Why don't auditors find fraud?

Organizations continue to be at risk because their auditors and accountants often don’t know about, or continuously look for, fraud red flags. And they don’t apply additional audit procedures to offer reasonable assurance that financial statements are free of misstatements due to fraud. Let’s help them and engage everybody in this good fight.

In “Alice’s Adventures in Wonderland,” Alice asks the Cat:

“Would you tell me, please, which way I ought to go from here?”

“That depends a good deal on where you want to get to,” said the Cat.

“I don’t much care where —” said Alice.

“Then it doesn’t matter which way you go,” said the Cat.

The story illustrates a very important point for everyone: We have to know where we’re going to get anywhere. As fraud examiners, we certainly face that issue. We must know where we’re going when we begin a fraud examination. To help us, we have the Fraud Examiners Manual (FEM) to guide the examination and, as we’ve been trained, we follow the “fraud theory”:

• Analyze available data.
• Create a hypothesis.
• Test the hypothesis.
• Refine and amend the hypothesis.

(See “Fraud Examination Methodology” in the online FEM.)

Then, once on the trail, we continue to follow the process of a fraud examination. We know that when our bosses, coworkers, colleagues, clients and the public ask us how we detect fraud, we can answer, “We look for red flags — the anomalies.” Furthermore, as CFEs, our job is to resolve allegations of fraud.

But what about auditors? Laypersons might think it’s auditors’ job to resolve allegations of fraud. For auditors, however, unless they’re performing fraud examinations, resolving allegations of fraud isn’t their job. Yet, invariably, when a fraud scheme is discovered, both the victim and the public believe that auditors should’ve discovered the scheme. Finger-pointing and lawsuits result as human nature dictates everyone wants to know the answer to the question: “How did the fraud occur and not get detected?”

And, of course, the victim wants to recover losses. No matter the type of organization — governmental, nonprofit, private or public entity — the additional questions persist after a fraud is discovered: “Where were my auditors?” or “Why didn’t my auditors discover this scheme?”