Breaking Tradition in the Auditing Profession

 


Established auditing approaches cannot adequately detect financial statement fraud. The ACFE proposes a Model Organizational Fraud Deterrence Program as an alternate, more effective strategy for both auditors and investors. 

One of the most difficult issues facing the auditing profession is that there are no auditing procedures that can provide absolute assurance in detecting all fraudulent financial reporting. As a result, auditors have historically attempted to avoid the responsibility for fraud detection, albeit unsuccessfully. In the current environment, the public holds expectations of auditors with respect to fraud that simply cannot be fulfilled.

In a perfect world, auditors would concentrate primarily on prevention – not detection – of fraud. We all are aware that, from cancer to crime, it is much more effective to prevent problems rather than to deal with the aftermath. The ACFE was a strident voice in adding prevention concepts to the new U.S. auditing standard on fraud, SAS 99. Although this is an improvement on SAS 82, it will not solve the whole problem and we propose a different approach that could be better for investors and for auditors.

As many members know, the ACFE studied and evaluated nearly 4,000 cases of fraud from 1996 to 2002 that covered asset misappropriations, corruption, and fraudulent statements. The results subsequently were detailed in the ACFE’s “Report to the Nation on Occupational Fraud and Abuse” of the same years. To our knowledge, these represent the largest research projects on the topic.

Although fraud prevention was not the primary focus of our research, it became clear that some organizations were less prone to fraud than others. The reasons are not entirely known, but it appears that the prevention of fraud extends beyond traditional accounting controls. It involves a number of diverse disciplines such as behavioral sciences and criminology.

Moreover, we believe that internal controls and fraud prevention – although interrelated – are not one and the same. Criminologists have long established that the willingness to commit any crime is inversely proportional to an individuals’ perception (not necessarily the reality) that the illegal conduct will be detected. That explains why the mere presence of police in crime-prone neighborhoods deters criminal activity.

Contrarily, criminological research has shown that general deterrence – a politically popular notion that concentrates on sending a message by punishing criminal behavior – is relatively ineffective. In short, punishment is irrelevant for those who are convinced that they will not be caught.


For full access to story, members may sign in here.

Not a member? Click here to Join Now and access the full article.