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« Back  | November 2011

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Can an Auditor Be Expected to Detect Fraud?

There is a common public perception that when financial fraud has been committed, an audit of financial statements can and ultimately will detect it. But in the real world, an employee or outside vendor is more likely to report fraud than an auditor is to detect it.

In its 2010 Report to the Nations on Occupational Fraud and Abuse, the Association of Certified Fraud Examiners (ACFE) says 43 percent of not-for-profits surveyed report that initial fraud detection in their organization was due to a tip.

"Employee education is the foundation of preventing and detecting occupational fraud," the ACFE report concludes. "Staff members are an organization's top fraud detection method; employees must be trained in what constitutes fraud...and how to report any questionable activity."

Still the perception of "auditor as fraud detector" persists, even among those who realize that the financial statements being audited are not produced by the auditors, and that the auditor does not guarantee or certify them.

Of course, the auditor is on the lookout for fraud, perhaps now more than ever. But this is primarily in response to the expectations of others, rather than as a professionally required aspect of an audit. An auditor generally should bring a "healthy skepticism" to his or her tasks. And yet the auditor cannot realistically warrant that he or she will find fraud if it is there. A good auditor frequently informs his or her client of this fact at the outset.

Why can’t an auditor guarantee that he or she will detect fraud?

  • It is difficult for an auditor to detect fraud when his or her examination – in accordance with the standards of the profession – consists of selective tests conducted over a small part of the year under examination.
  • In the proper performance of his or her duties, and with full regard to the professional mandate of independence, the auditor must inevitably rely (to at least some extent) on the company’s representations and cooperation in the audit. In other words, fraud is presumably undertaken with the intention that it not be detected; the fraud is purposely hidden from auditors and other third parties by the perpetrators.

Ultimately, fraud prevention and detection is the responsibility of the organization and its management. If, as ACFE suggests, education is the foundation of fraud prevention, answering a few questions may be the place to start:

  • Do employees understand what constitutes fraud?
  • Have the costs of fraud to the organization and everyone in it – including lost revenues, adverse publicity, job loss and decreased morale and productivity — been made clear to employees?
  • Is there a formal, written Code of Conduct that outlines expectations and consequences? Are employees required to sign and agree with the Code?
  • Do employees know where to seek advice when faced with uncertain ethical decisions, and do they believe they can speak freely?
  • Has a policy of zero tolerance for fraud been communicated to employees through words and actions?

Check out A Fraud Prevention Checklist for Not-for-Profits from ACFE.

Learn more about fraud prevention and detection in not-for-profits.


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