1. International Journal of Auditing doi:10.1111/j.1099-1123.2011.00442.x
Int. J. Audit. 16: 79–97 (2012)
Establishing Proactive Auditor
Responsibilities in Relation to
Fraud: The Role of the Courts and
Professional Bodies in Denmark ija_442 79..97
Claus Holm,1 Lars Bo Langsted2 and Jesper Seehausen3
1
Department of Economics and Business, Aarhus University
2
Department of Law, Aalborg University
3
Auditor, Beierholm Aalborg
Over the years, there has been considerable discussion about
the extent and exact nature of the responsibilities of the auditor
to detect fraud. The purpose of our study is to examine how the
courts and professional bodies in a principle-based legal
system respond to the change in the audit promulgations
introducing proactive responsibilities in relation to fraud.
We observe the outcome of actual fraud cases in which the
court system and professional bodies in Denmark establish
the responsibilities of auditors. The data set includes all
publicized cases in the period 1996–2006. We find that the
Danish audit profession has adopted the new proactive
responsibilities identified by the standard setters, whilst the
courts and the professional bodies seem to see ‘the changes’ as
mere clarifications of existing responsibilities. The proactive
responsibilities are not further accelerated by prescriptive
court rulings.
Key words: Fraud, auditor responsibility, Denmark, court system,
proactive, good audit practice
SUMMARY 1981; Chandler et al., 1993; Bonner et al., 1998;
Fraser & Lin, 2004). This is illustrated by the
Over the years, there has been considerable continuous ‘clarification’ of pertinent auditing
discussion about the extent and exact nature of standards on fraud in the United States and
the responsibility of the auditor to detect fraud in similarly by the International Federation of
relation to audit engagements (e.g., Uecker et al., Accountants (IFAC) in the International Standards
on Auditing. It is noticeable that the auditor’s
responsibilities in relation to fraud have undergone
Correspondence to: Claus Holm, Department of Business
Studies, Aarhus School of Business, Aarhus University,
a change from reactive to proactive, as
Fuglesangs Alle 4, DK-8210 Aarhus V, Denmark. Email: promulgated through the auditing standards (e.g.,
hoc@asb.dk Anderson et al., 1998; DeZoort & Lee, 1998; Glover
ISSN 1090-6738
© 2011 Blackwell Publishing Ltd

2. 80 C. Holm et al.
et al., 2003; Lynford & Bedard, 2003). In this study, 1. INTRODUCTION
we examine how this change in regulation
is adopted in a Danish setting. Engaging in The auditor’s work is unlikely to be subject to
clarification of existing responsibilities identified in scrutiny unless something adverse occurs such as
auditing standards can be seen as a way for the fraud. Over the years, there has been considerable
audit profession to protect self-interests (Parker, discussion about the extent and exact nature of the
1994; Chandler, 1997; Cowton, 2009). This can be responsibility of the auditor to detect fraud in audit
interpreted as a chosen level of self-regulation in engagements (e.g., Uecker et al., 1981; Chandler
order to avoid legal intervention enforcing new et al., 1993; Bonner et al., 1998; Fraser & Lin, 2004).
audit regulations or adverse court rulings claiming This is illustrated by the continuous ‘clarification’
audit failures in fraud cases (see also Jönsson, 1991; of pertinent auditing standards on fraud in the
Buckless & Peace, 1993; DeZoort & Lee, 1998; United States, e.g., SAS 53 (AICPA, 1988), SAS 82
Glover et al., 2003). (AICPA, 1997) and SAS 99 (AICPA, 2002), and
The purpose of our study is to examine how similarly by the IFAC in the International Standards
courts and professional bodies have responded to on Auditing, e.g., ISA 240 (IAASB, 2001, 2004,
the change in the audit promulgations introducing 2009). Sunder makes the argument that most
proactive responsibilities in relation to fraud. standards in accounting are born small, but grow in
Consequently, we observe the outcome of actual detail over time because ‘earlier versions generate
fraud cases in order to analyse and discuss the requests for clarification that arise from conflicting
role of the Danish Responsum Committee, interpretations rooted in the self-interests of
Disciplinary Tribunal and the courts in those who implement the standards’ (Sunder,
establishing the extent and nature of the 2010: 108). The economic rationale suggests that
promulgated proactive responsibilities. We have any profession will protect the rights and benefits
chosen to focus on the first decade after the acquired (Parker, 1994; Wallace, 2004; Cowton,
introduction of the ‘proactive responsibilities’ 2009). The European Commission points out in its
in relation to fraud. This enables us to discern Green Paper on the role, position and liability of the
whether the courts and professional bodies statutory auditor within the European Union that
consider these as new (changed) responsibilities the public expects the auditor to play a role in
or clarified (existing) responsibilities. The data set protecting the interests of shareholders, creditors
includes all publicized fraud cases against Danish and other stakeholders by providing assurance
auditors in the period 1996–2006. Our paper regarding the existence of fraud (EU Commission,
provides insight into the Danish audit market 1996). Hence, the public’s trust in auditing is
with an ultimately principle-based legal system diminished by fraud scandals: for example, the
based on the legal provision termed ‘good audit collapse of Enron and other corporate scandals
practice’. which have contributed heavily to decreasing the
Overall, we find that the Danish audit profession trust of users of financial statements and the
has adopted the new proactive responsibilities general public in the reliability of auditors
identified by the standard setters, whilst the (Knechel, 2007; Landsman et al., 2009). A frequent
courts and the professional bodies seem to see response to calm the political waters has been
‘the changes’ as mere clarifications of existing codification of standards, meaning the rules are
responsibilities. This study contributes to ongoing made clear to all (Sunder, 2010). An elaborate
debates about principle-based vs. rule-based effort on this part has been the now completed
regulatory systems. While the nature of a principle- ‘clarity project’ by the International Auditing
based legal system implies more uncertainty about and Assurance Standards Board (IAASB) with
the extent of the auditor’s responsibilities in the proclaimed aims of enhancing the
relation to fraud, we do not find that the regulatory comprehensibility as well as making substantive
change towards proactive responsibilities in changes to many of the existing auditing standards
relation to fraud has been further accelerated by (IAASB, 2008). Engaging in clarification of existing
prescriptive court rulings. We suggest that the responsibilities identified in auditing standards
interaction between standard setters and the can be seen as a way for the audit profession to
rulings of courts and professional bodies should protect self-interests (Parker, 1994; Chandler, 1997;
be understood in the context of the less litigious Cowton, 2009). From the perspective of the audit
environment of our study. profession, this can be interpreted as a chosen level
© 2011 Blackwell Publishing Ltd Int. J. Audit. 16: 79–97 (2012)

3. Establishing Proactive Auditor Responsibilities in Relation to Fraud 81
of self-regulation in order to avoid legal proactive responsibilities. We choose to focus on
intervention enforcing new audit regulations or the first decade after the introduction of the
adverse court rulings claiming audit failures in ‘proactive responsibilities’ in relation to fraud.
fraud cases (see also Jönsson, 1991; Buckless & This also enables us to discern whether the courts
Peace, 1993; DeZoort & Lee, 1998; Glover et al., and professional bodies consider these as new
2003). (changed) responsibilities or clarified (existing)
It is noticeable that the auditor’s fraud responsibilities.
responsibilities have undergone a change from The audit profession is facing increasing
reactive to proactive, as promulgated through the demands for documentation of compliance with
auditing standards (e.g., Anderson et al., 1998; auditing standards (examples in the context of
DeZoort & Lee, 1998; Glover et al., 2003; Lynford & fraud are provided by Glover et al., 2003; Mock
Bedard, 2003). Statements like the following made & Turner, 2005; Hammersley et al., 2010). Legal
by the US Public Company Accounting Oversight environments may be either principle-based or
Board (PCAOB) illustrate the proactive emphasis rule-based (e.g., Satava et al., 2006; Dennis, 2008),
encompassing the auditor’s responsibilities in hence the audit profession in different countries
relation to fraud: ‘the auditor should [because has been forced to deal with such opposing
the risk of non-detection is likely to be higher demands. Therefore, it is important to examine
for misstatements caused by fraud than for and recognize the conditions of the audit
misstatements caused by error] assess risks and profession in the context of different legal
apply procedures directed specifically to the environments, which have been shown to
detection of a material, fraudulent misstatement of influence disciplinary outcomes under different
the financial statements’ (PCAOB, 2007: 2). liability regimes (e.g., Carrington, 2010) as well as
In this study we examine how this change key attributes such as levels of audit fees (e.g.,
in regulation is adopted in a Danish setting. Kallunki et al., 2007) and audit quality (e.g.,
Because auditing is inherently a practice-oriented Francis, 2004). Our paper provides insight into the
discipline, audit regulation has often been Danish audit market with an ultimate principle-
described as a codification of established good based legal system based on the legal provision
audit behaviour (Wilks & Zimbelman, 2004) which termed ‘good audit practice’. With its historical
is ‘nudged along’ by enforcement activities tradition for mandatory audits of listed companies
(Campbell & Parker, 1992). It is in this context that and most limited liability companies, Denmark
the auditor’s responsibilities in relation to fraud represents a rather large audit market which,
have developed over time. Peecher et al. (2007: before the new regulation exempted the smallest
464) suggest that auditing approaches evolve companies from mandatory audits, numbered
endogenously in response to changes in society’s approximately 140,000 companies under the
information needs and regulations, business mandatory audit regime (Holm & Warming
organizations’ value creation processes and Rasmussen, 2007). In the period before 1996,
available accounting and auditing technologies. In codification of ‘good audit practice’ dominated the
a similar manner, it is our contention that the Danish audit regulation, introducing the auditor’s
responsibilities manifested in audit regulations reactive responsibilities in relation to fraud in the
work in a symbiotic relation with actual practice, general auditing standards. The period witnessed
court rulings on litigation cases and disciplinary a number of serious fraud cases resulting in high
actions imposed by professional and supervisory public and political awareness, but sanctions
bodies subject to institutional differences in against auditors were not strengthened beyond
individual countries (see also Anderson, 1977; the proportional size of the cases (Holm et al.,
Anderson et al., 1998; Blij et al., 1998). Hence, the 2011). In the period after 1996, the proactive
purpose of our study is to examine how courts approach to the auditor’s responsibility to detect
and professional bodies have responded to the fraud was introduced in the audit regulation in
change in the audit promulgations introducing Denmark, i.e., starting by the Executive Order on
proactive responsibilities in relation to fraud. In Auditors’ Statements issued in 1996. One of the
effect, we observe the outcome of actual fraud provisions in this Executive Order states that
cases in order to analyse and discuss the role of when planning and performing the audit, the
the courts and professional bodies in establishing auditor must to a certain extent be aware of
the extent and nature of the promulgated circumstances that are indicative of fraud or other
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4. 82 C. Holm et al.
irregularities that are of importance to the users of about the extent of the auditor’s responsibilities in
financial statements.1 This provision predates the relation to fraud, we do not find that the regulatory
Danish Audit Guideline 21 on fraud (DISAPA, change towards proactive responsibilities in
1999) by a few years. The latter is inspired by the relation to fraud has been further accelerated by
American SAS 82 (AICPA, 1997) and is the first prescriptive court rulings. We suggest that the
Danish auditing standard that deals exclusively interaction between standard setters and the
with the auditor’s responsibility in this area rulings of courts and professional bodies should
(Kiertzner, 2006).2 be understood in the context of the less litigious
The actual cases provide a basis for identifying environment of our study. Our findings do not,
the responsibility to recognize potential fraud however, rule out the potential for future discourse
situations during an audit and the responsibility to concerning interpretations of the auditor’s
react upon such knowledge (on the relevance of responsibilities in relation to fraud.
situational factors, see also St. Pierre & Anderson, In the next section, we review prior literature on
1984). The low incidence and the confidential fraud issues related to our study. In Section 3, we
nature of fraud provide serious constraints on describe the methodology used to identify, classify
data availability for research studies in this area and analyse the actual fraud cases. Section 4
(Lynford & Bedard, 2003). Though accounting provides an analysis of fraud cases handled by
studies identify the contribution of court systems courts and professional bodies. Finally, Section 5
as being very important, this has been relatively concludes the paper.
ignored in research (Mills & Young, 1999: 244). In
the context of our study, examining the outcome of
2. LITERATURE REVIEW
actual fraud cases is of prime importance because
the auditor’s responsibilities are ultimately Prior studies have dealt with the issue of the
determined by the courts (DeJong & Smith, 1984; auditor’s responsibilities in relation to fraud
Buckless & Peace, 1993; Baker & Prentice, 2008). from different viewpoints, including audit failures
Overall, we find that the Danish courts and and regulations. In a comprehensive review of
professional bodies are responsive to the proactive empirical fraud research, Nieschwietz et al. state
responsibilities identified by the standard setters. that their review is warranted primarily because
We find that in the fraud cases handled by the policy makers, academics, government officials
Responsum Committee as part of the professional and practising auditors have debated the auditor’s
body, the proactive responsibilities are interpreted responsibility for detecting fraud for several
as a clarification of previously uncodified specific decades (Nieschwietz et al., 2000: 190). Hogan
responsibilities in relation to fraud. Differences et al. (2008: 246–7) note that ‘despite existing
in perception of the auditor’s responsibilities auditing standards and authoritative guidance on
could lead to adverse outcomes. However, we an auditor’s responsibility for discovering and
find that the Disciplinary Tribunal acts in line with reporting financial statement fraud, there remains
the interpretations of the professional body, and an expectation gap between what investors believe
we find no discord with the interpretations by the auditor’s responsibility should be in detecting
the courts either. As regards the change in financial fraud and what auditors are willing to
promulgated responsibilities, we do find that court assume as responsibility in this area’. From the
rulings relate to specific proactive audit acts, such users’ point of view, the lack of understanding of
as the prescribed responsibility to consider the the role of an auditor obscures the distinction
possibility of fraud when planning the audit between detecting fraud and reacting to observed
procedures at the beginning of the audit process. fraud. Differences in expectations are observed in
Hence, we find that the Danish audit profession terms of the perceived level of assurance for fraud
has adopted the new proactive responsibilities detection, with users expecting higher levels than
identified by the standard setters, whilst the auditors (e.g., Epstein & Geiger, 1994; Goldwasser,
courts and the professional bodies seem to see 2005).
‘the changes’ as mere clarifications of existing The studies on audit failures are concerned
responsibilities. The study contributes to ongoing primarily with the litigation and enforcement
debates about principle-based vs. rule-based activities of supervisory bodies such as the
regulatory systems. While the principle-based legal Securities and Exchange Commission (SEC) in the
system implies the existence of more uncertainty United States (see, e.g., Campbell & Parker, 1992;
© 2011 Blackwell Publishing Ltd Int. J. Audit. 16: 79–97 (2012)

5. Establishing Proactive Auditor Responsibilities in Relation to Fraud 83
Rollins & Bremser, 1997; Bonner et al., 1998). In a assessments. Their study provides descriptive
closely related study, Carrington examines how the evidence that most clients have one or more factors
Swedish Supervisory Board of Public Accountants indicative of fraud risk. But only the client’s
frame a sufficient audit (‘good audit practice’) by financial condition is a significant factor related to
investigating a sample of 354 disciplinary cases fraud risk assessments. They also show that the role
from the period 1995 to 2004 (Carrington, 2010). of fraud risk assessments in audit test planning
He classifies the wrongdoings mentioned in varies depending on the type of procedure being
the disciplinary cases into two main categories planned.
(process and professional) and suggests that Some studies specifically examine user
‘the relative importance between process and perceptions of the replacement of SAS 53 (AICPA,
professional aspects of a sufficient audit is clearly 1988) by SAS 82 (AICPA, 1997). Relying on
tilted in favour of the professional aspects. A the attribution theory framework, Anderson
sufficient audit is an audit that preserves the et al. (1998) examine attributions of auditor
priest-like status of the auditor, which enables the responsibilities by auditors and practising judges.
ritual of verification’ (Carrington, 2010: 680). While This is relevant in the context of our study, i.e.,
the focus of his study goes beyond the fraud ‘the judges were selected as a knowledgeable,
focus of our study, he examines the demands influential group who provide views reflective of
for a sufficient audit in a disciplinary context the legal environment and, therefore, allow for
conditioned by low litigation very similar to the detection of potential expectational differences
the Danish corporate environment (for Swedish between the legal and audit communities’
auditor regulation in relation to fraud, see also (Anderson et al., 1998: 217). They find that auditors’
Larsson, 2005a, 2005b). attributions of responsibility are significantly
Several US studies are relevant to the context affected by the collusion and materiality variables
of our study because they examine the audit in the fraud case, while the judges’ assessments
implications and user perceptions of the of auditor responsibility are affected by the
replacement of SAS 53 (AICPA, 1988) by SAS 82 interaction between their general attitudes
(AICPA, 1997), hence reflecting queries about the regarding the auditing profession and collusion
intended clarification of the fraud responsibilities in the fraud case. They also find that evidence
(e.g., Anderson et al., 1998; DeZoort & Lee, 1998; reliability and materiality significantly affect
Knapp & Knapp, 2001; Glover et al., 2003; Lynford auditors’ attributions, while they do not play a role
& Bedard, 2003). In an experimental study, Glover in the attributions of the judges (Anderson et al.,
et al. (2003) distinguish between ‘pre- and post-SAS 1998). In another experimental study, DeZoort and
82’ auditors and find that, in accordance with the Lee (1998) hypothesize that the nature of the new
prescribed changes in the fraud standard, auditors standard (SAS 82) and the contemporary audit
are more aware of the need to modify audit plans environment will result in perceptions that the
and more likely to increase the extent of their audit new standard increases auditors’ responsibilities
tests performed in response to increased fraud. for fraud detection (as compared to SAS 53).
However, they do not find (pre- or post-SAS 82) Their findings suggest that perceptions of
evidence that auditors modify the nature of the external auditor responsibility to detect fraud were
planned tests in response to the increased fraud increased across different groups of participants.
risk (Glover et al., 2003: 249). The professional body They also find that the external auditors’
(AICPA) argues that SAS 82 should provide perceptions increased more than the perceptions of
operational guidance to audit practitioners. One of internal auditors and fraud examiners (DeZoort &
the proactive responsibilities introduced in SAS 82 Lee, 1998: 168). The empirical evidence from
is the need to make explicit fraud risk assessments. the US studies suggests that the introduction of
Knapp and Knapp (2001) examine this proactive responsibilities was accompanied by
responsibility in an experimental study and their more detailed guidance for external auditors and,
findings suggest that effectiveness is improved for thus, resulted in an increase in perceptions of
experienced auditors performing an explicit fraud auditor’s responsibilities for fraud detection.
risk assessment using analytical procedures. In a However, these studies also show that new
sample of 23 Big 5 audit clients, Lynford and concerns and challenges were raised by research
Bedard (2003) examine the relationship between as well as standard setters. This subsequently
fraud risk factors and auditors’ fraud risk led to a rapid replacement of SAS 82 by SAS 99
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6. 84 C. Holm et al.
(AICPA, 2002), introducing further clarifications (see Eilifsen, 1998; Carrington, 2010). The Danish
and suggestions for new audit procedures such as term is ‘god revisionsskik’ and it is based on the
brainstorming sessions on the possibility of fraud idea of the ‘bonus pater familias’ (good family father)
in all audit engagements (see, e.g., Carpenter, 2007; in Roman law or ‘the reasonable man’ in English
Hunton & Gold, 2010). law. The key point is that the legal provision does
not provide guidance on what to do, partly because
even good and reasonable people sometimes act
3. METHODOLOGY
negligently, partly because the demands of care
In this section, we describe the methodology used differ depending on the specific circumstances
to identify, classify and analyse the fraud cases (Langsted, 2008). The legal provision provided in
used in this study. The 30 fraud cases considered the Auditors Act is supplemented (and interpreted)
in this study are instances where the responsibility by other acts and other types of regulation, e.g.
of the auditor has been questioned. It includes the Danish auditing standards. Furthermore, the
all the cases that were made publicly available in extent and nature of the auditor’s responsibilities
the period from 1996 to 2006. We chose to limit are interpreted under specific circumstances
the period studied to the first decade after the through responsa from the Responsum Committee,
introduction of the ‘proactive responsibilities’ in disciplinary decisions made by the Disciplinary
relation to fraud. We deliberately consider the cases Tribunal and rulings by the courts in the regular
based on the outcome dates and not on the time of court system.
the audit pertaining to the case. This is necessary to The fraud cases considered by the Responsum
examine the role of courts and professional bodies Committee are presented in Table 1, together with
in establishing the proactive responsibilities, and the cases from the Disciplinary Tribunal and the
it also enables us to discern whether the courts courts. Cases can be put before the Responsum
and professional bodies consider the promulgated Committee by the members of DISAPA, the
fraud responsibilities as new (changed) or clarified government, the administrative authorities and the
(existing) responsibilities. It should be noted that court system. The Responsum Committee has no
the list of cases is not exhaustive in terms of fraud obligation to consider cases from other parties such
cases raised within the court system in Denmark as clients, and hence other parties have to engage a
and certainly not in terms of the number of criminal State Authorized Public Accountant to raise a case
offences committed. In fact, in many fraud cases on their behalf. Unlike the Disciplinary Tribunal
the particular responsibilities of the auditor is and the courts, the Responsum Committee cannot
not questioned. In comparison, the MARC impose sanctions on auditors. The Responsum
‘Classification and Analysis of Major European Committee makes expert opinions regarding ‘good
Business Studies’ (2005) identifies 21 of 60 business audit practice’, but it is up to the Disciplinary
failures as involving the role of the auditor. Due Tribunal and/or the courts to decide whether
to our interest in examining the auditor’s sanctions should be imposed on the auditor
responsibility for fraud, only fraud cases involving involved (Langsted, 2009). Furthermore, neither
the role of the auditor are examined. the Disciplinary Tribunal nor the courts are obliged
Table 1 provides an overview of the type of fraud to request a responsum from the Responsum
cases considered. Here we make a distinction Committee before deciding whether to enforce
between case documents provided by the sanctions.
Responsum Committee, the Disciplinary Tribunal As identified in Table 1, three types of legal
and the court system. The responsibility of liability can be imposed on auditors: (1)
the Responsum Committee as an independent disciplinary liability, (2) civil liability (or liability
committee formed by the Danish Institute of State to pay damages) and (3) criminal liability. The
Authorized Public Accountants (DISAPA) is to Disciplinary Tribunal is mandated by the Danish
provide expert opinions called ‘responsa’ on ‘good Auditors Act (2008) to handle disciplinary liability
audit practice’. The concept of ‘good audit practice’ cases regarding the audit profession.3 The
is a legal provision in the Danish Auditors Act Disciplinary Tribunal is chaired by a judge and
(2003, 2008). It states that the auditor must perform consists of members representing the business
audits in accordance with what can be described as community (the majority) as well as members of
good or sound audit practice. Similar provisions the audit profession. Disciplinary liability can
are found in the audit laws of Norway and Sweden result in different sanctions depending on the
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7. © 2011 Blackwell Publishing Ltd
Table 1: Classification of fraud cases based on case document and outcome
Criticism and sanctions Responsum Committee Disciplinary Tribunal High and Supreme Courts No. of cases
Criticism Disciplinary liability Civil liability Criminal liability
Criticism No criticism 3 3
Criticism 8 8
Establishing Proactive Auditor Responsibilities in Relation to Fraud
Sanctions No liability 0 2 0 2
Warning 0 0
Fine 12 1 13
Suspension 0 0 0
Payment of damages 4 4
Imprisonment 0 0
No. of cases 11 12 6 1 30
Int. J. Audit. 16: 79–97 (2012)
85

8. 86 C. Holm et al.
severity of the offence and other circumstances. court systems need to arrive at an interpretation of
These sanctions include a warning, a fine or a the auditors’ responsibilities, the responsum may be
suspension of the license to practise as an auditor. a useful instrument in tribunal and court systems.
Cases of civil or criminal liability, on the other One of the court cases provides an example of
hand, are resolved in the regular Danish court the importance of the responsum. Here, two of the
system consisting of local district courts, two high three judges stated that the absence of a responsum
courts and the Supreme Court.4 Similarly, criminal pertaining to the specific area precludes them from
liability can result in different sanctions depending finding the auditor responsible in violating ‘good
on the severity of the offence, the provision that is audit practice’, see court case 2 (1997), as listed in
violated and other circumstances.5 These sanctions Table 3. Consequently, a certain overlap of fraud
include a fine, imprisonment or – similar to cases could be expected, but because we discard
disciplinary liability – a suspension of the license to interrelated cases issued earlier than 1996, only two
practise as an auditor. Civil liability cannot result overlaps are present in our investigation, i.e.,
in any sanctions as such. Instead, in cases of civil responsum case 1151 (2000) is related to court case
liability, the plaintiff seeks to claim damages from 5 (2003) and responsum case 1213 (2003) is related
the defendant, i.e., the auditor. Thus it is assumed to court case 7 (2006). We have decided to include
that the plaintiff has suffered an economic loss, the cases as separate cases in the investigation
e.g., because the auditor has been negligent in due to the different approaches of the different
performing an audit or another type of engagement institutions, while still noting that the substance
(Langsted, 2009). matter of the underlying frauds is the same for
these particular cases.
Classification of fraud cases We have examined each of the 30 fraud cases in
detail in order to extract information about the
We obtained information about the publicized specific circumstances of the fraud scenarios
fraud cases from various sources. The database of and the responsibilities of the auditors involved.
the Danish Institute of State Authorized Public In addition to the detailed information in the
Accountants is electronically available to the public individual fraud cases, we use the following main
and contains more than 1250 responsum cases classifications:
dating back to 1930. Based on a thorough word (a) type of case document (responsum, tribunal,
search using several different combinations of court)
words such as fraud, criminal act, etc., we were able (b) type of perpetrator(s) (management,
to identify a total of 11 cases related to fraud in the employee, management and employee in
period 1996–2006 (see Table 1). As a next step, we collusion, external party, internal and external
carried out a detailed examination of the fraud party in collusion)6
responsa provided by the Responsum Committee. It (c) ISA 240 fraud classification (fraudulent
should be noted that any particular responsum reporting, misappropriation of assets,
typically addresses more than one issue pertaining concealment/ combination of the two)7
to the responsibility of the auditor. Most of the (d) criticism of auditor (yes/no)
issues raised involve specific scenarios which (e) type of criticism (none, insufficient or
provide insight into whether the auditor has inappropriate audit tasks, communication
conducted the mandated tasks in accordance with failure(s), both audit task and communication
‘good audit practice’. Table 1 also shows whether failure(s))
the auditor has received criticism from the (f) type of liability (disciplinary, civil, criminal)
Responsum Committee, which is the case in 8 of (g) type of sanction (none, warning, fine, liability
the 11 cases. Criticisms raised in the responsum may amount, imprisonment, suspension)
later on lead to sanctions against the auditor, but Based on a tabulation of the 30 fraud cases, we are
this is not necessarily the outcome in the tribunal able to discern the relationships between types of
and court systems. An additional 19 fraud cases fraud and types of perpetrator (see Table 2). The
were identified from the Disciplinary Tribunal (12) identified relationships provide an initial insight
and court systems (7) (see Table 1). We have into which kind of scenarios would most likely lead
considered only publicly available cases that raise to an examination of the auditor’s responsibilities
questions in relation to the responsibility of the in relation to fraud. Firstly, it is observed that
auditor in fraud settings. Because the tribunal and fraudulent reporting is a management deed (6 out
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9. Establishing Proactive Auditor Responsibilities in Relation to Fraud 87
Table 2: Types of fraud and perpetrators 1996–2006
Management Employees Collusion Total
Fraudulent reporting 6 6
Misappropriation of assets
Pure cases 2 1 3
Cases with concealment 12 9 21
Total 20 10 0 30
of 6 cases). Secondly, most of the cases where the and professional bodies in establishing the extent
responsibility of the auditor is questioned (21 of 30) and nature of the promulgated proactive
involve concealment of misappropriation of assets. responsibilities. The empirical findings available
As identified in ISA 240, fraud often involves for the period 1996 to 2006 are based on an
carefully organized schemes designed to conceal increased number of fraud cases relative to the time
the fraud.8 Pure cases of misappropriation of span.9 In 8 of the 11 responsum cases, criticism is
assets are rare for obvious reasons – the perpetrator made by the Responsum Committee. Before 1996,
does not want to be caught. Thirdly, both the specific regulatory requirements for the Danish
management and employees choose concealment auditor’s responsibilities in relation to fraud were
where possible. Fourthly, none of the cases involve absent (Holm et al., 2011). The earliest reference to
collusion by internal or external parties or pure the ‘new’ Danish Audit Guideline 21 (DISAPA,
theft by an external party. While collusion is 1999) is found in responsum case 1181 (2001, 2,
generally likely in fraud cases, we find no cases in in translation): ‘In Audit Guideline 21 it is stated
the period where questions are raised against the that if the auditor during his audit detects any
auditor in such contexts. The relatively small transactions that could give reason for a
number of cases identified in this decade is typical presumption that there was a risk of fraudulent
in the Danish setting and comparable to other acts, the audit must be extended to clarify this.
European countries with less aggressive litigation It is noted that this guideline came into effect in
environments than in the United States (see Baker 1999, but according to the committee it conforms
& Quick, 1996; Carrington, 2010). For comparison, with the guidelines for good audit practice in
we have also identified the number of fraud cases the period concerned’. Thus the Responsum
during the two decades immediately before our Committee expresses a possible reaction to fraud
period of interest. Only six fraud cases were detection that is very similar to earlier references to
identified from 1976 to 1986, whereas the total the Danish Audit Guideline 1 (DISAPA, 1993)
for the period 1986–1996 amounted to 22 fraud related to the general responsibility of the auditor
cases. The increase in number of tribunal and court (as opposed to specific responsibilities). In the
cases suggests an interesting pattern, but this may majority of the fraud cases, the Responsum
merely reflect trivial fluctuations in cases raised Committee actually refers to the Danish Audit
against auditors. Consequently, only a closer Guideline 1 and not Audit Guideline 21. In this
scrutiny of the individual cases will enable us to sense, the criticism raised during this period does
determine whether and how the new proactive not seem to change dramatically, suggesting that
responsibilities established by the courts and the the proactive responsibilities are interpreted by
professional bodies have affected auditors. the professional body as a mere clarification of
previously uncodified specific responsibilities in
4. ANALYSIS relation to fraud.
This also brings up the question whether the
In this section, we examine how the courts and professional body interprets and enforces the
professional bodies have responded to the change promulgations as new (changed) responsibilities.
in the audit promulgations introducing proactive The responsum cases deal with this in various ways.
responsibilities in relation to fraud. Consequently, In responsum case 1151 (2000, 1, in translation), the
we observe the outcome of actual fraud cases in auditor under scrutiny argues along the lines
order to analyse and discuss the role of courts followed in the past: ‘It is noted that the auditor
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10. 88 C. Holm et al.
in [the communication with those charged with responsible for detecting fraud. This limits the
governance] dated on March 11, 1991 has stated proactive responsibilities to active fraud awareness
that “it is not the main purpose of the audit to in the conduct of the audit. As suggested in
detect frauds and irregularities” and that “if any previous studies (e.g., Anderson et al., 1998;
inaccuracies are detected during the audit, the audit DeZoort & Lee, 1998; Fraser & Lin, 2004), this is
will be extended to clarify this”.’ The Responsum consistent with the auditors’ own interpretation of
Committee counters with criticism based on the the promulgated fraud standards at the time, i.e.,
new proactive responsibilities, i.e., identifying an Audit Guideline 21 (DISAPA, 1999), SAS 82
audit plan failure (responsum case 1151, 2000, 1, (AICPA, 1997) and ISA 240 (IAASB, 2001).
in translation): ‘In the specific case, it is the The number of tribunal cases in the period
committee’s opinion that the present audit plans 1996–2006 increased compared to the two prior
are adequate for an overall planning of the audit, decades. However, not all of the cases are worth
but that the audit plan should have included a examining in detail. One common type of fraud
review of the internal control in the company as far involves illegal loans to owners. The Danish
as salaries are concerned. This would have revealed Penalty Code classifies such loans as fraudulent
that the management had not established an misstatements (Greve & Langsted, 2011).
appropriate control of the salaries paid out.’ Hence, Accordingly, seven of the 12 cases lead to sanctions
the responsibility to plan for the possibility of against auditors because of their failure to adhere
fraud is here considered in the specific context of to the explicit responsibility of the auditor to
auditing the payroll and personnel cycle. The communicate about such illegal loans through the
potential shortcomings in the course of an audit audit opinion. The disciplinary sanctions in these
are now more regularly tied to the responsibility almost identical cases were auditor fines ranging
for planning. Audit planning is, of course, a from DKK 10,000 to DKK 40,000. Due to the similar
prerequisite for ‘good audit practice’, but now the nature of these cases involving illegal loans, Table 3
wording of the Responsum Committee’s criticism only summarizes the particulars of the remaining
addresses this explicitly. Thus, the criticism assists five tribunal cases.10
in clarifying specific responsibilities in accordance The tribunal cases include two examples of
with the proactive emphasis on fraud awareness. fraudulent reporting by management (see tribunal
In a later fraud case, the Responsum Committee cases 7 and 12). The size of the fine in tribunal case
also addresses the issue of an extension of the 7 (2001) is considerably higher than previously
audit scope as a consequence of fraud suspicion seen. Although high, a fine of DKK 100,000 is
(responsum case 1239, 2005, 1, in translation): ‘[I]t is still just one-third of the maximum fine applicable
the management that is responsible for establishing at that time and fines of that relative magnitude
administrative procedures and good internal had been used before. The list of shortcomings
control. It is the auditor’s task to confirm this. related to the audit is comprehensive and
However, it is the committee’s opinion that the contains elements related to audit planning,
auditor should have checked that agreed initiatives conduct, documentation and communication. The
with a view to strengthening the administrative fraudulent reporting includes examples of double
procedures and the internal controls had been counting of company cars, wrongful inclusion of
implemented. . . . [T]he fact that the auditor may property, overvaluation of assets, missing liabilities,
not have complied with good audit practice on etc. The decision made by the Disciplinary Tribunal
certain points does not mean that the auditor loses suggests that many of the particular issues in the
his right to receive a fee for his assistance in fraudulent reporting would be discovered if the
detecting fraud.’ It is noticeable that the extension auditor had conducted the audit in accordance
of the audit scope to examine the particular with ‘good audit practice’. Hence, the Disciplinary
circumstances where there is a suspicion of fraud is Tribunal is not imposing a new harsher
not considered part of the normal audit. The interpretation of shortcomings of the audit. In the
solving of the crime may be a task where the latest tribunal case in this period, the fines imposed
auditor is expected to have a natural advantage, but on the two auditors involved are even higher, i.e.,
this is not necessarily a part of the audit task for disciplinary sanctions amounting to DKK 150,000
which the auditor will receive the audit fee. This and 140,000, respectively, in tribunal case 12 (2006).
is a task beyond the financial audit. Accounting Very similar to what is seen in the responsum
to the professional body, the auditor is still not cases during this period, the Disciplinary Tribunal
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11. Table 3: Sanctions against auditors in fraud cases 1996–2006*
Case ID Type of court/tribunal Fraud type Perpetrator Auditor responsibility
Tribunal case 6 (1999) Disciplinary Tribunal Concealment Management Disciplinary sanction: fine
(amount DKK 25,000)
© 2011 Blackwell Publishing Ltd
Tribunal case 7 (2001) Accountants Tribunal Fraudulent reporting Management Disciplinary sanction: fine
(amount DKK 100,000)
Tribunal case 9 (2005) Disciplinary Tribunal Concealment Employee Disciplinary sanction: fine
(amount DKK 75,000)
Tribunal case 11 (2006) Disciplinary Tribunal Concealment Employee Disciplinary sanction: fine
(amount DKK 10,000)
Tribunal case 12 (2006) Disciplinary Tribunal Fraudulent reporting Management Disciplinary sanction: fines
(amounts DKK 150,000 and
140,000)
Court case 1 (1997) Supreme Court Fraudulent reporting Management Civil liability sanction
(amount DKK 543,497)
Establishing Proactive Auditor Responsibilities in Relation to Fraud
Court case 2 (1997) High Court Concealment Management No civil liability
Court case 3 (1998) High Court Fraudulent reporting Management Criminal liability sanction
(auditor 1: 20 day-fines of
amount DKK 2,000,
auditor 2: 10 day-fines of
amount DKK 2,000 and
auditor 3: acquittal)
Court case 4 (1999) High Court Fraudulent reporting Management Civil liability sanction
(amounts DKK 922,108.98
and 1,531,820.71)
Court case 5 (2003) Supreme Court Concealment Employee Civil liability sanction
(amounts DKK 374,584.64
and 43,750)
Court case 6 (2004) Supreme Court Fraudulent reporting Management No civil liability
Court case 7 (2006) Supreme Court Misappropriation of assets Management Civil liability sanction
(amount DKK 8,000,000)
*Tribunal cases 1, 2, 3, 4, 5, 8 and 10 are examples of illegal loans, which are excluded from the table.
Int. J. Audit. 16: 79–97 (2012)
89

12. 90 C. Holm et al.
considers the importance of audit planning with scandal of the period involving ‘Nordic Feather
explicit references to the Danish Audit Guidelines 1 Company’. The fraudulent reporting was initiated
(Fundamental Principles), 14 (Auditing Companies by the charismatic and dominant head of the
Using EDP), 17 (Audit of EDP-Based User Systems) listed company, Johannes Petersen, who held a
and 18 (Audit Protocol Communication), but not combined position as chair of the supervisory
Audit Guideline 21 (Fraud) (DISAPA, 1989, 1990, board and CEO. In 1990, the company was
1991, 1993, 1999). Audit planning is seen as an declared bankrupt – at that time the head of the
indispensable prerequisite for an appropriate audit company had committed suicide. The bankrupt
and therefore presumably also for any fraud estate was met with claims of more than DKK 2
detection on the part of the auditor. Similar billion. Trust in the auditor profession became a
remarks are made in tribunal case 9 (2005), which public issue because it was difficult for the public
involves a pure case of employee concealment to understand how the company could have
made possible by insufficient separation of duties. received unqualified audit opinions for a number
In this case, the tribunal sanctions the auditor with of years, even after the auditors had become aware
a fine of DKK 75,000 due to inappropriate audit of major problems, including the obvious signal of
planning (tribunal case 9, 2005, 3).11 auditors resigning. The fraud case continued for
The different composition of members of several years in the court systems and ended with
the Responsum Committee and the Disciplinary a High Court decision against the management
Tribunal opens the possibility of conflicting and the auditors (court case 3, 1998). Members
interests of the two bodies. Differences in of management were sentenced to several years’
perception of the auditor’s responsibilities (as imprisonment for gross fraud against investors
suggested in prior studies by Anderson et al., and creditors. Later, two of the three auditors
1998, DeZoort & Lee, 1998 and Fraser & Lin, involved were found to be criminally liable and
2004) could lead to adverse outcomes in cases were sanctioned with fines. We find no discord
considered by the professional body acting in the between the interpretations by the professional
self-interest of the membership body of auditors body and the High Court. The court’s ruling was
and in cases considered by the Disciplinary in line with the interpretation of the Responsum
Tribunal with a majority of non-accounting Committee which on ten specific issues criticized
members. However, the outcome of the fraud the auditors for not providing qualified audit
cases in this period suggests that the Disciplinary opinions. The identified shortcomings related to
Tribunal acts in line with the interpretations of the specific audit tasks and communication failures in
professional body. audits conducted before the promulgation of the
Finally, we turn to the circumstances of the fraud proactive responsibilities. However, the ruling can
cases handled in the court system from 1996 to be viewed as addressing the societal need for
2006. Due to the often very public nature of the reassurance of trust in the audit profession, hence
fraud cases brought before the High Courts or the supporting the clarification effort promoted by
Supreme Court, the courts are positioned to the profession at the time. In the related case, the
advocate the auditors’ fraud responsibilities in a Supreme Court ruled in favour of two resigning
prescriptive manner if there is a discord between auditors (court case 6, 2004). The two auditors
legal, societal interests and professional interests in were appointed in 1987 and resigned in 1988
the auditing standard promulgations. As explained without auditing the company in question. The
in Section 3, courts base their rulings on their Supreme Court finally absolved the two resigning
interpretation of the legal provision ‘good audit auditors of civil liability towards the shareholders.
practice’ as supplemented by other laws, auditing Consequently, the court ruling clarified that the
standards as well as existing responsa from the auditors had the prerogative to signal that the
Responsum Committee and decisions made by audit engagement was impossible to fulfil, hence
the Disciplinary Tribunal. Hence, it is from this the court concurred that auditors are not ascribed
perspective that we analyse the role of the courts special or additional responsibilities due to fraud
in establishing the extent and nature of the occurring in the company.
promulgated proactive responsibilities. The remaining fraud cases are civil liability cases
All but one of the seven court cases in this raised on behalf of stockholders or other plaintiffs
period are related to management frauds. Court asserting that they have suffered an economic
cases 3 and 6 deal with the major corporate fraud loss, e.g., because the auditor has been negligent
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13. Establishing Proactive Auditor Responsibilities in Relation to Fraud 91
in performing an audit or another type of statements, the auditor was found liable in relation
engagement. In court cases 2 and 6, the auditors to both plaintiffs.
were acquitted of neglect. The particular reasoning The two remaining fraud cases both present
in court case 2 was briefly mentioned earlier; examples of an auditor’s neglect in relation to
to demonstrate the weight the courts assign to adequately checking the internal control systems
interpretations provided by the Responsum of the clients. Court case 5 (2003) involves
Committee. That is, the ruling is in favour of concealment fraud committed by an employee. The
the auditor due to the absence of a responsum Supreme Court ruled in accordance with the
explaining the particular responsibilities regarding criticism raised by the Responsum Committee
an audit of related companies within a group. in the related responsum case 1151 (2000). The
The size of the civil liability claims should not be premises of the ruling indicate that the auditor
seen as a measure of the severity of the sanction. The should have (a) examined the internal controls
amount awarded in court cases 1, 4, 5 and 7 reflects which would have revealed that the management
the economic losses on the part of the plaintiffs due had not established appropriate controls in relation
to neglect on the part of the auditors (see Table 3). to payment of salaries, and (b) communicated
The importance of the interpretations from the the weaknesses of the internal controls to those
Responsum Committee is further emphasized by charged with governance as well as described
the fact that, in each of the cases incurring civil appropriate measures to improve the control
liability, a responsum is used as an element of the systems. The Supreme Court found that the auditor
court ruling showing auditor neglect. The criminal was liable to pay damages to the plaintiffs because
acts of the management predate the promulgation of the neglect can be directly associated with the
proactive responsibilities of the auditors in court absence of preventive measures against this
cases 1 and 4. In court case 1 (1997), the management particular fraud. Hence, the proactive role of the
issued fictitious invoices to their factoring service auditor in relation to fraud is here extended
company. The criticism raised in responsum case 938 considerably compared to previous interpretations
(1989) expresses the auditor’s responsibility. The of fraud responsibilities. Court case 7 is classified
Responsum Committee finds shortcomings in this as an example of misappropriation instead of
audit as compared to an appropriate audit, e.g., the concealment. This is a somewhat arbitrary
lack of sampling tests controlling the existence of classification because the main problem here
real deliveries behind hypothecated invoices and is a widespread absence of bookkeeping in the
the lack of confirmation letters to debtors. Under the company. The Responsum Committee in the
premises of the court case, it is assumed that the related responsum case 1213 (2003) expressed
bank involved would have refused further use of criticism of the auditor as he should have made
the credit facilities if appropriate information on the sure that the accounting system and internal
circumstances of the company had been provided to controls of this investment company were
them. The neglect by the auditor, compared to an established and functioning. The premises of the
appropriate audit, is sufficient to find him liable in Supreme Court are clear, i.e., court case 7 (2006, 17)
this fraud case. Court case 4 (1999) is a somewhat refers directly to the Danish Audit Guideline 1:
similar instance of fraudulent reporting. In due to the lack of appropriate bookkeeping
accordance with responsum case 1049 (1995), the and financial reporting, the auditor should have
High Court found that the auditor involved had planned the audit in accordance with an
incurred civil liability and he was sentenced to pay assessment of the risk of errors as being relatively
damages to the plaintiffs (i.e., to the factoring high (DISAPA, 1993, paragraph 6). The lack of
company amounting to DKK 922,108.08 and to the inspection constitutes an audit failure that is so
bank amounting to DKK 1,531,820.71). Under the severe that the auditor and the audit firm are found
premises, the court decision states that the auditor is liable to pay damages to the plaintiff of the highest
not reproached for not detecting fictitious invoices amount to date, i.e., DKK 8 million. Consequently,
as part of the management fraud scheme. However, the interpretation of the court concurs with the
due to clearly demonstrated shortcomings of the view promoted by the professional body, hence
audit, the financial statements portray an excessively establishing the extent and nature of the auditors’
positive picture of the actual financial responsibilities in relation to fraud by clarifying the
circumstances. Because of his obligation to provide case-specific responsibilities in accordance with the
an opinion on the true and fair view of the financial proactive emphasis on fraud awareness.
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14. 92 C. Holm et al.
5. DISCUSSION AND CONCLUSION bodies responded to the change in the
audit promulgations introducing proactive
The auditor’s responsibilities in relation to fraud responsibilities in relation to fraud. Our study
have undergone a change from reactive to provides insight into the Danish audit market and
proactive, as promulgated through the auditing its ultimate principle-based legal system based on
standards (e.g., Anderson et al., 1998; DeZoort & the legal provision termed ‘good audit practice’. In
Lee, 1998; Glover et al., 2003; Lynford & Bedard, the period after 1996, the proactive approach to the
2003). The audit profession engages in clarification auditor’s responsibilities for fraud detection was
of existing responsibilities. This can be interpreted introduced in Denmark parallel to other national
as a way to protect self-interests (Parker, 1994; and international auditing standards on fraud (e.g.,
Chandler, 1997; Cowton, 2009) and a means of SAS 82, SAS 99 and ISA 240).
self-regulation in order to avoid legal intervention In this study, we collect and analyse a unique
imposing new audit regulations or detrimental data set which includes all publicized fraud cases
court rulings (see also Jönsson, 1991; Buckless & against Danish auditors in the period 1996–2006.
Peace, 1993; DeZoort & Lee, 1998; Glover et al., We chose to focus on the first decade after the
2003). While the auditor’s responsibilities relating introduction of the ‘proactive responsibilities’ in
to fraud have been subject to numerous studies (for order to examine the role of courts and professional
extensive literature reviews, see Nieschwietz et al., bodies in establishing the proactive responsibilities.
2000; Hogan et al., 2008), previous research has An important issue is, of course, whether the
not provided empirical evidence on the adoption courts and professional bodies consider the
of this change by the national court systems. promulgated fraud responsibilities as new
Examining the outcome of actual fraud cases (changed) or clarified (existing) responsibilities.
is of prime importance because the auditor’s We find that in the fraud cases handled by the
responsibilities are ultimately determined by the Responsum Committee, the criticisms against the
courts (DeJong & Smith, 1984; Buckless & Peace, auditor have been based on shortcomings of
1993; Baker & Prentice, 2008). As a premise for the audits, either in the form of inappropriate/
our study, we contend that responsibilities laid insufficient audit tasks or communication failures.
down in audit regulations work symbiotically The nature of the criticisms suggests that
with actual practice, court rulings on litigation the proactive responsibilities are interpreted by
cases and disciplinary actions by professional and the professional body as a mere clarification of
supervisory bodies (see also Campbell & Parker, previously uncodified specific responsibilities in
1992; Wilks & Zimbelman, 2004; Peecher et al., relation to fraud. According to the professional
2007). This interaction is subject to institutional body, the auditor is still not responsible for
differences in individual countries, thus implying detecting fraud, which is consistent with the
the relevance of international as well auditors’ own interpretation of the promulgated
country-specific studies in this area. Prior studies fraud standards (see also Anderson et al., 1998;
have dealt with the issue of the auditor’s DeZoort & Lee, 1998; Fraser & Lin, 2004). The
responsibilities in relation to fraud from differences in composition of members in the
different viewpoints, including audit failures Responsum Committee, the Disciplinary Tribunal
and regulations. The studies on audit failure are and the courts opens up the possibility of
concerned primarily with the litigation and conflicting interests of these bodies (see also
enforcement activities of supervisory bodies such Sunder, 2010). Moreover, differences in the
as the SEC in the United States (see, e.g., Campbell perception of auditors’ responsibilities (as
& Parker, 1992; Rollins & Bremser, 1997; Bonner suggested in prior studies by Anderson et al., 1998,
et al., 1998). Hence, this provides the impetus for DeZoort & Lee, 1998 and Fraser & Lin, 2004)
research into the role of the courts and professional could lead to adverse outcomes in cases considered
bodies in establishing the extent and nature by the professional body acting in the self-interest
of the promulgated proactive responsibilities in of the auditor profession and in cases considered
less litigious environments than, for example, by the Disciplinary Tribunal with a majority of
the United States (for a related study in the non-accounting members. However, the outcome
Scandinavian context, see also Carrington, 2010). of the fraud cases in this period suggests that
Accordingly, the purpose of our study is to the Disciplinary Tribunal acts in line with the
examine how Danish courts and professional interpretations of the professional body.
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15. Establishing Proactive Auditor Responsibilities in Relation to Fraud 93
Due to the often very public nature of the importance in a more principle-based legal system
fraud cases brought before the High Courts or such as the Danish system. The presumption is
the Supreme Court, the courts are positioned to that the audit profession has to monitor the
advocate the auditor’s fraud responsibilities in a interpretations of the outcomes of specific fraud
prescriptive manner if there is a discord between cases brought before the court systems and
legal, societal interests and professional interests professional bodies. In the context of the
in the auditing standard promulgations. However, low-litigious environment exemplified in this
we find no discord between the interpretations study, it is noticeable that the audit profession
by the professional body and the courts. The seems to pre-empt the possible discourse on the
common outcome of the fraud cases considered responsibilities in relation to fraud by embracing
by the courts and professional bodies is in line the proactive regulation introduced by the standard
with the court rulings before the transition into setters. Hence, further research into how the
more proactive auditor responsibilities regarding auditor’s responsibilities are determined in
fraud. However, pertaining to the transition in different legal systems and what constitutes an
promulgated responsibilities, we find that court appropriate audit effort in relation to fraud
rulings relate to specific proactive audit acts, such certainly continues to be pertinent.
as the prescribed responsibility to consider the The limitation of this study is related to data
possibility of fraud when planning the audit availability. Even though our study is based on all
procedures at the beginning of the audit process. the publicized fraud cases in the period 1996–
Overall, we find that the courts and professional 2006, we acknowledge that the number of cases
bodies can be characterized as responsive to the is relatively small. Although this it not a
proactive responsibilities identified by the standard generalizability issue due to the availability of
setters even though their interpretations suggest all data, it is a caveat of the study to be
that they see the ‘changes’ as mere clarifications of recognized. In the Danish setting, frauds are fairly
existing responsibilities. In the period 1996–2006, rare in occurrence and not all fraud cases lead
we also observe an increase in sanctions imposed to questions being raised as to the particular
and civil liabilities. We attribute this to a change in responsibilities of the auditor. This is consistent
perception by the court system. Consequently, the with the perception that the corporate
Danish court system now considers fraud as a environment in Denmark is not highly litigious.
normal, although unusual, business scenario for This is noticeable and accentuates the importance
which the auditor has proactive responsibilities of interpretations of the fraud responsibilities
when planning and conducting the audit. based on the relatively few responsum, tribunal
Due to the exploratory nature of this study, and court rulings. Future research should
the implications for practice and future research examine the role of courts and professional bodies
are interrelated. The study contributes to ongoing in other countries and institutional environments.
debates about principle-based vs. rule-based The ease with which new promulgations can be
regulatory systems. Our findings demonstrate that adopted into audit practice is germane to ensure
while the principle-based system has a possible trust in auditors. This calls for international
disadvantage in terms of uncertainty of the legal comparisons of the interaction between standard
position of the auditor, the change towards setters, court systems and the new oversight
proactive responsibilities in relation to fraud is not bodies established in many countries in the wake
accelerated by prescriptive court rulings. ‘Good of recent corporate scandals.
audit practice’ is a legal provision to be interpreted
and hence it changes continuously with the
developments in society and in the audit
NOTES
profession. Our findings, however, do not rule out
the potential for future discourse concerning 1. Specifically, the provision stipulates the
interpretations of the auditor’s responsibilities in following: ‘In connection with this [i.e., when
relation to fraud. The continuous need for changes planning and performing the audit], the
in the regulations in rule-based systems is evident auditor to a certain extent must be aware of
by observing the pace of the standard setters. While circumstances that are indicative of fraud and
the changes in regulations are enforced globally other irregularities and that are of importance
across legal systems, they are supposedly of less to the users of financial statements’.
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16. 94 C. Holm et al.
2. The audit codification process in Denmark cases of misappropriation of assets are often,
experienced a shift from local Danish audit but not exclusively, employee fraud.
guidelines to the International Standards on 8. Examples of such schemes that the standard
Auditing (ISAs) similar to the development in mentions include (1) forgery, (2) deliberate
other countries. In effect, Danish auditing failure to record transactions, and (3)
standards based on ISAs were implemented intentional misrepresentations being made to
through a gradual transition from 2002 to 2006 the auditor.
concurrent with the translation of the ISAs into 9. The six fraud cases identified in the period
Danish (Holm & Warming Rasmussen, 2007). 1976–1986 consist of 5 responsum, 1 tribunal and
3. From 1967 to 2002, the Danish auditor no court cases, whereas the 22 fraud cases in
disciplinary system was a two-stage system 1986–1996 consist of 14 responsum, 6 tribunal
with the Disciplinary Tribunal as the first layer and 2 court cases. As shown in Table 1, the
and the Accountants’ Tribunal as a court of number of cases in our period of interest
appeal. The Accountants’ Tribunal is now (1996–2006) is 30, which consists of 11
abolished and the Disciplinary Tribunal alone responsum, 12 tribunal and 7 court cases.
constitutes the disciplinary system. 10. Even though the seven cases involving illegal
4. No cases start out at the Supreme Court level. loans are simple and straightforward illegal
As a main rule, it is only possible to appeal acts, we have decided to include them in this
a judgment once, i.e., either from one of the study as they represent a subset of the total
district courts to one of the two High Courts number of fraud cases raised against auditors
(if the case starts out at the first level) or from in the period, i.e., we examine all and not a
one of the two High Courts to the Supreme sample of the fraud cases against Danish
Court (if the case starts out at the second auditors. See also Fraser and Lin (2004) on the
level). auditors’ perception of illegal acts related to
5. Many of the criminal provisions – in particular fraud.
the most ‘serious’ ones – are found in the 11. The size of the fines suggests different
Criminal Code. However, criminal provisions – circumstances in each of the disciplinary cases.
in particular the less ‘serious’ ones – are The two cases involving fraudulent reporting
also found in other acts, e.g., the Financial lead to relatively higher fines than the cases
Statements Act (§164), the Auditors Act (§27) involving concealments (see Table 3). It should
and the Companies Act (§§160–61). be noted that the fine of DKK 25,000 in tribunal
6. Management fraud is defined as fraud case 6 (1999) relates to a fraud case involving
involving one or more members of the criminal charges against both the management
management or those charged with governance, and the auditor. Part of the circumstances is
whereas employee fraud is defined as fraud outdated, while the part considered by the
carried out by employees only. In either case, tribunal dates back to 1991 and 1992 when the
there may be collusion inside the company or maximum fine would have been DKK 50,000.
with third parties outside the company (IAASB, This is considered explicitly in the decision of
2009, §36). the tribunal court. In comparison, the sanction
7. Fraud may be divided into fraudulent of DKK 10,000 in the employee concealment
financial reporting and misappropriation case found in tribunal case 11 (2006) should be
of assets. Fraudulent financial reporting regarded as being considerably less harsh.
is defined as intentional misstatements or
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