By George Staple
Fear of fraud strikes directly at business confidence. Many large US companies have suffered serious falls in share values in the wake of Enron and WorldCom.
On this side of the Atlantic, the Bank of England has warned that uncertainty about the integrity of reported earnings has raised the equity risk premium for capital. And we may well uncover more serious frauds if the economy goes into recession. A high level of insolvencies always reveals a level of financial malpractice covered up in more favourable times.
Auditors were never intended to be fraud-hunters and there are strict limits to what even the most diligent among them can achieve. But the Fraud Advisory Panel believes that more can be done. In particular we agree with the Auditing Practice Board that ‘an attitude of professional scepticism is vital’ for auditors.
Of course, the industry has done a great deal over the last decade to tighten up on standards.
But rules are not enough; training, CPD and the cultures and attitudes that exist within audit firms are far more important factors.
Chief among these is a heightened ability to assess people in audited businesses, the pressures they face and the illegal responses they may employ. These are traditional, indeed they should be basic professional attributes but some serious fraud cases suggest they may not be as highly valued as once they were. To that end the panel welcomes the ICAEW’s announcement that it will develop new guidance to challenge ‘box-ticking’ attitudes.
The panel has often highlighted the complacency about fraud that is costing British business hundreds of millions of pounds.
All too often fraud is treated as an overhead and the damage done goes undisclosed. ‘Professional scepticism’ can still play a vital role in deterring and unearthing fraud and must not be neglected on the grounds that it is not an all-embracing remedy.
- George Staple is chairman of the Fraud Advisory Panel and a former director of the Serious Fraud Office.
Getting our priorities rightBy Hugh Matthew-Jones
Statistics for the value of fraud cases in the first half of 2002 show a dramatic increase over the previous year and there is no doubt that economic weakness reveals frauds and malpractice that might otherwise remain hidden.
However, it is not immediately clear what more accountants should be doing to combat this rising tide of fraud. It is striking that surveys of companies and their management asking what the main areas of concern are for businesses place fraud very low down on the list.
Exchange rates, employment law, red tape, general economic conditions and many others are rated as more important than fraud.
This immediately makes it very difficult for a company’s accountants to offer support and expertise in detecting fraud and reducing risk when this is not perceived by the client as being high on the list of priorities.
This is particularly true when you bear in mind that an audit is not designed specifically to detect fraud.
Why would a client pay for a service which it does not immediately want?
Naturally, if a fraud has occurred, a lot of time, resource and expenditure is focused on it. However, the public sees this as shutting the stable door after the horse has bolted.
In many cases of corporate fraud there is a high level of senior management involvement particularly in higher value frauds, as is evident in the current crop of scandals.
This involvement by management not only makes the fraud more likely to be better concealed and harder to detect, but also mitigates against management welcoming a specific fraud review and risk management assessment. In fact accountants are, and have been during the last couple of years, placing greater emphasis on fraud and risk and bringing this to the attention of clients.
There are also a number of reviews of fraud and its effects by the leading firms of accountants each of which emphasise the risks and costs involved.
At the same time, the various accountancy institutes have been involved in hammering home the message that fraud is a serious risk to business.
Nevertheless, you can only take a horse to water …
- Hugh Mathew-Jones is a partner at PKF.
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