An exploratory study of auditors’ responsibility for fraud detection in Barbados

An exploratory study of auditors’ responsibility for fraud detection in Barbados

Philmore Alleyne
Department of Management Studies, Faculty of Social Sciences, University of the West Indies, Barbados, West Indies, and

Michael Howard
Department of Economics, Faculty of Social Sciences, University of the West Indies, Barbados, West Indies


Abstract
Purpose – Recently, fraud has been brought to the forefront with the scandals of Enron and Worldcom. Fraudulent financial reporting and misappropriation of assets served to undermine investors’ confidence in audited financial statements. This study investigates how auditors and users perceive the auditors’ responsibility for uncovering fraud, the nature and extent of fraud in Barbados, and audit procedures utilised in Barbados since Enron.
Design/methodology/approach – A total of 43 respondents (19 auditors and 24 users) were surveyed regarding their perceptions and experiences on fraud, using qualitative and quantitative approaches.
Findings – Indicates that the expectation gap is wide, as auditors felt that the detection of fraud is management’s responsibility, while users and management disagreed. Also finds that fraud is not a major issue in Barbados and that companies who have internal auditors, sound internal controls and effective audit committees are better equipped to deal with fraud prevention and detection.
Research limitations/implications – The sample size is relatively small and it is not intended nor claimed that those interviewed comprise a representative sample.
Practical implications – This research fills a void in research in this area in a small country like Barbados. These findings have important implications for users of Barbadian accounts, especially investors, auditors and regulators.
Originality/value – This paper fulfils a resource need for academics and practitioners, and makes an interesting contribution to our understanding of fraud in Barbados.
Keywords Fraud, Auditors, Barbados
Paper type Research paper

Introduction
For a long time, there has been controversy over the role of the auditor with respect to the detection of fraud. It has been argued that an audit should be done by a competent, independent, individual and involves the collection and assessment of evidence about information to decide and report on the degree of correspondence between the information and certain established criteria (Arens et al., 2003, p. 11).

The Association of Certified Fraud Examiners (ACFE, 2004) in its study entitled The Report to the Nation on Occupational Fraud and Abuse has reported that annual fraud costs to US companies exceed 6 per cent of their revenues, which is approximately US$660 billion annually. However, this figure does not include the impact that fraudulent financial reporting has on the capital markets (Cox and Weirich, 2002). The ACFE (2004, p. 1) defined occupational fraud as:

the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organisations’ resources or assets.

Some common types of fraud include creating fictitious creditors, “ghosts” on the payroll, falsifying cash sales, undeclared stock, making unauthorised “write-offs”, and claiming excessive or never incurred expenses.
In today’s technological age, fraud has become very complicated, and increasingly difficult to detect, especially when it is collusive in nature and committed by top management who are capable of concealing it. Consequently, auditors have argued that the detection of fraud should not be their responsibility.
This exploratory study attempts to focus on the auditors’ and users’ perceptions in detecting fraud and related audit procedures, the nature and extent of fraud in Barbados, possible influences of professional experience and educational background of auditors, and the organisation’s previous experience in detecting fraud (Moyes and Hasan, 1996, p. 41). The paper also looks at the way auditors respond to the increased likelihood of material misstatements caused by fraud, especially since Enron (Makkawi and Schick, 2003). International literature contributes much on the debate of the auditor’s role and the public’s perception of his role, but none has been researched on this issue in Barbados. However, KPMG in Barbados (KPMG, 2000a, b) has carried out a study on fraud in Barbados which provides a foundation for the conduct of the present study.
The paper is structured as follows: The second section looks at a brief historical background. The third section deals with a review of previous research and is followed by the fourth section on key characteristics of Barbados. The next section looks at the research methodology and the findings and discussion are then presented and analysed in the sixth section. The final section concludes the study.

Brief historical background

The role of the auditor has not been well defined from inception. In the nineteenth century, auditors claimed fraud detection as an audit objective. In re London and General Bank (No. 2) [1895] 2 Ch. 673, Lindley LJ stated that it was the auditor’s duty to report to shareholders all dishonest acts which had occurred and which affected the propriety of the contents of the financial statements (Porter, 1997). However, the learned judge also argued that the auditor could not be expected to uncover all fraud committed within the company, since the auditor was not an insurer or guarantor, but was expected to conduct the audit with reasonable skill and care in the circumstances.
By the 1930s, it became generally recognised that the principal audit objective was the verification of accounts (Vanasco, 1998). The profession took the position that fraud detection was management’s responsibility since management had a responsibility to implement appropriate internal control systems to prevent fraud in their organisations. This was as a result of the increase in size and volume of companies’ transactions that made it virtually impossible for the auditor to examine all transactions (Porter, 1997). Auditors used sampling and testing procedures, which offered only reasonable assurance of the contents of financial statements. In addition, auditors were unable to detect fraud that involved unrecorded transactions, theft and other irregularities (Vanasco, 1998, p. 4).
By the 1960s, there was widespread criticism from the press and the general public of the profession’s denial of responsibility for detecting fraud (Morrison, 1970, cited in Porter, 1997). The author also argued that the press and general public considered an audit useless if it was not designed to uncover major frauds (Morrison, 1970, cited in Porter, 1997). Despite the criticism, auditors continued to minimise the importance of their role in detecting fraud and continued to stress that it was the role of management. By publicly disclaiming responsibility for detection of fraud, external auditors wished to avoid or minimise legal liability in order to protect them from legal claims holding them responsible for fraud (Humphrey et al., 1993; Vanasco, 1998).
From the 1980s, as a result of technology, the complexity and volume of fraud have posed severe problems for the corporate world. However, Porter (1997) argued that, although case law has determined that in some circumstances auditors have a duty to detect fraud, the courts have attempted to maintain that duty within reasonable limits.

Selective review of the literature
Fraud may be defined as intentional deception, cheating or stealing and can be committed against users such as investors, creditors, customers or government entities (Weirich and Reinstein, 2000). Statement on Auditing Standards (SAS) No. 82 identified two categories of fraud as fraudulent financial reporting and misappropriation of assets. Fraudulent financial reporting (management fraud) is where management seeks to inflate reported profits or other assets by overstating assets and revenues or understating expenses and liabilities in order to embellish the financial statements. Misappropriation of assets (employee fraud) is where employees steal money or other property from their employers. Various fraud schemes could include embezzlement, theft of company property and kickbacks.
Albrecht et al. (1995) classified fraud into employee embezzlement, management fraud, investment scams, vendor fraud, customer fraud, and miscellaneous fraud. Albrecht et al. (1994) identified the causes associated with individuals committing fraud. They concluded that there are factors (also known as the fraud triangle) such as situational pressures, perceived opportunities and rationalisation. Situational pressures originate from underpaid and overworked staff, excessive debt and lifestyle. Perceived opportunities allow fraud to be committed because of poor internal controls or negligence. Rationalisation is where the individual justifies the behaviour as being acceptable with seemingly plausible, but false reasons (Moyes and Hasan, 1996).
In the international arena, there are examples of corporate failures such as Bank of Credit and Commerce International (BCCI), Barings Bank, Enron and Worldcom. In July 1991, there was the “wind up” of BCCI as a result of fraudulent activity which included collusion with top management and third parties in fictitious loan schemes, and the falsification of accounting records (Vanasco, 1998, p. 38). As a result of this fraudulent activity, there were lawsuits worldwide as investors attempted to recoup some of their monies, and guilty parties were even incarcerated (Truell and Gurwin, 1992). In February 1995, there was also the collapse of Barings Bank in England as a result of the speculative and unauthorised activities of a trader named Nick Leeson in Singapore. Leeson misled the bank by seemingly earning phenomenal profits while incurring substantial losses (Drummond, 2002, p. 232) and “left debts of over £850 million that brought down one of England’s most prestigious banks” (Strategic Direction, 2002, p. 4). In 2001, Enron, a US company, was a perfect example to illustrate the awareness by both management and the auditor of fraudulent financial reporting. The collapse of Enron took down the accounting firm of Arthur Anderson (Vinten, 2003). The Treadway Commission has defined fraudulent financial reporting as intentional or reckless conduct, either by act or omission, which results in materially misleading financial statements (COSO, 1999).
Beasley (1996) concluded that there was a significant negative relationship between the proportion of outside directors on the board and the likelihood of financial statement fraud. He also concluded that the presence of an audit committee did not significantly affect the likelihood of financial statement fraud. However, it may be argued that mere presence alone could well not have an impact on fraudulent financial reporting, but rather it depends on the way the audit committee operates. Abbott et al. (2000) found that companies with audit committees, which comprised independent directors and met at least twice per year, were less likely to be sanctioned for fraudulent or misleading reporting. In many cases, since members of audit committees may not have the type of information to make independent judgements on fraud, they depend heavily on information provided by the internal auditors.
Cox and Weirich (2002, p. 374) argued that the pressure to meet or exceed analysts’ expectations has resulted in various entities turning to fraudulent financial reporting activities. Vinten (2003) pointed out that it is often the chief executive officer (CEO) who is involved in the efforts by the corporation to inflate profits or hide certain liabilities off the financial statements as was done by Enron.
Moyes and Hasan (1996, p. 46) concluded that the degree of fraud detection was not dependent on the type of auditor, since both internal and external auditors have equal abilities to detect fraud. Moyes and Hasan (1996, p. 46) also found that organisational success in detecting fraud was significantly enhanced in auditing firms with previous experience in fraud detection than auditing firms with no such history. It was also found that auditors who were certified as certified public accountants (CPAs) were more likely to detect fraud than auditors who were non-CPAs. Moyes and Hasan (1996) argued that this certification may imply a greater level of professional competence in fraud detection. The authors further argued that the peer review process puts pressure on auditors to be more diligent in incorporating relevant audit procedures to detect fraud.
Bonner et al. (1998) concluded that there existed some support for higher incidence of litigation against auditors, when a company’s financial statements contain fraud that most commonly occurs, or when fraud arises from fictitious transactions and events. Summers and Sweeney (1998) found that insiders reduced their equity stake during the occurrence of fraud.
There is still no modern consensus about the role of the external auditor, so far as the detection of fraud is concerned. Users of financial statements and accountants have a divergent perception of the auditor’s role. The literature refers to this difference as the “Audit Expectation Gap”, a phrase which was introduced by Liggio (1974). The audit expectations gap may be defined as the difference between the levels of expected performance as perceived by the external auditor and the user of financial statements (Pierce and Kilcommins, 1996). Farrell and Franco (1999) found that more than 61 per cent of the CPA respondents disagreed that they should be responsible for searching for fraud.
Auditors claim that they are not responsible for detecting fraud, but that the detection of fraud is management’s responsibility and that audits are not designed, and cannot be relied on, for this purpose (Porter, 1997). The SAS 1 (AU110) Codification of Auditing Standards and Procedures stated that:

The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. Because of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain reasonable, but not absolute, assurance that material misstatements are detected. The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements, whether caused by errors or fraud, that are not material to the financial statements are detected (Arens et al., 2003, p. 138).

There are clearly varying opinions on the role of the auditor. For instance, the professional bodies that set the standards for the profession and the auditors themselves do not totally agree on the auditors’ role, much more the users of financial statements.
This expectation gap can be linked to the fact that investors (users) want to know that they are investing their money in reputable companies. One of the ways of doing this is by analysing the audited financial statements, since they expect the auditors to give them this assurance when they are making financial decisions. Investors expect the auditors to detect fraud, as they do not trust management to do so as management can be fraudulent. The auditors, on the other hand, although they view their role as bringing credibility to financial statements, know that because of the scope of their responsibilities and the fact that they do investigations based on samples, cannot therefore verify every single transaction, hence fraud is likely to be undetected. This combined with the fact that fraud of a collusive nature is extremely difficult to detect are some of the possible reasons why auditors take the position that they are not responsible for detecting fraud.
In 1988, SAS No. 53, The Auditor’s Responsibility to Detect and Report Errors and Irregularities, was introduced and held the auditor responsible for detecting errors and irregularities that materially impacted on the financial statements. However, Moyes and Hasan (1996) argued that negligible attention was given to the auditors’ qualifications, particular organisational factors and audit procedures that could be very important in the detection of fraudulent financial reporting.
Then SAS No. 82 Consideration of Fraud in a Financial Statement Audit was implemented in 1997, and stated that the auditor is “. . . to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud” (ASB, 1997). SAS No. 82 provided guidance on how the auditor should achieve this by looking at areas and categories of heightened risk of fraud, how the auditor should respond, the evaluation of audit test results as they relate to the risk of fraud, and the communication about fraud to management, the audit committee and others.
In 2001 and 2002, there was public outcry in the aftermath of the collapse of Enron, Global Crossing and WorldCom who were forced to declare bankruptcy as a result of the discovery of massive accounting and other irregularities (Lander, 2004, p. 1). Enron contracts, with these fictitious gains representing more than 50 per cent of their reported US$1.41 billion reported pre-tax income for the financial year 2000 (Makkawi and Schick, 2003; Thomas, 2002). In response to the public outcry, the Sarbanes-Oxley Act of 2002 was enacted on 20 July 2002 in the USA. The Act provides for fines ranging between US$1million to US$5 million and imprisonment ranging from ten to 20 years for knowingly certifying false statements, the deliberate destruction of any audit work papers or other documents, and any mail, wire, bank or securities fraud.
Thus, SAS No. 82 was superseded by SAS No. 99, also known as Consideration of Fraud in a Financial Statement Audit and it was implemented to expand procedures to detect fraud. Ramos (2003) argued that the new standard (SAS No. 99) aimed to have the auditor’s consideration of fraud incorporated fully into the audit process from start to finish. SAS No. 99 requests auditors to approach the audit with professional scepticism (an attitude that includes a questioning mind), and to avoid some natural inclinations such as placing excessive reliance on representations from clients. The auditor must forget previous relationships and not assume that all clients are honest.
The American Institute of Certified Public Accountants (AICPA) has implemented this new fraud standard to restore investors’ confidence and faith in the stock markets, and reduce the incidence of financial fraud. SAS No. 99 looks at identifying, responding to and assessing fraud risks, addressing risk of management override of internal control, specific accounts or classes of transactions, reviewing accounting estimates, communication and documentation (Ramos, 2003). Like SAS No. 82, SAS No. 99 lists numerous illustrative fraud risk factors to help the auditor in considering whether fraud is present. However, in SAS No. 99, these illustrative fraud risk factors have been reorganised to track the fraud triangle. Readers are invited to look at Vanasco (1998) for a comprehensive analysis of the role of professional associations, governmental agencies and international accounting bodies in promulgating standards to deter and detect fraud.

Key characteristics of Barbados
Barbados is a small island of 166 square miles in the Caribbean and has a population of over 250,000. It is a democratic and stable political society, with a private sector that includes a vibrant financial services sector of both offshore and onshore businesses. The Securities Exchange of Barbados (SEB) regulates the public limited companies. Companies are regulated by the Barbados’ Companies Act, which sets out the duties and responsibilities of the directors and management but does not specifically legislate or directly address the issue of fraud (see Appendix 1). Barbados is represented by the “Big Four” firms of Ernst & Young, PriceWaterhouseCoopers, KPMG Peat Marwick and Deloitte & Touche. Medium-sized firms are represented by international names such as Pannell Kerr Forster, Porter Hetu International and Grant Thornton. The remaining auditors comprised small indigenous firms and sole practitioners.
The Institute of Chartered Accountants of Barbados (ICAB) is the regulatory body for the accounting profession in Barbados and is a member of the International Federation of Accountants. All of its members are affiliated to recognised accountancy bodies such as the AICPA, Certified Management Accountants (CMA), Certified General Accountants (CGA) and the Association of Certified and Chartered
Accountants (ACCA), the Institute of Chartered Accountants in England and Wales (ICAEW), among others, in the UK, USA and Canada. As of 31 December 2003, ICAB had a membership of 572 fully qualified accountants of which 175 held practising certificates to perform audits.
Historically, as a former British colony, the Barbadian economy has been heavily dependent on sugar, but in recent years the economy has diversified into manufacturing and tourism. Tourism plays a vital role in the country’s economy. Offshore finance and information services are also important foreign exchange earners. The government encourages foreign direct investment with a significant amount coming from North America and Europe. Barbados has a literacy rate of approximately 98 per cent and has been rated as one of the leading developing countries by the United Nations’ Human Development Index Report measuring education levels, life expectancy and per capita income. As a small open economy, Barbados is influenced by a wide range of external economic factors that very often originate in the USA. For example, the Barbados dollar is tied to the US dollar at a fixed rate of 2 to 1.
KPMG had performed a survey on fraud in the Caribbean and the findings are included in their KPMG Caribbean Fraud Survey Report 2000 (KPMG, 2000a).
The following key characteristics for Barbados are set out below:
. Only 10 per cent of the respondents in Barbados believe fraud is a “major problem” for their business.
. Of the respondents, 71 per cent claimed that fraud was discovered through internal mechanisms such as existing internal controls, while 43 per cent claimed for internal audits. No respondents in Barbados indicated that fraud was discovered through external audits.
. In Barbados, 67 per cent of the respondents cited customers as the greatest source of fraud, while employees were identified as the second greatest source (33 per cent). Most of the employee-related fraud occurred through kiting or lapping[1]. The majority of customer-related fraud was perpetrated through cheque forgery, filing of false invoices, and credit card schemes. No one cited financial statements fraud.
. Of the respondents in Barbados, 31 per cent acknowledged that fraud occurred against their company. A total of 93 per cent of all respondents in Barbados who believe fraud will increase attributed this increase to weakening in society’s values, and 86 per cent attributed the anticipated increase to more sophisticated criminals. KPMG (2000a) concluded that taken together, these responses indicate that the anticipated increase in fraud will result from factors outside the control of their company or the government.
The KPMG study focused on users’ perceptions rather than measuring both the auditors and users perceptions, as this study will attempt. In addition, the KPMG study was quantitative rather than qualitative.

Research methodology
The literature reveals that the dominant method of research was the quantitative questionnaire (Beasley, 1996; Moyes and Hasan, 1996; Porter, 1993). The vast quantitative survey-based empirical studies have established a body of knowledge about the auditors’ responsibility for detection of fraud, but failed to conduct deeper analysis of the research phenomena, particularly the question of how stakeholders’ react to fraud detection. As Saunders et al. (2003, p. 92) pointed out: “the data collected by the survey strategy may not be as wide-ranging as those collected by other research strategies”.
The use of a qualitative approach to support a quantitative survey will serve to understand fully the question of fraud detection. This research paper is very much an exploratory study into the auditors’ responsibility for detecting fraud in Barbados. Personal face-to-face interviews were held with a random sample of auditors and users, using a semi-structured interview schedule that was developed based on the issues coming out of the literature. The use of face-to-face interviews was chosen as the research method because of the likelihood of a high response rate, a high degree of accuracy and minimal non-response, and the need to discover underlying motivations, feelings, values, attitudes and perceptions about fraud detection (Alleyne, 2002; McDaniel and Gates, 2001). In addition, the project demanded that a fairly wide-ranging approach be taken to understand the issue, and the fact that interviews generate a much richer source of insights into questions under investigation (Strauss and Corbin, 1998).
Judgemental sampling was used as a basis for the selection of the size of both groups of respondents (auditors and users), since the aim was to include all those persons related to the phenomenon (Hudaib, 2003). Much emphasis was placed on quality rather than quantity. Following Arber (1993) and Oppenheim (1992), Hudaib (2003, p. 106) used a similar approach and stated that:
. . . the number of participants in each group is determined by interviewing as many participants as possible until it is felt that no new ideas are emerging from the in-depth interview.

Random telephone calls were made to persons enquiring whether they were willing to be interviewed. Some difficulties were encountered in obtaining personal interviews with some auditors and certain senior managers of some organisations, given their hectic busy schedules and their willingness (or lack thereof) to share hard and sensitive data. These interviews were obtained to assist in finding out what is happening and to ask questions (Saunders et al., 2003, p. 96).
The interviewees were split into two groups of auditors and users. The auditor group comprised 19 auditors (including two partners/managers of the four major international audit firms, two senior government auditors and nine other sole practitioners). The user group totalled 24 and comprised 16 senior managers of auditee companies (including five public limited companies, four financial institutions and seven other businesses), seven user-investors and one representative from ICAB. On average, the 24 audit respondents had 18.53 years of experience with 5.92 standard deviations. On average, the 16 senior managers within the user group had 13.94 years of experience with 4.725 standard deviations, while on average, the other eight respondents (seven user-investors and the member from ICAB) had 8.38 years of experience as investors in public limited companies. The high level of experience of the sample should provide knowledgeable views on fraud and auditing in Barbados. In addition, 24 respondents (19 auditors and five users) had professional accounting qualifications.
Respondents were asked to rate certain questions on a five-point Likert scale varying from 1 (strongly disagree) to 5 (strongly agree). The responses to these questions are shown at Table I. The questionnaire also contained in-depth questions pertaining to fraud on which interviewees were asked to comment. Interviewees were also allowed to speak at length on any issues regarding auditing and fraud. Each interview lasted approximately one hour. The full interview questionnaire schedule is shown in Appendix 2, Figure A1. Certain questions were adapted and modified from Farrell and Franco’s (1999) study. The sample size is relatively small and those interviewed are not intended, or claimed to comprise a representative sample of persons. Consequently, the results should be interpreted with caution and could serve as a springboard for further research into this important area.

Findings and discussion
Auditor’s responsibility for uncovering fraud All the auditors sampled and 29.2 per cent (seven persons) of the users strongly disagreed that it was the auditors’ role to detect fraud, as the scope of their duties prohibited them from doing so. The quantitative results at Table I reveal a statistical significant difference with auditors and users on the point about auditors’ responsibility for uncovering fraud (t ¼ 26:333, df ¼ 23, p , 0:001). The auditor group showed a significantly lower mean score of 1.00 compared to the user group who had a higher mean score of 3.38. The low mean was expected from the auditors, as well as from five of these seven users who had accounting qualifications that would have influenced their perceptions.
One auditor argued that:
The role of the auditor is not to detect fraud, but in planning an audit so that there is reasonable expectation of discovery. The public is not sufficiently educated on the role of the auditor and this leads to unrealistic expectations on the part of clients, investors and others with vested interests.

However, the other users were adamant that detecting fraud was not just the auditors’ responsibility but also the main objective of an audit. One user queried, “. . . then, why pay for an audit?”. In contrast, one partner at a major audit firm argued that:
Fraud detection is the responsibility of management, who controls the day-to-day running of the organisations. Auditors are not responsible for prevention and detection. We must do continuous risk assessment and tailoring of our audit strategy to suit. The attitude of professional scepticism also implies management must also be considered as a risk factor.
The risk-based audit procedures used by auditors prohibited them from being totally responsible for fraud detection. The reporting of fraud is to management and the shareholders. Results of the independent t-test revealed that there is a statistical significant difference (t ¼ 25:655, df ¼ 24:724, p , 0:001) between auditors and users on the need to legislate auditors to be responsible for uncovering fraud and reporting to authorities (see Table I). There appears to be strong disagreement among auditors (mean ¼ 1:11) for such legislation compared to the significantly higher users perception of agreement (mean ¼ 3:25). Those who supported further legislation felt that society in general would benefit, while those who opposed felt that it was not feasible as the audit is already being viewed as expensive and therefore had no benefits. One auditor queried: “Who will bear the additional costs of auditing when clients are restricting us to fixed fees?”
One factor that was evident from the information collected was that the educational background in terms of accounting knowledge influenced whether the interviewee perceived that the auditor should detect fraud. The majority of the interviewees with an accounting background or qualification expressed the view that auditors were not responsible for detecting fraud. This included the auditors and several management respondents who had accounting knowledge. However, users without that accounting knowledge held the opposing view.

Extent of fraud
The auditors (mean ¼ 1:58) and users (mean ¼ 1:71) did not differ significantly on the question of the impact of the size of Barbados’ society on fraud occurrence or detection. They agreed that the small size of Barbados’ society did not have an effect on fraud occurrence or detection. However, Table I further revealed a statistical significant difference between auditors and users on fraud being a major problem in Barbados (t ¼ 22:763, df ¼ 29:484, p ¼ 0:010). Users tended to show moderate disagreement (mean ¼ 2:42) in fraud being a major problem compared to the strong disagreement of the auditors (mean ¼ 1:26). Discussions with the interviewees revealed that fraud was not viewed as a major problem. These results agreed with KPMG’s (2000a) findings that only 10 per cent of the respondents believed that fraud is a major problem. Interviewees believed it was because Barbados had good business practices, excellent checks and balances in place to deter fraud. It was highlighted that the self-owned businesses with one or few staff members were able to detect and correct any fraud because of their “hands on” involvement in most aspects of the business. The larger organisations used internal auditors, strong internals controls, constant reviews and made improvements where necessary, to prevent and detect fraud. Tough disciplinary measures such as immediate dismissal and suspensions were used to deter and correct fraudulent activities. However, 12.5 per cent of the users felt that in a community as small as Barbados, the challenges of fraud detection and regulation could be uphill tasks, given the closed ranks of certain sectors of the society.

Reasons for committing fraud
The respondents suggested the following factors from their experience as the reasons for committing fraud:
. the moral values of individuals;
. the need to maintain an increasing social status;
. persons unhappy with their job;
. persons with drugs and gambling addictions;
. people with increasing indebtedness;
. individuals who “see other people doing it”; and
. persons who feel that they would not be caught.
The understanding and reaction to fraud was determined not only by the size of the fraud and who committed it, but also against which organisation the fraud was committed. One manager from a financial institution said that:

Organisations like financial institutions, keep such matters in-house and try to recover losses or minimise erosion of public confidence by not prosecuting perpetrators of fraud. Banks, credit unions and insurance companies are organisations most likely to have fraudulent activity.

Auditors and users did not view fraudulent financial reporting as a major issue, as it was commonly felt that there were no major incentives to do it. Unlike in the USA, many companies did not have bonus payments tied to financial results. Furthermore, respondents argued that there were no publicised cases of fraudulent financial reporting in Barbados These findings agreed with KPMG’s (2000a) results. However, a small minority (8.3 per cent) of the users felt that it could happen whenever additional financing was needed or tax liabilities needed to be reduced.

Audit procedures
The auditors claimed that they assessed internal controls, the role of the internal auditors, going concern issues, management’s characteristics, and worked to uncover related party transactions, and ensured that audit findings are conveyed to the board of directors or audit committee, wherever applicable. For example, it was pointed out that auditors always check the current year’s audit to see if the recommendations from the previous year’s audit were carried out. Both auditors and users agreed that these procedures should be done, as the overall mean ranged from 4.93 to 5.00 for these procedures.
However, in Table I, auditors showed a significantly lower mean score of 1.21 compared to a higher mean score of 4.58 for users on the question of actively searching for illegal acts (t ¼ 212:244, df ¼ 41, p . 0:001). The auditors were adamant that they were not responsible for searching for illegal acts, as compared to users agreeing that this procedure should be done. One auditor argued that “such duties are merely incidental to the engagement”. However, users expected all these procedures to be carried out, and as one user commented “. . . anything short of this can be considered as negligence!”.
One of the auditors’ duties is to report to management on the company’s internal controls. If this is being done, the incidence of fraud as a result of poor controls should be minimised. One auditor argued that:
Large businesses tend to rely more on extensive internal controls and sometimes internal audit departments, whereas small businesses, with limited resources, see financial statement audits as equivalent to fraud audits.

Another auditor further pointed out that:
Some small businesses do not heed the auditors’ advice in tightening controls.

Audit requirements in Barbados include the assessment of internal control, identification of control weaknesses and making recommendations to improve the internal control system and preventing fraud. The profession distinguishes between an internal and an external auditor. The internal auditor, as part of the internal control system, must also verify that the financial statements are free of material misstatements. As part of the organisation, the internal auditor should be in a position to detect any fraudulent activities or behaviour. The public limited companies and financial institutions interviewed had internal auditors that they viewed as being effective in their duties to detect and prevent fraud. The external auditors have agreed to this fact, since the internal auditors would have had their training in some of these audit firms. In addition, the public limited companies and the financial institutions agreed with the external auditors that the presence of knowledgeable and independent audit committees in their organisations have served to strengthen controls, ensure fair and honest reporting and preserve the independence of auditors.
Moreover, the external auditors felt that the presence of the internal auditors in these organisations has given them a major degree of comfort in carrying out their duties. The good working relationship between the external and the internal auditors has helped to improve internal control systems by the pooling of knowledge resources.

Auditors’ response since Enron
The auditors and users were fully aware of the Enron scandal as a result of the level of publicity in the media. Auditors’ awareness of fraud have been heightened since Enron’s debacle. There appeared to be strong agreement among auditors (mean ¼ 5:00) that auditing in Barbados has improved since Enron compared to the users perception (mean ¼ 3.83). This was found to be statistically significant (t ¼ 4:897, df ¼ 23, p , 0:001). Further questioning revealed that the profession in Barbados has responded well by providing continuing professional education for its members. ICAB has been holding many seminars to address these and other issues, by making it mandatory for members to attend them or fear non-renewal of practising certificates. The large audit firms have provided more training in fraud-detection techniques and planning audits with a view to detecting fraud, as the fear of a subsequent discovery of fraud after issuing a clean audit report could affect the firm’s reputation and finances through lawsuits. The smaller firms are spending more time in conducting the audits to ensure greater accuracy. The profession has now become more cognisant of its responsibility to restore faith, not withstanding its staunch position that fraud detection is management’s responsibility. More due diligence work is now being done to eliminate potentially high-risk audit clients. As a result, clients are being carefully screened at the acceptance stage. More internal peer review processes are being implemented in the large firms to determine whether audits have achieved their objectives. Users have also acknowledged that there seems to be increased auditing procedures being performed.
A total of 89.5 per cent of the auditors and 41.7 per cent of the users (including those who had accounting knowledge) knew about the Sarbanes-Oxley Act in the USA. The auditors who knew more about the Act were from the major audit firms who audited the large public limited companies and offshore companies that could be affected by the Act, given the Securities Exchange Commission’s (SEC’s) requirements for all US companies. The users had heard about the Act but could not recall any specifics.

Regulation and enforcement
ICAB indicated that it never had to enforce regulations or censure practitioners as a result of poor audits since there was generally strict adherence to standards. Hence, there were no known cases of revocation of the practising certificates of auditors in Barbados. ICAB also indicated that the investigation of fraud was left to certain bodies such as the law, which is vested with the power to investigate and take action in certain fraudulent activities.
There was consensus among the interviewees that auditors should be held responsible if it could be proven that poor audits were conducted. This view was presented in light of the standards that the auditor must follow. Within Barbados, auditors agreed that they followed Generally Accepted Auditing Standards (GAAS), as failure to do so opens them to litigation. It was further pointed out that the engagement letter also sets guidelines that should be followed by the auditor.
What is expected of the audit profession in Barbados seems to stem from the development of the profession’s role in fraud detection in the USA and UK. However, there were no local cases to show what the courts in Barbados decided in such situations. Even in the past corporate failures in Barbados, no mention was ever made of the auditors and/or management being sued. In the 1980s, Trade Confirmers Limited (TCL), a local financial institution, closed down as a result of suspected fraud and the Government launched a major commission of inquiry (Worrell Commission) into its collapse. The inquiry revealed fraud, corruption, mismanagement and incompetence. Leacock (2001, p. 270) related that interest rates exceeded the maximum statutory limit that led to illegality and non-repayment of interest by borrowers. In addition, top management had converted corporate funds into personal use. The Commission’s terms of reference did not allow it to proceed with any legal action against those at fault but it suggested that the matter be referred to the law courts for determination. No litigation was ever brought against auditors or management, nor did the inquiry result in the return of deposits to clients. No reason was ever given for the failure to prosecute guilty parties.
At the time of writing, there was an investigation into fraud (theft of money) at BICO Limited, a local public limited company. BICO Limited is currently claiming Bds$3 million in damages against its previous auditors, PriceWaterhouseCoopers, for not uncovering irregularities between 1995 and 1999 (Daily Herald, 2004).

Conclusion
The paper explored the auditors’ and users’ perceptions of the auditors’ responsibility for uncovering fraud, the performance of related auditing procedures, the nature and extent of fraud in Barbados, as well as the auditors’ response since Enron. The findings provided some valuable insights into how both parties view audit responsibilities and what their expectations are.
These results indicated that auditors strongly disagreed that they were responsible for uncovering fraud compared to the users’ strong view that they should be responsible. While fraud, in general, was not perceived to be a major problem in Barbados, there was a statistical significant difference between auditors and users on this point. Users showed moderate disagreement in fraud being a major problem compared to the strong disagreement of the auditors. In addition, both groups did not view fraudulent financial reporting as a major issue.
There was a general strong consensus by both groups that auditors should work to uncover related party transactions, assess internal controls, the work of the internal auditors, management’s characteristics and going concern issues, and ensure that audit findings are conveyed to the board of directors or audit committee, wherever applicable. However, users expected that auditors would actively search for illegal acts while auditors disagreed. Auditors and users agreed that auditing has improved since Enron, and both parties were fully informed on the issues surrounding the collapse of Enron. It was also found that organisations with strong internal controls, internal auditors and audit committees were better equipped to deal with fraud in any form.
Users in Barbados may need to be better informed as to how auditors view their role. Education may be the key in solving part of the problem, by closing the “misunderstanding gap” although the “expectation gap” may still exist (Porter, 1997). In addition, a precise and detailed engagement letter must, inter alia, contain all the relevant conditions necessary for the engagement, the services provided and the responsibilities of both parties. This is an excellent opportunity for the auditor to inform the client and to explain to the shareholders at the annual general meeting (rather than to the directors) that the prevention and detection of fraud rests with the company.
Makkawi and Schick (2003) suggested two approaches that auditors should adopt to aid in fraud detection. First, they argued that auditors need to “audit smarter” because they operate in a fixed fee environment, which limits the fees, that clients are willing to pay. This can be accomplished by the need for auditors to be more aware context in which the audit occurs and the fact that the nature and concentration of fraud varies by industry. Second, the authors suggested that auditors should exercise greater scepticism and rigorous assessment of management’s integrity, which are also required by SAS No. 99.
The fact that auditors in Barbados do not view the detection of fraud as their responsibility, but rather see their role as expressing an independent opinion on financial statements is an indication that they still need to be aware that undetected fraud could distort their findings and affect the reliability of their reports. Above all, from an ethical viewpoint, external auditors as well as internal auditors should report any suspicion of fraud rather than remain silent.
The findings from this research show a favourable picture on certain issues as audit respondents may have attempted to portray the profession in a favourable light. Future research may consider sending a large-scale self-administered questionnaire to remove any potential bias. Further research into this area could also be undertaken to investigate the functional and operational aspects of auditing for fraud.