Auditors must “stop pretending” it’s not their job to catch fraud

Auditors must “stop pretending” it’s not their job to catch fraud

President and founder of audit tech company Confirmation calls on auditors to get serious about catching fraud

Auditors must “stop pretending” it’s not their job to catch fraud

The audit profession must get “serious” and “stop pretending” that catching fraud is not part of their role, says Brian Fox, president and founder of Confirmation, part of Thomson Reuters.

The Wirecard scandal is just the most recent in a stream of audit scandals over the past few years, where auditors failed to detect material misstatements in company accounts. However many in the audit profession argue it is simply not part of their job to catch fraud, like Grant Thornton’s chief executive told the Business, Energy and Industrial Strategy (BEIS) committee in 2019.

According to Fox, this idea is wrong and could lead to the audit profession becoming obsolete in the not-too-distant future.

“We as a profession absolutely have to start getting serious; we have to stop pretending it’s not our job to find material misstatement due to fraud,” he says.

“When [auditors] say [it’s not their job to catch fraud], what they mean is we can’t be expected to catch 100 percent of all the fraud in the company. And that’s why I’m saying we’ve got to stop dodging the real issue.

“We’re not there to find 100 percent of all fraud. But we are there to find material misstatements that would change our audit opinion. It doesn’t matter whether it’s due to an error or fraud – if it’s a material misstatement, we should have identified that,” Fox adds.

Auditors are paid too highly and forget their duty to society if it is to simply count numbers, he says.

“What is our job? Is it to add up columns of numbers? Because excel and the calculator, they do that real well. Do we really need to get paid hundreds of thousands or millions of dollars to add up columns of numbers?

“Luckin Coffee – a third of the revenue was fraudulent. Wirecard – $2bn of fake cash. Those are material, that would have changed your audit opinion had you identified it, so how do you say that that’s not our job?

“We are not just hired guns for the company that hired us. We are there to represent the public,” he says.

In the Wirecard case, all the auditors had to do was check the bank addresses in the statements actually existed and they would have realised that something was amiss. In the case of Patisserie Valerie, Fox says he was astounded that the auditors signed off on accounts despite around £50m being missing.

“We have to take our responsibility seriously. I would say that to any auditor, any chartered accountant or certified public accountant (CPA) that doesn’t accept the responsibility that fraud is what we’re there to do: It’s time for you to retire. Get out of our profession, you’re giving us a bad name.”

According to a report by the Association of Certified Fraud Examiners, only four percent of fraud is initially detected by external auditors despite auditors having the best access to information which could help them detect it.

“Auditors have access to all the facilities and we have access to the underlying financial records, statements and records. Short sellers like Muddy Waters and Wolfpack Research don’t have access to any of that and yet, they’re the ones uncovering the fraud.

“I know both of those companies. Each company has less than 100 staff. So, how are they able to use tools and just common sense to identify these frauds that the external auditors with hundreds of thousands of staff and billions of dollars in revenue, can’t identify?”

Ultimately, Fox believes the attitude around fraud could cost auditors their future as a profession.

“My concern is if we don’t start getting better at doing our job for the public that we’re there to represent, then the public and the regulators are going to open up our job to anybody else that can actually do a better job.”

 

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