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There is a 99% chance of an auditor being sued if fraud is not detected

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The UK government last year estimated that the level of fraud in government spending represented just 0.02% of its total expenditure. Excluding tax credit and benefit fraud, the government detected between £27.6m and £72.9m in fraud out of its £306bn total expenditure in 2014/15. The National Audit Office’s fraud landscape review, however, found that there is a large disparity between what fraud and error is actually report, and has warned that the true scale of fraud within government is unknown.

With total government spending fraud in the EU and the US representing between 3% and 5%, it could be that total UK government fraud runs anywhere up to £15.3bn. And it’s not just government that has to contend with fraud.

In the last two years alone both BT and Tesco have found themselves in hot water with regards to potentially fraudulent activity being identified after their books have been audited. BT was forced to pay £225m after the Italian accounting scandal went public, whilst Tesco had to pay the Serious Fraud Office and Financial Conduct Authority £129m over their 2014 accounting scandal. On both of these occasions, the auditing firms themselves were later investigated due to seemingly having missed the fraudulent activity taking place, in their audits. This raises an important question; is it an auditors’ job to detect fraud?

Vernon Soare, chief operating officer of the Institute of Chartered Accountants in England and Wales (ICAEW), doesn’t seem to think so.

“I think one of the problems is the expectations of what an audit is there to do is very high,” Soare told BBC Radio 4’s Today programme. “The audit is not there to be a forensic review of every transaction that passes through the books of a company, where there are millions of transactions.”

It is not there primarily to find fraud. It is defined in company law that the auditors give a true and fair opinion of the company's accounts.

He added: “It is not there primarily to find fraud. It is defined in company law that the auditors give a true and fair opinion of the company’s accounts.” Despite this legal technicality, it was recently suggested that there is a 99% chance of the auditor being sued if actual fraud is not detected as part of an audit.

“The bottom line is that if there’s fraud and the auditor did not discover the fraud, there’s a 99 percent chance that the auditor will be sued,” said Ralph Summerford, president of Forensic Strategic Solutions, a financial investigation firm that specialises in fraud examination. “I’m not just talking about CPAs,” he added. “I’m talking about internal auditors, governmental auditors, any auditor that does auditing work, and people like Certified Fraud Examiners who do investigations.”

There are a number of reasons for the waste and improper detection of fraudulent claims. Large volumes of transactions, lack of time to review transactions for accuracy and a system that values quick (and cheap) dispensation of funds are just some of the explanations cited for the waste. The Financial Reporting Council (FRC) has stated that auditors must do more to challenge their clients.

“In our monitoring of audit quality we have yet to see overwhelming evidence of improvement in all sections of the market or the consistency of performance we want between different firms,” said Melanie McLaren, the FRC’s executive director for audit and actuarial regulation, as reported by Reuters. In the last financial year, the FRC issued £12.5m in sanctions against auditors.

What’s to be done?

It is an argument that has been going on for decades, now. With fraud detection increasingly becoming the responsibility of auditors, whether they like it or not, it becomes equally important for organisations to implement continuous controls monitoring (CCM) solutions so that the audit team can focus on other high-risk areas of the business. CCM solutions are used for areas such as accounts payable, accounts receivables, purchase cards, travel & entertainment expenses and more.

For the audit team, it is imperative that they expand their audits and employ tools like IDEA Data Analysis, that allow them to easily review 100% of the data in order to catch fraudulent transactions. In a recent survey by Canadian data analysis software developers CaseWare Analytics, it was found that only 50% of respondents were using data analytics software intended for auditors. The rest are using tools like spreadsheets that can’t provide the same level of sophistication in the analysis process or are prone to data integrity issues.

For those who have adopted data analytics, the advances in the technology are enabling them to do even more. According to the CPA Journal, visual and text analytics are the next step in forensic auditing and accounting, and will enable auditors and accountants to look at both structured and unstructured data sets for better fraud detection.

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