Escaping Detection: Why Auditors Do Not Find Fraud

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needle-in-a-haystackThis article was originally printed in Valuation Strategies, a magazine published by Thomson Reuters.

Even with all the publicity surrounding the issue of financial fraud in the last decade, most auditors, investors, and other professionals still do not “get it” when it comes to detecting fraud. Traditional financial statement audits were never designed to detect fraud.

The audit is simply a process by which auditors check the company’s math and application of accounting rules. Auditors examine a very small percentage of transactions. Fraud is rarely detected by financial statement audits because they are not aimed at doing so. However, sometimes fraud is detected by auditors, and they can increase their chances of finding fraud if they are so inclined. There are opportunities during each financial statement audit to find fraud, if only the auditors are diligent. One of the keys to becoming better at detecting fraud is by understanding why auditors so often do not find fraud. Continue reading

Koss Fraud: We Didn’t Bother to Look at the Endorsements On Our Own Checks, But Grant Thornton Should Have!

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The latest news in the Koss Corporation fraud committed by ex-VP of Finance Sue Sachdeva is a lawsuit filed by the company against Sachdeva and auditors Grant Thornton. It’s unlikely that the company will collect much from Sachdeva, but the auditors are a great target because they have deep pockets (especially in the form of a professional liability insurance policy).

Everyone expected Koss to sue Grant Thornton. It’s just standard procedure to sue the auditors after a fraud is discovered. It never matters to the companies that audits are not designed to detect fraud and the auditors tell management this over and over.

It never matters to the companies that they are the ones responsible for establishing and maintaining internal controls over financial reporting, as well as putting procedures in place to prevent and detect fraud. Continue reading

Koss Corp. Fraud: Defending Grant Thornton? No.

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fraudI have been criticized for “defending” Grant Thornton, the auditors of Koss Corp, which has suffered a fraud loss of at least $31 million at the hands of the company’s Vice President of Finance, Sue Sachdeva. In fact, my comments relating to this case are not a defense of Grant Thornton, in the least. They are meant to point the finger squarely at Koss management, which is wholly responsible for this fraud.

I’m not saying that Grant Thornton did a bang-up job when it comes to Koss. I couldn’t possibly know that without knowing exactly how the fraud was carried out (Koss still hasn’t said) and without seeing GT’s workpapers and taking a good look at what they actually did. What I am saying is that audits have so little usefulness and are so awful at detecting fraud, that it’s a given that a woman like Sue Sachdeva would easily be able to get away with a massive theft. Continue reading