Introduction
Fraud is one of the major problems faced by organizations and financial institutions. The main aim of financial institutions and other companies is to make profit with minimum cost. However, there are some instances where most companies have done projects at higher cost than they anticipated and therefore the projects have resulted in losses rather than profits (Carey, Tanewski and Simnett, 2000). Likewise, most financial institutions have collapsed due to lack of funds or experiencing losses rather than profits. Studies have shown that losses that most financial institutions and other companies have incurred have been caused by fraud. Some development projects have also stalled around the world because of fraud. To prevent further losses in financial companies, government institutions and other organizations, financial auditing should be considered (Subramaniam and Ching, 2006).
Description of fraud and auditing
Financial audits are very useful because they ensure credibility of companies and organizations where money is involved. Audit reports can make investors know whether their investments are safe or not. At the same time, stakeholders in any business venture can know the state of their investment after auditing has been done. Any person who may want to commit financial crime can be afraid of the action that might be taken if an audit report reveals that funds have been misused.
Auditing can simply be described a process of checking financial statements to ascertain their credibility (Dunn, 2004). If any fraud has been committed within an organization then it can be detected through auditing and an audit report made public to relevant people. Fraud is a way in which an individual or a group of individuals can dishonestly benefit from value of money or any other property that is intended for a particular purpose. Fraud can further be described to cover explanations of the actions of corruption and misappropriation of funds. For example, when a construction of an infrastructure such as a road or a dam is being funded by public funds it is usually a big project which must involve a lot of funds. Some engineers involved in such projects may estimate the prices of construction materials to be more than the real market prices of the construction materials and even go ahead to make quotations using the inflated prices. Such engineers can then find a way of benefiting from the extra funds they quoted. This is a typical example of misappropriation of funds or basically fraud. Such vices can only be detected and controlled through auditing.
Roles of internal and external auditors
It is therefore very important to study auditing because as an auditor, a person is able to appropriately advice investors depending on how the funds have been used within the investment. If bad reports have been received from auditors, investors can decide on which actions to take so as to avoid further losses that may occur within the investment. Credibility of financial institutions can be known by the public and thus any person who wants to make investment can choose a credible institution that has been audited (Gramling, Maletta and Schneider, 2004). On the other hand, medical profession is also a good one because medical practitioners usually save some of the lives that could have otherwise been lost. In a free market economy (a market where individuals are free to set prices of their goods and services), a private medical practitioner may decide the amount of money to charge patients. In most medical organizations and public hospitals there are standard payments depending on the type of services offered. Such medical organizations and hospitals require auditors so that funds are not misused. This implies that both auditing and medical professions are important and anyone willing to study any of them should be encouraged to do so.
Organizations should have internal auditors to keep on checking and detecting frauds within the organizations. This can ensure that funds within organizations are only used for the intended purposes (Holtfreter, 2004). An auditor is an independent individual who counterchecks financial statements of an organization or a business entity to verify whether the financial status represented in the financial statements are true or false. A big business can set up a team of auditors to work as an independent unit. Most finance companies in New Zealand have their internal auditors (Holtfreter, 2004). There is high likelihood that the finance companies in which the parents had their investments had internal auditors. The finance companies may have collapsed because the independency of the internal auditors was compromised. Auditors should be allowed to be independent when carrying out an audit and when writing audit reports (Gay and Simnett, 2009). If any individual influences the audit process within a company, the work of auditors can not reflect the real financial situation of the company and thus a company may collapse.
The fact that some audited finance companies collapsed in New Zealand and many people lost their investments should not worry people to an extent of losing trust in auditors. Auditing is a profession that should be practiced in environments that allow independency of auditors so as to preserve the integrity of auditing processes and be trusted by investors. Internal audit units are very important in companies because they are used to oversee the activities of top management teams in companies. For example, in a company such as a finance company in New Zealand Chief Executive Officer (C.E.O) is usually the top management team. An audit unit is usually a department that reports to the board of directors but should be under C.E.O. This means that audit unit should be independent so as to oversee the activities of every department including the financial activities of the Chief Executive Officer in a company.
Apart from internal auditors, companies and organizations should hire services of external auditors to conduct auditing (Dunn, 2004). This should happen once in a while so that reports of external auditors can be compared with those of internal auditors. In New Zealand there are private auditing firms that can be hired by companies and organizations so as to carry out financial auditing (Holtfreter, 2004). External auditors should also be allowed to carry out their activities without any influence from the company or organization that is supposed to be audited. An audit report should be made available to the stakeholders of a company so as to know the financial state of their investments. This is a sure way of ensuring that investors do not lose their investments due to fraudulent deals.
Reasons for inviting external auditors
The importance of external auditors is that they can bring to light fraudulent deals that have been covered by internal auditors. I strongly feel that if the parents could have invested in finance companies that had internal auditors and also allowed external auditors within their premises then the parents could not have lost their investments. The three companies might have been earlier audited as it was claimed but the auditors could have been internal auditors who were also involved in extorting money from other investors within the three financial companies. A report by Ramsey showed internal auditors who did not do their work professionally also led to corporate collapses outside Australia. Internal auditors contributed to collapse of companies in New Zealand and corporate collapses overseas (Gay and Simnett, 2009).
Findings of survey conducted by KPMG
A survey conducted in the year 2004 by a popular auditing firm KPMG revealed that most citizens in New Zealand prefer auditing to be done by registered external auditing firms but not internal auditors within organizations or companies. The survey also revealed that there was a general perception that internal auditors were in most cases involved in fraudulent deals with top managements of most companies (Carey, Tanewski and Simnett, 2000). It is therefore necessary to have internal auditors but at the same time hire services of credible auditing firm so as to build trust of investors in finance companies.
Conclusion
Auditing firms should have staff members that have good knowledge of business operations. Staff members should be able to carry out their duties professionally and even present their reports in an objective manner so that they can earn more trust from business individuals and the public at large. This implies that staff members of any auditing firm should have high degree of integrity, honesty and even professional competence because these are the values which can make their findings to be trusted by relevant authorities and individuals (Gay and Simnett, 2009). It is therefore very important to do auditing in any company and organization where money is involved so as to protect investors from losing their investments due to fraudulent deals that could have been detected and appropriate measures taken. It is on this basis that I am encouraging investors to trust services offered by credible auditing firms and respond appropriately to reports by auditors.
Reference List
Carey, P., Tanewski, G. and Simnett, R. (2000). Voluntary demand for internal and auditing literature and directions for future research. Journal of Accounting 19 (supplement): 37-51.
Dunn, P. (2004). The impact of insider power on fraudulent financial reporting. Journal of Management 30 (3): 397-412.
Gay, G. and Simnett, R. (2009). Auditing and assurance service in Australia, 4th Edition. Sydney: McGraw-Hill.
Gramling, A., Maletta, J. and Schneider, B. (2004). The role of the external auditing by family businesses. Auditing: A Journal of Practice & Theory Literature 23: 194- 244.
Holtfreter, K. (2004). Fraud in US organizations: An examination of control mechanisms.
internal audit function in corporate governance: A synthesis of the extant internal Journal of Financial Crime 12 (1): 88-95.
Subramaniam, P. and Ching, (2006). Internal audit outsourcing in Australia. Accounting and Finance 46 (1): 11-30.