Why Audits Don't Catch Fraud: The So-Called "Expectation Gap"

by KLINK
0

Four Tactics to Reduce Fraud and Assure Effective Compliance

We are currently investigating a material, multi-billion, multi-year fraud scheme involving hundreds of vendors, dozens of corrupt employees, and too many crimes to count. Yet, the Big-Four audit of this business found NO PROBLEMS. How can this be? 

First, the organization’s faith in the audit process was misplaced. Put simply, audits based upon a review of financial statements are unlikely to uncover fraud. Effective compliance programs prevent fraud, identify fraud and mitigate fraud, yet the budgets and resources made available to compliance departments often are far less than necessary to protect the organization.  

Here are comments from the global head of UK KPMG in the Financial Times from August 24, 2015 on the so called “expectation-gap” between what audits cover and don’t cover:

“Audit is not a guarantee of detecting fraud or predicting company failure. It gives an opinion at the time on the truth and fairness of financial statements.”

In essence, the very head of UK KPMG was saying that financial statement audits involve a review of financial statements and related documents, and don’t necessarily find or fix fraud.

In the same Financial Times article, it was noted that KPMG failed to detect the recent multi-year fraud occurring at FIFA, the global sports body. KPMG had given the organization a glowing, thumbs up audit report year after year. 

Preventing, identifying and correcting fraud is not something auditors typically do for their clients. The so-called “expectation gap,” meaning what clients think an audit covers and what it really covers, is a serious matter, in that high-ranking executives tend to believe that their organizations are free of material fraud after a positive audit report has been issued.  

Relying on glowing audit reports to identify fraud actually prolongs fraudulent schemes, and costs organizations both, lost profits and opportunities. In short, relying upon audits to catch and fix fraud is misguided. Fraud identification and correction can only be accomplished through creation of an effective compliance program. 

Successful organizations should consider focusing upon the following four tactics to assure an effective compliance program:

1.Aggressively using the hotline. Employees need to know about the hotline, use the hotline and have confidence that it works. If your hotline isn’t ringing, it does not mean that you are free from problems, it means you aren’t implementing that hotline appropriately. When calls are made, be vigilant about following up.

2.Utilizing effective pre- and post-employment screening tools to keep the bad guys out.  Know who you are hiring and promoting.

3.Performing In-person ethics training, which is far more effective than mass on-line punch the key ethics training. Who is really paying attention when on-line training is utilized? (Few). Instead, talk with your colleagues about what you think is important.

4.Finally, using appropriate internal or external investigative professionals when the need arises. There is a right way to investigate fraud. There is a right way to assure that the insurance carrier pays your claim. There is a right way to weed out the bad employees and vendors. One tip:  Don’t rely on law enforcement to do what you need to do. You lose control of the process. Often the interests of law enforcement agencies differ dramatically from your interests.

 
 

Comments (0)