This 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.
