees brief histtorical back
kground,
emphassizing the auuditors responsibility to detect frraud. The thhird sectionn offers a reeview of
previouus empiricall research. The
T fourth ssection look ks at the research methood, followeed by the
investiggation resullts in the fifth
f sectionn. The stud
dy then finiishes with the discusssion and
conclussion section.
The Au
uditor Resp
ponsibility for
f Fraud D
Detection
For a loong time, there has been n controverrsy about the auditors alleged respponsibility to
t detect
fraud. IIt is perhapps true to saay that the role of the auditor haas not been well defineed since
inceptioon. The audditors respoonsibility too detect frau
ud, as noted
d by Willinggham (1975 5), was a
stated audit objecctive for oveer 400 yearss and was removed
r as an objectivve by the profession
rather tthan by a chhange in thhe demand oof clients of o accountinng firms (ccited in Huumphrey,
1997, pp. 15).
Since thhe 1920s, thet accounting profes sion has fo ocused prog gressively lless on the alleged
responssibility to deetect fraud. This has beeen a resultt of the increase in sizee and compllexity of
businesss transactioons which make
m it uneeconomic fo or the audittor to exam
mine all trannsactions
(Lee, 19986). Humpphrey et al (1993b)
( andd Power (19 995) attributte the changge to the acccounting
professiions pursuiit of a self-iinterested roole and its attempts
a to manage thee interplay between
b
its own (financial and
a brand-n name) intereests and any y competing g public dutiies and obliigations.
By the end of the 1960s, frau ud detectionn as an audiitors respon nsibility waas not assummed and
was acctually deniied by the accountingg professio on (Porter, 1997). Hoowever, thee public
criticism
m of auditorrs to assum me a broaderr responsibility for frau ud detectionn continued through
the greed-is-goodd decade of o the 19800s. Politicall pressures arising froom the proffessions
denial oof responsibbility for deetecting fraaud has stirrred the aud diting professsion into innitiating
activitiees to investiigate the isssue. A nummber of work king commiissions were re establisheed in the
USA (A AICPA, 19778, Cohen Commissio
C on); UK (IC CAEW, 1985a, Davisonn Committee); and
Canadaa (CICA, 1988, McDo onald Comm mission). The
T survey findings oof the comm missions
consisteently indicaate that the majority
m of financial sttatement useers and the general pub blic, and
even soome of thee auditors themselves,
t believe thhe auditor holds
h respoonsibility fo
or fraud
detectioon. Howeveer, the accou unting proffession still rejects exteending audiitors responsibility
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to deteccting fraud. This oppossition is refl ected by thee clear stateement that the auditor was not
to detecct fraud andd the respo
onsibilities tto prevent anda detect fraud firmlly rest on company
c
manageement, not ono the audito or of the coompany (CICA 1988, ICAEW I 19885).
It shouuld be notedd, nevertheeless, that aauditors aree required to remain alert to su uspicious
circumsstances wheere fraud maay exist. Poorter (1997)) indicates th
hat such reqquirement, together
with thee acknowleedgement th hat sound auudit proced dures should
d uncover m major frauds, imply
auditors acceptancce of some responsibiility to deteect fraud. Siince the 19980s, the profession
has graadually mooved in thee direction of recognizing increeased respoonsibility fo or fraud
detectioon. This cann be seen by
y the extractts from the UK
U SAS 11 10 (APB, 19995)
the fact that an audit is carrried out maay, howeverr, act as a deterrent (paara. 17). Auditors
A
plan, peerform andd evaluate their
t audit w
work in orrder to havee a reasonaable expecttation of
detectinng material misstatemeents in the fi
financial staatements arising from eerror or frau
ud (para.
18).. the auditoors should as soon aas practicaable commu unicate theeir findingss to the
approprriate level of
o managem ment, the boaard of direcctor or the audit
a commiittee if theyy suspect
or discoover the frauud (para. 41). (APB,, 1995)
Howeveer, companiies continueed to collappse (Enron and a WorldC Com in US, BCCI and Barings
Bank inn UK, etc.),, substantiall fraud conttinued to occcur, and fu unds continuued to disap ppear go
missingg. Public prressure has mounted, pparliament members were w criticall, and goveernments
threatenned regulatoory legislatiion (Sikka et al., 1998 8; Dunn and d Sikka, 19999). Koh and
a Woo
(1998) suggest thatt one of posssibilities too reduce thee expectationn gap is exppansion of auditors
a
responssibilities andd enhancem ment of audditor indepeendence. OMalley (19993) also agrees a to
imposinng additionaal responsib bilities on aauditors with
h regard to detecting ffraud by sug ggesting
four addditional respponsibilitiess which thee profession
n might conssider: manaagement and d auditor
evaluatiion of interrnal control systems; ccompliance reporting; direct
d reporrting by aud ditors to
regulatoors; and audditor associaation with innterim finanncial inform
mation.
Neverthheless, the accounting g professionn has given n increase to the breeadth and depth
d of
auditors responsibbilities. Th
his is refleccted, under the UK IS SA240 (APPB, 2005) and US
AU316 (PCAOB,, 2002), which w emphhasize the importance of exerccising proffessional
skepticiism, discusssion amon ng engagem ment perso onnel regaarding the risks of material
misstateement due to
t fraud, an nd obtainingg the inform
mation needeed to identiify risks of material
misstateement due to
t fraud. Th he duty on fraud detecction remainns publicly disavowed and the
accountting professsion contin nues to streess it is thee duty of managemen
m nt. Vanasco o (1998)
argues that the audditors expect to minim mize legal liability by avoiding leegal claims holding
them reesponsible for
fo fraud.
In the Taiwanese arena, virtually no chhange has occurred in n the auditting standarrds with
respect to the audiitors responnsibility to detect fraud
d since the Taiwan SAAS 14s inceeption in
1987. TTaiwans SAS S 14 is the majorr auditing standard which w regullates the auditors
a
responssibilities. Thhe core con
ncept of Taiw wans SAS 14, in simiilar vein to US SAS 53 3 (Chen,
2004), is that ressponsibilitiees to preveent and dettect fraud and a errors lie with company
c
manageement. How wever, auditors should plan and perform their audit worrk with duee care so
that maaterial misstatements in i the finanncial statemments arising from frauud or errorr can be
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uncoverred. No respponsibility for reportinng fraud is involved

i wh
hen the audiitor discoveers fraud
during hher/his audiit.
Prior too 2000, the Taiwan pro ofessional bbodys systeem of Practiice Review with respect to the
auditors duty to deetect fraud was not disscussed in thhe public do
omain. Littlle publicity is given
to sancttions impossed on erran nt auditors iddentified by
y the monito
oring of audditors perfo
ormance,
informaation about monitoring process andd its outcom mes.
Fraudullent activities across business havve increased d in the lastt two decaddes. Among gst them,
Procommp Informatiics Ltd. wass one case iinfamous en nough to be deemed thee Taiwan veersion of
the US Enron finanncial fraud.. By the endd of June 2004, Procom mps NT$400 billion (UUSD$1.3
billion) fallout roccked the Taaiwanese m market and brought ab bout scathinng criticism
m of the
accountting professsion. Other fraud episoodes includ de Infodisk Technologyys NT$4.28 8 billion
in lossees relating to the investment in 2004, and d the illegal over-due loans mad de to its
subsidiaaries by Chhung-shing Bank resultted in NT$ $11 billion bad-debt
b looss in 2000.. During
the 19990s, well-knnown fraud d cases are Tung-lung Metal Industry Cos fraudulent activity
made by its CEO which
w resullted in a losss of NT$2.4 billion (U USD$80 milllion) in 19 998 from
avoidinng short-term
m investment loss reallization by the t shift to long-term iinvestment without
authorizzation, and Taiwan Intternational Securities Company
C suffered
s los s of NT$10 0 billion
(USD $$330 millionn) in 1994 because
b of thhe false tran
nsaction maade by a junnior staff.
The aboove corporaate frauds in Taiwan hhave not on nly resulted in huge loosses of mooney and
public cconfidence in auditorss but have aalso placed d the spotlig
ght of the ddebate on auditors
a
responssibility to deetect and reeport fraud. However, the
t Governm ment, variouus pressuree groups,
and the general pubblic do not favor the sttatus quo.
Influencced by circcumstances that led tto the passage of Sarrbanes-Oxleey Act (SO OX), the
governmment authorrity, Financiial Supervissory Comm mission, begaan seriouslyy to explore ways to
raise CPPA audit staandards and
d effect a robbust Practicce Review system
s in Taaiwan. Regrettably,
not purrsuing the iddea of empploying an ooutside regu ulatory agen
ncy such ass PCAOB to t be its
supervisor and ovverseer, the Practice R Review systtem has still relied onn the most part on
Taiwann CPA Assoociations self-regulatoory function ns, which are supporteed and endo orsed by
the CPAA Act amenndment 2007 7 (Wu, 20077).
In Taiw wan, the current
c aud
dit standardds regulating body is i Accountting Researrch and
Developpment Founndation (AR RDF). As a ffoundation,, ARDFs in ncome derivves mainly from
f the
donatioons by CPA A Association, with thhe exceptio on of some income deerived from m selling
publicattions and holding
h accoountant proofessional trraining sem
minars. The conflict off interest
relatingg to income sources at the Associaation not on nly hamperss ARDF in its standard d-setting
efficienncy, but alsoo renders it ineffectuall when it co
omes to promoting auddit standardss for the
public good and interest.
i Th
his is not cconducive to t the healtthy developpment of Taiwans
T
accounttancy professsion.
In Septtember 20006, Taiwan auditing seetting body y, respondin
ng to the puublic criticism and
debatess on the auuditors resp
ponsibilitiess to detectt and reporrt fraud, isssued SAS 43: The
Auditorrs Responsibility to Co
onsider Frauud in an Auudit of Finan
ncial Statem
ments. The Taiwans
T
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SAS 433 adopted cuurrently, refferring to U S SAS 99 anda UK SAS S 110, recoggnizes the auditors
a
responssibility to reeport fraud,, and consiideration off fraud risk factors durring the audit (Ma,
2006). It points out
o that the detection responsibility rests with w manageement. How wever, it
spells oout the respponsibility as
a adherencce to GAAS S, namely that
t the audditor is req
quired to
maintaiin an attitudde of profeessional skeepticism in order to haave a reasoonable assurrance of
detectinng material misstatements in the fiinancial stattements arissing from errror or fraud
d.
Eviden
nce from Em
mpirical Studies
The debbate about the
t auditors responsibiility to deteect fraud revveals that thhere are exp
pectation
gaps within the acccounting profession
p iitself concerning the proper
p condduct of an audit,
a as
well as between puublic expecctations andd auditor perrformance. Liggio (19 74) was thee first to
define tthe term eexpectation gap as diifference off the levelss of expectted perform mance as
envisionned both byy the independent accoountant and d by the useer of financcial statements. The
term bbecame preevailing ussage in thhe auditing g literature after thee conclusio ons and
recomm mendations of the Coh hen Report on auditorss responsib bilities (AICCPA, 1978)). Porter
(1993) extended thhe definitio ons as the ggap betweeen societyss expectatioons of audittors and
auditorss perform mance as perceived
p by societyy. By em mbracing thhe notion of the
reasonaableness and expeected perrformance, she adopted th the title audit
expectaation-perform mance gap p, and pproposed two t majorr componeents, nameely, the
reasonableness gaap and the performannce gap. Th he latter is constructedd as the summ of the
deficieent standardds gap and the
t deficiennt performaance gap.
Numeroous empiriccal studies ofo the audit expectationn gap have been conduucted since 1970 in
many ccountries. Beck
B (1973)) surveyed Australian shareholdeers in 19722 and obtain ned 711
usable rresponses (46% respon nse rate). B
Becks findin
ngs were th
hat the profe
fessional asssurances
that shaareholders expect from m the audditors far ex xceed whatt the audittor would consider
c
reasonaable or evenn possible.
Baron eet al. (19777) conducted d a survey in 1975 to learn the ex xtent of anyy expectatioons gap.
Questioonnaires weere sent to large firm aaudit partnerrs (105); sm mall firm CCPA (35); baank loan
officerss (83); finaancial manaagers (79); and financcial analystts (52). Thhe study fo ound the
existencce of audit expectation n gap whereeby non-au uditors thoug ght auditorss should takke more
responssibility to detect
d the deeliberate m
material falsiification off the financiial statemennts. The
partnerss of large firms
f were the group pproclaiming g least resp ponsibility tto detect deeliberate
falsificaation.
Further evidence in the 1980ss was proviided by thee MacDonalld Commisssion (CICA A, 1988).
One thoousand resppondents weere interview wed by telepphone and, as far as fraaud was con
ncerned,
47% off those questtioned belieeved that auuditors should actively seek fraud.
The Stteen surveyy (1990), conducted
c by means of face-to-face intervviews in the t UK,
comprissed 1,737 usable
u respo
ondents whoo were divided into thrree categoriies: (1) inffluential
were thhose who saaid they weere chairmaan, director or senior partner
p in a company; (2)the
financiially aware, were those in a positiion to influeence audit appointment
a ts and familliar with
audit fiinancial staatements, annd who ow wned sharess and activeely manageed their ow wn share
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portfoliio or financiial affairs; (3)

( the remaainder of the responden
nts who werre not familliar with
audited financial statements.
s The surveyy revealed that the widely
w held opinion th hat fraud
detectioon is an immportant parrt of the auuditors job,, and showeed clearly tthat there exists
e an
expectaations gap reegarding fraaud detectioon gap of co
onsiderable proportionss.
Humphhrey et al. (11993a) cond ducted a queestionnaire survey betw ween Octobber 1990 and d March
1991. A 38% respponse rate was achievved which equated to o 935 usablle replies. The six
categories of inteerviewees were: audiitors, accou untants, fin
nancial dirrectors, inv vestment
analystss, bankers, and financiial journalissts. The eviidence indiccated that ppreparers, users and
even auuditors saw auditors as having a roole to ensurre that all sig gnificant fraaud is deteccted, but
they didd not feel thhat auditors currently offfer significcant protectiion against fraud.
Porter (1993) connducted a survey
s in N
New Zealan nd in 1989 to ascertaain the opin nions of
auditorss interest groups
g abouut auditors eexisting ressponsibilitiees, the standdard of perfo
ormance
of thosee responsibbilities, and the responssibilities auuditors shou uld take upoon themselv ves. The
usable 1,184 respoonses from four groupps (auditorss, auditees, financial coommunity, and the
general public) revealed
r th
he presencee of an expectation
e gap betw ween audito ors and
non-audditors. Thee study callculated thee size of the gaps and a found that the deficient
d
perform
mance gap, deficient
d staandards gapp, and unreasonablenesss expectatiion gap con ntributed
11%, 58%, and 311% respectiv vely. In 19999, Porter and
a Gowtho orpe (2004)) replicated Porters
1989 sstudy in both NZ an nd the UK K and fou und that th he composiition of th he audit
expectaation-perform mance gap has changeed significaantly over th he decade ffrom 1989 to t 1999.
The 19999 study shhowed the sizess of the deficient performance
p e gap, deficcient standaards gap,
and unrreasonablenness expectation gap hhave chang ged to 6%, 53%, and 41%, respeectively.
Porter aand Gowthorpe indicaated (2004) that audito ors perform mance of thheir responssibilities
has impproved so thhat the perfformance gaap has narro owed. However, societtys expectaations of
auditorss have incrreased to a level that more than n offsets thiis improvem ment. Theyy further
recommmended fourr measures to be implaanted to narrrow the peerformance gap: contin nued and
strengthhened moniitoring of au uditors perrformance; improving
i quality
q conttrols in aud
dit firms;
enhanciing educatioon of the au uditing practtitioners; annd introduciing new audditing stand dards. As
to narrowing the reasonableeness gap, they suggeested the need n for soociety to be
b better
educateed about thee audit functtion and whhat auditors can reasonaably be expeected to ach hieve.
Othher studies in emerging econom mies have provided the evidennce identify ying the
existencce of the exxpectation gap.
g Most off these stud dies were unndertaken byy means off surveys
designeed to asceertain the opinions oof differen nt interest groups abbout the auditorsa
responssibilities andd the audit objectives. They are, forf examplee, the investtigations by y Gloeck
and Jagger (1993) in i the Repu ublic of Souuth Africa; Leung and d Chau (20001) in Hong g Kong;
Low, FFoo, and Koh (1988) and Best, B Buckby an nd Tan (200 01) in Singgapore; Fad dzly and
Ahmad (2004) in Malaysia; Lin and C Chen (2004)) in China; Chowdhurry, Inn and d Kouhy
(2005) in Bangladdesh; Dixon, Desira aand Baldaccchino (200 05) in Maltta; Woodhead and
Sohlimaan (2006) inn Egypt; Siidani (2007)) in Lebano on. Most stuudies abovee consistentlly found
the exisstence of thee audit expeectation gapp in the areaa of the auditors respoonsibility, reeliability
of auditted financiaal statement,, and auditoors indepenndence or acccountabilityty.
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2013, Vol. 5, No. 1
Results from a striing of empirical studiees stretchin ng over the last 40 yeaars or so haave been
examined. They coonfirm the historical aanalysis maade earlier, namely
n that
at the gradu
ual move
away frrom fraud detection
d as the main au
audit objectiive, which solidified
s inn the second
d half of
the 20thh century, iss not a view
w shared by the public. Not only do d the viewss differ betwween the
accounttancy profeession and audit
a benefi
ficiaries, theey differ co
onsiderably. The percen ntage of
survey rrespondentss who wanted the audittors role to o embrace frraud detectiion is substantial. It
is pertinnent to notee also that such
s views have, in broad terms, remained cconsistent ov ver time
despite general exxhortations from the pprofession and educational publiicity to chaange the
so-calleed ignorancee gap.
Researcch Method
d
Whetheer the accouunting profe fession in T
Taiwan has met the pub blics expecctations is an issue
worth investigatinng. This em mpirical innvestigation
n are to ascertain thhe nature of o audit
expectaations gap with
w respecct to the auuditors resp ponsibilitiess to detect corporate fraud.
f In
order too examine thhis issue, th
he followingg statementss are develo
oped and tessted:
1. Thee auditor should be held
h responnsible for th
he failure to detect m
material frau
ud in an
ordinaryy audit exam
mination.
2. Thee auditor shhould be heeld responsiible for faillure to detect material fraud in a detailed
audit exxamination specifically
y designed ffor such detection.
3. Thee auditor shhould be helld responsibble for failu
ure to detect material fra
raud when collusion
c
exists aamong emplloyees below
w managem ment level.
4. Thee auditor shhould be helld responsibble for failu
ure to detect material fra
raud when collusion
c
exists aat the managgement leveel.
5. Thee auditor shhould be heeld responsiible for faillure to deteect material fraud in siituations
where tthe irregularrities are a result
r of unrrecorded traansactions.
6. Thee auditor shhould be heeld responsiible for failure to detecct fraud thaat materially
y affects
the truee and fair vieew of finan
ncial statemeents.
7. Thee auditor should
s be held responnsible for failure to detect matterial fraud d that is
perpetraated and cooncealed thrrough relateed party traansactions (i.e.,
( shares trading irrregularly
betweenn affiliated companies)).
8. Thee auditor shhould be heeld responsiible for faillure to deteect the typee of materiaal frauds
(such as embezzlemment) that serve
s to perrsonally enrrich manageers, officerss, or directo
ors of an
entity.
9. Thee auditor shhould be heeld responsiible for faillure to deteect the typee of materiaal frauds
(such aas petty cashh theft, pay
yroll paddinng, theft of stocks) thaat are comm
mitted to peersonally
enrich eemployees below
b manaagement levvel.
10. Thee auditor should be held respponsible forr failure to o detect m
material, deeliberate
falsificaations and misrepreseentations off financial statementss that are ccommitted for the
Asian
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2013, Vol. 5, No. 1
purposee of defraudding the inveesting publiic.

A choicce of six altternative ressponses for each statemment is desiigned, and tthe respond dents are
asked tto give onee level of agreement.
a In order too eliminate the bias oof analysis that the
responddents may notn have bacckground knnowledge about a the au
uditors respponsibility for
f fraud
detectioon, the donnt know (ccoded 0) chhoice is giv ven in the questionnaiire but exclluded in
analyzinng. Therefoore, the fivve choices oof level off agreementt, excludingg the dont know
choice, were calcuulated by ussing the fivve-point Lik kert scale, varying
v from
om Strongly Agree
(coded 5) on the leeft hand sid
de of the scaale to Stron
ngly Disagreee (coded 1 ) on the rig
ght hand
side of tthe scale.
The annalysis is made off the diffferences in n the meean rankinng based on the
Wilcoxoon-Mann-W Whitney tesst. The Wi Wilcoxon-Maann-Whitney y test has been ado opted to
establissh whether apparent
a diffferences off opinion between the survey grouups are stattistically
significcant. The Wilcoxon-Ma
W ann-Whitneey test was chosen
c becaause it couldd test differrences in
means of the two population ns without hhaving to test
t for norrmality of ddistribution. Where
significcant differennces were found
fo amonngst five gro
oups within these tablees of resultss, it may
be claimmed that thee auditors are expectedd to be held responsiblee for the deetection of th he fraud
(Siegel and Castelllan, 1989)
For thee purpose of this study y, three grooups were selected.
s Th
hey are audditor group, auditee
group cconsisting of financiaal directors,, CEOs, orr accountin ng managerrs from Taaiwanese
Top-5000 public coompanies; and a the grooup of users of finan ncial statem
ments, consiisting of
financiaal analysts and bank lo oan officerss. The subg
groups of thhe auditee aare regarded as the
prepareers of financcial statemen
nts.
A total of 964 quesstionnaires were
w mailedd. In order to t increase the
t responsse rate, folloow-up of
non-resspondents wasw done by 669 dupliccate copies of o the questtionnaire annd original letters
l of
explanaation, 340 of o which went
w to mem mbers of thhe auditor group,
g 116 to memberrs of the
auditee group, andd 213 to the members oof the users of financial statementss group. Off the 964
memberrs surveyedd, there weree 341 usablle responsess, a 35% return rate forr data analysis. This
is a veryy satisfactorry responsee rate withinn an East-Assian contextt.
Investiggation Resu
ults
As the respondentt group of the t users off financial statements consists off financial analysts,
a
institutiional investtors, and baank loan offficers, who
o represent different bbeneficiary interests
with reespect to acccounting in nformation,, the analyssis is thus undertakenn by compaaring the
surveyeed opinionss of auditorrs responssibility betw ween the fiive major rrespondent groups.
Differennce of opinnions withinn the user grroup was allso identifieed. The desccriptive stattistics of
the survvey results are
a exhibiteed in Table 1, where th he means an nd standard deviations for each
statemeent responsees are proviided. In adddition, Tablle 2 shows Wilcoxon-M Mann-Whittney test
results which exaamine whetther differeences are evidente in the opinioon results between
b
responddent groups. The summ mary and ovverview of the respondents opinnions is prov vided in
Table 3.
It is ackknowledgedd that, altho
ough judgm
ment of the performancce of auditoors responssibilities
Asian
n Journal of F
ISSN 19946-052X
2013, Vol. 5, No. 1
involvees a range of
o spectrum ms, rather thhan a point of measureement, for tthe purposee of this
study, 3 has been selected
s as the
t point off differentiattion (averag
ge of sum bby 1 to 5). By
B doing
so arbittrariness willl decrease, and objectiivity increasse.
On aveerage, in thee overall grroup analyssis, three off the statem
ments are noot perceived as the
auditors responsibbility for fraud detecti on. This is shown in the
t Table 11, by having g means
results oof less than three. Thesse three stattements are::
Statemeent 3: The auditors
a sho
ould be heldd responsib
ble for the failure
fa to deetect materiial fraud
when coollusion exiists among employees
e bbelow the management
m level.
a sho
ould be heldd responsib
ble for the failure
when coollusion exiists at the management level.
Statemeent 9: The auditors sh hould be heeld responssible for thee failure too detect thee type of
materiaal frauds (ssuch as pettty cash theeft, payrolll padding, or theft off stocks) wh hich are
committted to persoonally enricch employeees below ma
anagement level.
l
The oveerall group perception of the abovve three stateements is co with the responses of
onsistent wi
the finaancial analyyst group, buut bank loann officer grroup only aggrees with tthe statement 3 and
statemeent 9 which are not auditors dduties. It should s be noted that both audiitee and
institutiional investtor groups agree
a with all the ten statements which claim m that the auditors
are respponsible forr fraud deteection. By ccontrast, the auditor group agreess only with h four of
them. TThe auditor group
g consiiders only thhe followingg statements as their reesponsibilitiies:
a sho
ould be heldd responsib ble for the failure
in a dettailed audit examinatio
on specificallly designed
d for such detection.
d
Statemeent 6: The auditors shhould be heeld responssible for thhe failure too detect fra
aud that
materiaally affects the
t true and
d fair view of financial statements.
a sho
ould be heldd responsib ble for the failure
perpetrrated and cooncealed thrrough relateed party tra
ansactions.
Statemeent 10: Thee auditors should
s be hheld respon nsible for the
t failure to detect material,
m
deliberaate falsificaations and misrepresent
m tations of fiinancial statements thaat are comm
mitted for
the purppose of defrrauding the investing ppublic.
It is interesting to note, howev ver, that thee above fou
ur responsib
bilities do noot have stattistically
significcant differennces in the mean
m responnses betweeen the audito
or group annd the auditeee group
accordinng to the Wilcoxon-M Mann-Whitnney test in n Table 2. The resultss indicate that the
auditorss perceive thheir responssibilities onnly within th
he existing auditing
a staandard requiirements,
which tthey are reeasonably expected
e too perform the
t duty to o detect. Thhe prescrip ptions in
existingg auditing sttandards ex xpress that aauditors sho
ould issue th
he audit repport stating whether
the finaancial statem ments be prresented wiith a true an nd fair view
w. Any mate terial misstaatements
caused by deliberaate falsificattions or disstortions wo ould have material
m effeects on the true and
fair vieww of the finnancial stateements.
There is a strong consensus
c by
b both audditor and no
on-auditor groups
g that auditors sh
hould be
Asian
n Journal of F
ISSN 19946-052X
2013, Vol. 5, No. 1
held ressponsible foor fraud dettection in a design speccifically to search for ffraud (Stateement 2)
and for detection of
o fraud thatt materiallyy affects the true and faair view of ffinancial staatements
(Statem
ment 6).
Howeveer, the non--auditor gro oup would nnot merely expect the auditors reesponsibility y within
the scoppe of existiing auditing
g standards but expectt auditors too expand thhe responsiibility to
detect aall type of frauds
f inclu
uding the coollusion am
mongst the employees
e bbelow manaagement
level. TThe significant differeences of oopinions aree between the auditoor and institutional
investorr groups, annd between the auditorr and bank loan officerr group. Thhe similar reesult can
be founnd in the coomparison between
b auuditor groupp and finanncial analystt group, exxcept for
Statemeent 3. The results
r of Wilcoxon-Ma
W ann-Whitneey test (see Table
T 2) revveal that theere is no
generalized concluusion that caan be drawnn about the statistically
y significannt differencees of the
responsses betweenn the groups.
To summ up, the ressults indicatte the existeence of the expectationn gap in terrms of the auditors
a
duties tto detect thee material fraud,
f durinng an ordinaary audit ex
xamination; that materiial fraud
perpetraated by em mployees below
b manaagement leevel; and th hat materiaal fraud cooncealed
throughh related-parrty transactiions. Table 3 provides a summary and overvieew of the op pinions.
Discusssion and Coonclusions
The paaper has innvestigated,, amongst auditor an nd non-aud ditor groupps, the perceptions
regardinng the auditors respo onsibility too detect co
orporate frau ud. The finndings indicate the
expectaation gap existing in n Taiwan. The non--auditor grroups are expecting greater
responssibility from
m auditors with
w respecct to detectting fraud thant the auuditor group
p, which
agrees oonly with thhe detection
n responsibbility requireed in the Taaiwanese exxisting standards. It
appearss that adequuateness of the auditinng standard with respecct to the auuditor responsibility
needs too be consideered and maaintained.
To ensuure that thee accountin ng professioon is perceeived by interested ouutside partiees to be
maintaiining the fraaud detectio
on standardss, it is sugg
gested that publicity
p off disciplinarry action
be incrreased, nott merely relying
r on the self-reegulation as a a monittoring mecchanism.
n enough for buildingg up the con
Self-reggulation is not nfidence off the public.. To increasse public
confideence in thee adequacy of the dissciplinary procedures
p of the proofession, it is also
suggestted that the auditing standards-settting body must
m not just be comprrised of acccounting
professiionals but include
i distinguished members from f diverse sectors oof society. Through
T
their innvolvement, financial statement
s aaudit proced dures can beb made moore transparrent and
public awareness heightened d, so that CCPAs in th heir financiaal audit annd standardss-setting
capacitiies can, whhile functionning under a self-regu ulatory insttitution, bettter conformm to the
principlles of what is termed ccommonly aaccepted.
The facct that audittors in Taiwwan do not ssee the deteection of fraaud as theirr responsibiility, but
rather ssee their roole as exprressing an independen nt opinion on financiaal statemen nts is an
indicatiion that they still needd to be awaare that und detected frau
ud could diistort their findings
and affe
fect the reliaability of th
heir audit rreports. Furthermore, from
f an ethhical viewpooint, the
auditorss should acct as a watcchdog that is responsiible for rep porting any suspicion of fraud
Asian
n Journal of F
ISSN 19946-052X
2013, Vol. 5, No. 1
rather thhan remainiing silent.

Educatiion and com mmunication n may be a kkey to solviing part of the
t problem m as to how auditors
regard ttheir role, by
b closing the misunnderstanding g gap althoough the exxpectation gap
g may
still exiist. Not onnly must auuditors knoow what th heir responssibilities aree, and possess the
technicaal competeence requireed to fulfilll them sattisfactorily, they mustt also deveelop and
maintaiin professioonal attituddes. In paarticular, thhe professiional standdards of integrity,
indepenndence and service abo ove reward mmust be insttilled in them
m.
Users inn Taiwan, on
o the other hand, mayy need to be well inform med throughh the provission of a
precise and detailled engageement letterr and the audit report. Such a report should be
sufficiently standaardized to avoid
a confuusion amongst readers as to its bbasic messaage (i.e.,
reasonaable assurannce). Howevver, it must also be flexxible enouggh for auditoors to reporrt clearly
concernns they havee about the company. IIt is suggessted that thee auditors inn Taiwan ex xplicitly
be requuired to add a paragraphh to the auddit report ex
xplaining th
he position iin cases whhere they
have dooubts about the viability
y of the audditee compaany.
The stuudy contribuutes our un nderstandingg of the aud y to detect ffrauds and possible
ditors duty
suggesttions providded in an atttempt to brridge the ex xpectation gap
g in Taiw wan. Moreov ver, it is
submittted that thee investigattion findinggs make a particular and valuabble contribu ution to
extendinng the interrnational liteerature regaarding the au
udit expectaation gap.
Future rresearch maay considerr both longiitudinal studdies and comparative sstudies overseas by
sendingg a large-sccale self-admministered qquestionnaiire to remove any poteential bias. Further
study innto this areea could alsso be underrtaken to innvestigate the
t functionnal and opeerational
aspects of auditingg for fraud. Detailed m micro case studies of how majorr frauds weere both
perpetraated and dettected will also
a be impportant (see e.g. Lam ett al., 2011).
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Table 1. Descriptivve statistics by subgrouups of respondents

Overall Grooup Auditorss Auditees Financial Analysts Institu
utional Investoors Bank Loan
n Officers
Means S.D
D. Means S.D
D. Means S.D
D. Means S.D. Meeans S.D
D. Means S.D.
Statement 1 3.75 1.004 2.71 0.9
97 4.38* 0.733 3.82* 0.82 4.7
72* 0.466 3.93* 0.35
Statement 2 4.31 0.663 4.00 0.5
53 4.51 0.744 4.33 0.56 4..68 0.488 4.28 0.55
Statement 3 2.53 1.008 1.83 0.6
62 3.36* 0.800 2.10 0.94 3.8
88* 0.888 2.42 0.84
Statement 4 2.69 1.15 1.78 0.6
61 3.37* 0.811 2.33 1.12 4.0
00* 0.911 3.25* 0.98
Statement 5 3.63 0.998 2.64 0.9
92 4.11* 0.599 3.72* 0.85 4.6
60* 0.500 4.05* 0.32
Statement 6 4.14 0.665 3.83 0.6
66 4.26 0.577 4.21 0.69 4..68 0.488 4.08 0.47
Statement 7 3.85 0.880 3.13 0.8
89 4.16* 0.588 4.09* 0.59 4.4
40* 0.500 3.95* 0.32
Statement 8 3.31 1.009 2.23 0.7
71 3.86* 0.800 3.46* 1.05 4.3
36* 0.700 3.58* 0.71
Statement 9 2.98 1.009 2.26 0.8
81 3.76* 0.699 2.77 1.05 4.3
32* 0.755 2.48 0.85
Statement 10 3.89 0.886 3.09 0.8
89 4.37* 0.666 4.01* 0.62 4.6
60* 0.500 3.95* 0.39
* indicattes that statisttically generaalised conclussion can be drawn
d about the
t differencee in opinions from the
auditor ggroup (p0.055), based on Wilcoxon-Man
W nn-Whitney teest.
Table 2. Auditinng function n expectedd of audito

ors toward
d fraud deetection ressults of
wilcoxoon-mann whhitney test to responsess
Auditors A
Auditors Aud ditors Auditors
vs. vs. vs.
v vs.
Auditess Finanncial Analystts Inst'l In
nvestors B
Bank Loan Officers
O
Z Sig.
S Z Sig. Z Sig. Z Sig.
Prrob. Prob. Prob. Prob.
Statemennt 1 -9.65 0.00 -6.998 0.00 -7.36 0.00 -6.47 0.00
Statemennt 2 -6.68 0.00 -4.442 0.00 -6.18 0.00 -2.90 0.00
Statemennt 3 -
-10.19 0.00 -1.883 0.07 -7.64 0.00 -4.45 0.00
Statemennt 4 -
-10.27 0.00 -3.554 0.00 -7.67 0.00 -7.36 0.00
Statemennt 5 -9.14 0.00 -6.442 0.00 -7.23 0.00 -6.44 0.00
Statemennt 6 -5.00 0.00 -4.113 0.00 -6.78 0.00 -2.09 0.04
Statemennt 7 -7.66 0.00 -6.883 0.00 -5.97 0.00 -4.36 0.00
Statemennt 8 -
-10.05 0.00 -7.555 0.00 -7.95 0.00 -7.76 0.00
Statemennt 9 -9.75 0.00 -3.664 0.00 -7.75 0.00 -2.12 0.03
Statemennt 10 -8.92 0.00 -7.113 0.00 -6.65 0.00 -5.46 0.00
indicaates that no sttatistically gen
neralised concclusion can bee drawn about the differencee in opinions between
b
the suurvey groups regarding
r this statements.
Asian
n Journal of F
ISSN 19946-052X
2013, Vol. 5, No. 1
Table 3. Summary and overvieew of the suurvey group

ps opinions
Fin
nancial Institutional
I Bank Loaan
Auditors Auditeees
Annalysts Investors Officerss
Sttatement 1 a b
Sttatement 2
Sttatement 3
Sttatement 4
Sttatement 5
Sttatement 6
Sttatement 7
Sttatement 8
Sttatement 9
Staatement 10
a: inndicates the statement is
i not considdered as thee auditors responsibilit
r ty.
b: inndicates the statement is considereed as the aud
ditors respo
onsibility.

An Investigation of Auditors Responsibility For Fraud Detection in Taiwan

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Asian

An Investiigation of Audditors Respon

Receiveed: June 28,, 2012 Accepted:

Findinggs The findings

the UKK and US, over the last

uncoverred. No respponsibility for reportinng fraud is involved

portfoliio or financiial affairs; (3)

purposee of defraudding the inveesting publiic.

rather thhan remainiing silent.

Manageerial Auditinng Journal,, 16(3), 133 -44. http://d

Table 1. Descriptivve statistics by subgrouups of respondents

Table 2. Auditinng function n expectedd of audito

Table 3. Summary and overvieew of the suurvey group

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