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Should auditors ignore fraud?

21st Feb 2019
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Financial analysis and audit

Philip Fisher thinks it's a bit rich of Grant Thornton's CEO to say auditors don't look for fraud. 

As so often, it is necessary to prefix this article by reminding readers that this accountant specialises in tax so has not been involved in audit, other than peripherally, in living memory.

Even so, on occasions, it is necessary to weigh in regarding a subject that is potentially threatening the reputation of the whole profession.

To say the very least, it came as something of a surprise to discover that Grant Thornton’s new CEO David Dunckley has told a Parliamentary committee that “We are not looking for fraud”.

You would guess that this flies against the expectation of every member of the public who has the faintest idea of what auditors do or are supposed to do. That will probably extend to many CFOs, members of audit committees and even, dare one say, representatives of our own profession.

Indeed, Mr Dunckley faced immediate contradiction not only from the politicians on the committee but also the departing head of the Financial Reporting Council, Stephen Haddrill. According to AccountingWEB’s report, the latter felt that auditors are “clearly responsible” for spotting fraud.

One can understand that the head of GT is currently feeling a little bit sore about this subject, having seen his firm receiving a media battering following the collapse and eventual closure of Patisserie Valerie, which was reputedly initiated by a fraud that the auditors were not looking for.

However, it seems a bit rich for the leader of one of the UK’s major firms to imply that auditors are quite capable of carrying out an in-depth project for which they are probably charging a six or seven figure sum and, at the end of the day, feel perfectly satisfied that they have done a good job while not even noticing financial irregularities that will have a direct impact on the stakeholders to whom they are reporting.

In the long run, most if not all of us will suffer as a result of frauds perpetrated on listed companies, since even if we do not invest in stocks and shares directly, those investing money on our behalf for example pension trustees certainly do.

One also can’t help but notice that when the banks brought Britain and the world to its knees in 2008, the auditors responsible for monitoring their affairs maintained a very low profile. It may well be that these failures entirely resulted from bad business practice rather than criminality, although that may be a moot point. Even so, over the years, companies have repeatedly gone under in situations where the man in the street might very reasonably have expected those responsible for reviewing their affairs to identify malpractice and misfeasance, thereby saving stakeholders and taxpayers from significant losses.

At a time when the profession is already under attack from those who believe that we are not doing a good enough job, it is unhelpful when a leader of our industry gives the impression that not only do we not do our jobs very well but are unwilling to take responsibility for obvious failings either.

I am interested to see what the future holds for both the profession and GT in these choppy waters and fear that without a very public change of attitude, there could be a backlash from which it takes decades to recover.

Replies (5)

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By stepurhan
21st Feb 2019 19:38

It is, and has always been, correct that audit does not look for fraud. Indeed, I am quite surprised that AccountingWeb assigned this article to someone that admits to not knowing the subject. I am also surprised that a former head of the FRC seems ignorant of that fact.

Audit looks for misstatements in the account. Financial fraud, by its very nature, is likely to create such misstatements. A well-performed audit is therefore likely to discover fraud, but auditors will only start looking more deeply into a misstatement if initial tests indicate such further investigation is required.

So heading the article "Should auditors ignore fraud?" is a complete misunderstanding. An audit failing to discover fraud is not "ignoring" the issue. It may be the audit was performed poorly, and that would be a concern. It may be that the fraud was well hidden, so normal procedures didn't pick it any irregularities arising. It may be luck, (good for the fraudster, bad for the auditor) as normal audit testing may simply miss the offending transactions.

With all due respect to Mr Fisher, I think the editors should not have assigned this to him. I expect better of this site.

Thanks (2)
Replying to stepurhan:
By andyjdicker
13th Mar 2019 11:53

You should also include another possibility. That any fraud simply isn't material/ is trival. in which case audit procedures just won't (or are unlikely to) identify it.

Thanks (0)
Chris M
By mr. mischief
22nd Feb 2019 08:43

I think it was a reasonable article. My own view is that auditing should be totally scrapped.

At the moment auditing is a transfer of wealth from the naive and vulnerable to the rich and savvy, and rich and dodgy. The naive and vulnerable actually believe the auditors are interested in anything other than picking up the audit fee, and marketing the client for tax and consultancy services.

The rich and savvy know that auditing is a chocolate fireguard, and of course the rich and well dodgy are the folk actually running the audit.

My own investment strategy involves a stop loss system. On a number of occasions this has protected me from the rubbish work of fradulent auditors. The latest example was on Globo which busted a month or 2 after I sold out, I think the insiders were all selling knowing the company was busted.

But a totally clean audit report.

So let's just get rid of auditing totally so everyone knows no external party is acting as a chocolate fireguard. But ruthlessless jail dodgy directors like Fred the Shred, and also strip them of their personal wealth. That should sort it.

Thanks (4)
Hallerud at Easter
23rd Feb 2019 00:44

But of course it is the truth.

One could never ignore fraud as the fact it has taken place infers a breakdown in internal controls which ought have, absent collusion, seriously reduced the risk of such an event.

However everyone must surely recall Kingston Cotton Mill, as it was drummed into everyone in auditing lectures,

"He is a watch-dog, but not a bloodhound. He is justified in believing tried servants of the company in whom confidence is placed by the company. He is entitled to assume that they are honest, and to rely upon their representations, provided he takes reasonable care. If there is anything calculated to excite suspicion he should probe it to the bottom; but in the absence of anything of that kind he is only bound to be reasonably cautious and careful."

Thanks (3)
By Vaughan Blake1
27th Feb 2019 16:39

What an odd title, looks like it should be in the Daily Mail rather than AW!

My formative years were spent auditing and the mantra always was "do the accounts show a true and fair view of the state of the company?"

Clearly Patisserie Valerie's accounts didn't show a T & F view of the company's affairs and that is the key issue.

Hopefully, more nitty gritty details will be disclosed as to the actual mechanics of the fraud. The sheer size of the black hole and thousands of fraudulent accounting entries defies belief that it didn't show up in some way during the audit.

Oddly, I found that the majority of frauds/scams leave the accounts still showing a T & F view. The fact that the sales team are fiddling their expenses, or the production director is selling off scrap and pocketing the cash, or the fleet manager is part exchanging cars for a suppressed value and pocketing the difference, leaves the accounts still showing the true position.

Whilst it always amused me to uncover these scams, in most cases they didn't affect the T & F view and/or were not material.

I await further details re PV with interest.

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