Comment – Auditors as victims of fraud

There is a long-standing debate – and no small amount of jurisprudence – on the auditor’s duty of care to clients and more generally to users of financial statements for the detection and prevention of fraud.

Despite the history of the debate, there is growing reliance on the auditor to play the role of fraud buster with the expectation that they will uncover whether or not there is anything wrong with financial reporting or whether the client has been the victim of fraud.

First, the argument about the onus of responsibility must consider whether management has a duty to create an environment where ethics and integrity are fundamental.

Directors and management cannot look to the audit as a substitute for an ethical working environment. Fraud prevention, in particular, really has to be on the board-room agenda, and directors need to put it there. They need to be in charge of creating the right environment through control, knowledge and information exchange.

Then, the accounting profession itself must consider how it may have contributed to bringing about this reliance on audit. It must also ask why expectations have developed the way they have.

It has rarely been argued, I believe, that an auditor does not have the ability to identify instances of fraud or to investigate and assess the nature and extent of the problem, should it exist. All the major accounting firms have forensic accounting and litigation support groups that promote the skills and experience needed in investigating fraud and white-collar crime.

With such knowledge and resources available, it should not be surprising that the expectation has arisen that the auditor should detect problems.

But, independence and objectivity have always been critical to audit’s traditional approach, reflecting an inherent belief in the integrity of the business in general and management, as well as employees, in particular. This angle does not sit easily with the subjectivity needed to detect and prevent fraud effectively. So if they wanted to be effective fraud busters, auditors would have to change their way of thinking radically.

And this is where auditors can play a role. They could extend their audit services to include a review and assessment of the client’s ethical environment.

Any shortcomings could be brought to the attentions of the management, who should take charge of sorting them out.

In the struggle to decide on a way forward, the audit profession needs to look for a balance. Auditors should not allow themselves to be drawn into something they later discover they had better left alone.

Ted Baskerville is managing director of Buchler Phillips Lindquist Avey, forensic and investigative accountants.

Related reading