Audit regulators are assembling their closest advisors this week to take a closer look at the latest thinking around what motivates auditors and what tools and skills they bring to the effort to detect financial reporting fraud.
The Public Company Accounting Oversight Board is hosting its Standing Advisory Group to discuss fraud detection by auditors with panel discussions on auditor incentives and behavior-related considerations regarding fraud detection, auditor skills and knowledge regarding fraud detection, and lessons learned from other disciplines. The SAG also will explore concerns over the auditing of revenue and the PCAOB staff’s recent consultation paper on auditing accounting estimates and fair value.
The PCAOB provided its SAG with a briefing paper to guide the discussion on the auditor’s approach to detecting financial statement fraud, acknowledging that the topic is not new. The SAG has discussed fraud issues numerous times in the PCAOB’s history, most recently in 2012 and 2013, and going back as far as 2004. This week, SAG panels will review the results of staff outreach, through which the staff has learned more about the effect of attitudes and behaviors on the aptitude for fraud detection, approaches and methods used in other fields to detect fraud that might be applicable to financial statement audits, and the knowledge and skills needed for effective fraud detection. “The results of this outreach have led the staff to seek further advice from the SAG on the potential implications of these matters for financial statement audits,” the PCAOB says.
Just as the PCAOB devotes its SAG agenda to fraud topics, the Anti-Fraud Collaboration has published its latest report on what companies can do to make themselves more resistant to fraud. The report summarizes the latest research on financial reporting fraud and concludes it finds consistently that fraud risk increases when individuals in the financial reporting supply chain do not fully understand their duties or do not execute them appropriately. That might include lack of a strong tone at the top, insufficient skepticism, or insufficient communication.
According to the report, a recent compilation by KPMG suggests fraud is perpetrated more often not by a criminal mindset, but by an otherwise honest employee who spots an opportunity to commit fraud and seizes it. Companies make themselves less prone to fraud if they shore up those opportunities with strong controls, clear lines of responsibility, and strong communication, the report says.
“While we cannot predict who will commit fraud, and although it is challenging to detect fraud once perpetrated, research in recent years has yielded valuable information about the conditions that might make an organization more susceptible to fraud, as well as techniques and tools that support both deterrence and detection,” write Michele Hooper and Cindy Fornelli, co-chairs of the Anti-Fraud Collaboration, in a cover letter to the report. “This knowledge is of value to all participants in the financial reporting supply chain, including management, boards of directors, audit committees, and internal and external auditors.”
The Anti-Fraud Collaboration is a joint effort of the Center for Audit Quality, Financial Executives International, the Institute of Internal Auditors, and the National Association of Corporate Directors. Perhaps not so coincidentally, their latest report and the PCAOB’s fraud-focused meeting with its advisory group fall during the Association of Certified Fraud Examiners’ “International Fraud Awareness Week.”