Can Audit Prevent Fraudulent Financial Re porting Practices? Study of Some Motivational Factors in Two Atlantic Canadian Entities

Abstract

Much as has been written and done to prevent Fraudulent Financial Reporting (FFR) practices 
but FFR is still exists in the corporate world. It is common to think about FFR practices in large 
companies for its greater amount of consequences, though such practises have negative conse
quences in small companies as well. FFR practices raise questions about the legitimacy of con
temporary financial reporting process, roles of auditors, regulators, and analysts in financial 
reporting. This empirical study attempts to investigate the motivational factors of the preven
tion and detection of FFR through the auditing process. The interviewees were carried out 
within the entity and proprietary theoretical framework with some accounting related manage
ment in two medium-sized organizations in Atlantic Canada in winter 2008. The findings of 
this research demonstrate that an audit is not enough to prevent and detect FFR.  The audit 
structure needs to be revised and employees need to be educated in order for them to better 
understand their internal control process, and their own role. Companies need to evaluate their 
controls and internal audit process instead of relying on the yearly audit. This study found that 
the most common methods used for FFR are improper revenue recognition, understatement of 
expenses/liabilities, and overstated and misappropriation of assets.