Winning a case against an auditing firm when there is a sizeable fraud (such as the Koss Corp. embezzlement) or the collapse of a Ponzi scheme (such as the Bernie Madoff case) is not easy. Simply because there is a fraud, a business failure, or a pyramid scheme collapse, the auditors are not necessarily at fault. The auditors may have carried out their professional responsibilities exactly as they should have, but they still did not uncover the fraud.
How does a fraud go undetected by auditors? The first thing to remember is that audits are not designed to find fraud, so they rarely do. Equally important, is the fact that frauds are deliberately (and often effectively) covered up by those perpetrating them. Particularly in the case of executives embezzling or perpetrating financial statement fraud, they are keenly aware of exactly how the auditors do their work, and take careful steps to avoid detection.
Technically speaking, auditors are not engaged to find fraud. They are engaged to give an opinion on the financial statements, and whether they are fairly stated. The auditors are required to perform certain procedures related to fraud, essentially assessing the risk of fraud and increasing the testing of the financial statements as there is a greater perceived risk of fraud. The auditors are not specifically engaged to (or expected to) find fraud, under the current auditing standards.Continue reading
Some companies think they are protected against employee fraud because they have strong internal controls. Often, that’s the case. Good controls mean the rules are followed and the money is properly accounted for.
Sometimes, however, good controls are meaningless. What about the controls over the controls? All the rules and designated procedures in the world are meaningless if management has the ability to override them at will. When these overrides go unchecked, the company is often no better off than if they didn’t have any controls in place.
Indeed, the risk that management will override controls established to prevent fraud and ensure accurate financial statements is great. It is a constant risk as executives are in a position to manipulate numbers and direct employees to aid the manipulation. They can easily fabricate transactions or modify numbers to craft the financial statements to report whatever their hearts desire.
The idea of performing a “fraud examination” sounds interesting to many. They don’t necessarily want to deal with the numbers that a forensic accountant wades through, but they like the idea of someone sleuthing and digging through records.
I’ll admit that the work I do is pretty darn interesting. Each case has its own intricacies and unusual spin.
In contrast, the idea of an accountant performing an “audit” on a company’s books doesn’t sound half as exciting. I’ve done both, and from my perspective, audits are far less noteworthy. They’re both necessary evils in the business world, and it’s important for executives, attorneys, and consultants to know the difference between the two. Buyer beware of what services a client is really buying.
Defining an Audit
There are many different types of audits that are all properly named, but they must be differentiated from one another. A typical bank audit for lending purposes is generally a limited scope examination of certain financial statement items. Each bank has its own guidelines for performance of those audits, and generally they are aimed at verifying the value of collateral.Continue reading
Why should a taxpayer use the services of a forensic accountant when being audited or under criminal investigation? Tracy Coenen talks about the expertise a forensic accountant can bring to the case, specifically in evaluating the methods used by the IRS for determining income.
An independent financial statement audit done by external auditors is the most extensive attest service provided by auditors, and it is still limited. A review of financial statements by an independent auditor is even more limited in scope.
Reviews amount to auditors looking at account balances and determining whether or not the balances look reasonable. They will perform some analytical procedures on the financial statements to further analyze the numbers. On occasion, they may ask to see some details about accounts and their balances, but this happens on a very limited basis.Continue reading
When a company discovers an internal fraud, it’s not uncommon for owners and management to look for a party to blame. After all, someone should have known that a fraud was in-progress, right? Often, the blame is cast in the direction of the auditors.
The auditors are an easy target. Not only do they usually have professional liability insurance policies to fall back on, the auditors initially seem like the logical culprit.
Management often believes that the auditors worked very closely with the financial information; therefore, they should have discovered the fraud.Continue reading
Sam Antar is a legend in the fraud industry. He was the CFO of Crazy Eddie, an electronics retailer which pulled off (for a time!) a massive fraud in the 1980’s. He was interviewed by CNNMoney while attending the New Jersey securities fraud summit as a keynote speaker.
Antar said during the interview:
“We are in the golden era of white-collar crime. My biggest regret is I should’ve been a criminal today rather than 20 years ago.”
Francine McKenna is an investigative reporter who focuses her writings on the auditing profession. She blogs at re: The Auditors, and also writes for financial publications such as Forbes, The Financial Times, American Banker, and more.
With the bulk of its hog production operations in China, the executives used a variety of methods to inflate revenue from 2008 to mid-2011, including fake invoices for the sale of feed and purported sales of hogs that didn’t really exist. They later tried to cover up their actions by saying the fake hogs died. Because fatter hogs bring higher market prices, they also inflated the weights of actual hogs sold and correspondingly inflated the sales revenues for those hogs. Continue reading