14 May 2013
4 min read
The auditors are often thought of as the ones who detect fraud in a company. Yet that is often not the case, argues Aziz Rahman, who believes legal minds working with the money men are best equipped to stop the wrongdoing.
Maybe it’s the definition of an auditor that makes them seem so authoritative. “One who officially examines accounts’’, is the entry for auditor in my battered old dictionary. Maybe it’s that impression of officialdom and their search for reliability and validity that gives auditors such an air of integrity and honesty.
Certainly, as trained professionals, there is no doubt auditors do what they do better than anyone else. They know their role and they perform it to the letter. Whether carrying out an audit or cost audit, they examine the figures, assess the financial statements and determine whether, in their eyes, the company is functioning properly. Their conclusions have great weight attached to them by company directors and managers. Such senior company staff very often accord similar reverence to the reports of the company accountants.
The argument for such devotion to their findings is perhaps understandable. Company auditors and accountants are the seers, the ones who can look at the pounds and pennies (or euros or dollars) and decide whether the company is in a good state of health. The company may seem to have a good workload, a willing staff and the right assets but for many of its senior figures it is the thumbs up from the accountant or auditor that provides the most valuable assurance that all is well. But should that be the case?
Traditional auditing involves reviewing systems and controls and the use of statistical sampling to assess the workings of a company. Auditors can come up with a detailed picture from such activity and may flag up any concerns they have as a result of their enquiries. But there is no guarantee that they will spot any fraud that has been committed in that workplace. The sample sizes they use in an audit may make it unlikely any fraud would be uncovered and if a company has not placed any emphasis on fraud prevention it would be asking a lot of the auditor to detect it.
In many ways, fraud can only be the responsibility of the company. Doing nothing in the hope that any wrongdoing will be picked up in an audit is both over optimistic and unfair to the auditor. A company has to devise and implement a fraud management programme itself – a programme that outlines the expectations on staff to help prevent fraud and includes on-going assessment of the risk of fraud. A system of checks and controls should be introduced along with a clear procedure for staff to report their suspicions of wrongdoing.
Such activity is not the responsibility of a company’s auditor or its accountant. The company’s senior staff have the best overview of its workings and are in an ideal position to assess what such an anti-fraud programme should include and how it should work. As a company’s processor of financial information, accountants are arguably in a position to detect and report fraud. But it is important that they (like all other staff) are made aware of what they should be looking for when it comes to fraud and exactly what they should do if they believe they have found it. Reports suggest that companies lose 7% of their annual turnover to fraud on average, with surveys stating that anywhere between 48% and 85% of companies fall victim to it in any given year. Hoping that the auditors and accountants find it is not good enough. If a company does not have a clear, anti-fraud policy then the accountant or auditor should suggest that one is introduced.
At Rahman Ravelli, our experience of fraud and other types of business crime have led to companies using our expertise to help them devise anti-fraud strategies. Devising such a strategy involves taking a detailed overview of the firm’s way of working – an overview that an accountant or auditor is not always given the opportunity to gain. Such a proactive approach is more likely to stamp out fraud than the company simply hoping an auditor or accountant will discover something is wrong and then react to it. When it is considered that insurance companies will often not pay out on fraud claims if there is no evidence of a company having an anti-fraud strategy in place, the need for devising one becomes even clearer.
Preventing and deterring fraud should be the goal of every company. Once an effective anti-fraud policy has been introduced to a company it may even give the accountant or auditor more scope for detecting wrongdoing. After all, if a company has assessed its vulnerability to fraud then it will know where to look for potential problems - and can advise its accountants and auditors accordingly. Auditors could even be instructed to carry out unannounced, on-the-spot audits to ensure the company is working under a more watchful eye than before the anti-fraud policy was introduced. Meanwhile, the accountant can work with a greater level of fraud awareness, potentially helping the company root out wrongdoing. Introducing such anti-fraud measures may not be 100% foolproof but having a policy involving prevention and deterrence is likely to mean that there is less (if any) fraud to detect . By doing nothing, there is no prevention or deterrence – and certainly more chance of fraud being committed but not being detected.
As the people examining a company’s finances, accountants and auditors can recommend checks and precautions on a company’s transactions which may limit employees’ ability to commit fraud through complex or unauthorised dealings. We often work with accountants who have suspected fraud or had it happen in their company without it being detected. Some feel that they or the auditor should have spotted something earlier. But the reality is that they are not there to track down fraud. They may be able to suggest measures to reduce the chances of it happening but it is the company’s senior staff that have to take responsibility and seek specialist legal advice.
Fraud can damage a company’s finances, reputation and ability to trade. Heaping responsibility for all that on the shoulders of the auditor and accountant is neither fair nor wise.