Investigating the black box of external audit practice: the paradox of auditors' failure in detecting and reporting fraud

Abstract

Purpose

The study aims to explore the reasons behind external auditors' failure to detect and report fraud.

Design/methodology/approach

Semi-structured interviews were conducted with twenty-four experienced Big 4 auditors.

Findings

The present study reveals power issues within audit firms and how some dishonest audit partners deal with auditors' concerns at the higher echelons. It also shows how auditors are pressured and intimidated by audit clients when fraud-related issues are raised. Further, it sheds light on ethical, governance and regulatory issues inhibiting auditors’ ability to detect or report fraud.

Research limitations/implications

This study advances the audit literature by adding practice-based evidence on why external auditors fail to discover fraud.

Practical implications

The results draw policymakers' attention to the issues that inhibit external auditors' ability to discover fraud in practice which could help policymakers develop effective interventions. Additionally, it provides several recommendations which could aid policymakers and audit firms in designing effective audit reforms to resolve the fraud detection deficit.

Originality/value

This is the first study exploring external auditors' views on their failure to detect and report fraud and how the conflict of interests operates in the audit practice.

Citation

Kassem, R. (2023), "Investigating the black box of external audit practice: the paradox of auditors' failure in detecting and reporting fraud", Journal of Accounting Literature, Vol. 45 No. 2, pp. 406-424. https://doi.org/10.1108/JAL-05-2022-0057