Won't get fooled again, but they'll try

With a nod to Pete Townshend and The Who, many auditors have expressed their determination to not get fooled again after being deceived by creative fraudsters. One of the underlying questions in many of the cases I've profiled is: "What did the auditors do?" And over the years I've seen cases that run the gamut — from those in which an auditor failed to heed some obvious warning signs of fraud to cases in which anyone would be hard-pressed to criticize the auditor's efforts.

Included in the latter category are some very interesting cases in which fraudsters took some rather extensive actions to fool the auditors. Those efforts are the focus of this column more so than the nature of the fraud schemes. I'll use two recent cases to illustrate the lengths that crooks will go to trick auditors into issuing clean opinions on fraudulent financial statements.

KIT Digital

The first case involves KIT Digital, a company that most people have likely never heard of. The company provided software and services designed to help video content providers make their content accessible on the Internet and on Internet-enabled television. KIT Digital won't easily be mistaken for Enron, Olympus or any of the other large and well-publicized financial reporting fraud cases; the monetary impact of the KIT Digital fraud was much smaller. However, it provides one of the best lessons in terms of steps taken by fraudsters to fool auditors. (See the September 2015 complaint against KIT's former CEO and CFO.)