Featured Article

Why audits fail

And how CFEs can help fix them



Fraud Magazine spoke recently with veteran auditors Elizabeth Simon, CFE, CPA, and E. Michael Thomas, CFE, CPA, CIA, who tell how they interpret and manage the technical factors, interpersonal dynamics and organizational politics that can interfere with audits. Adding to their insights, economic sociologist Irina Olimpieva, Ph.D., explains how society at large suffers when key social contracts are broken. The bond of trust between auditors and their stakeholders is one such fundamental agreement.

A bond of trust joins auditors with all who depend on the accuracy and completeness of their findings. But venal executives, captured regulators and compromised auditors can subvert that bond, betray confidence and dissipate capital. This article offers key insights and best practices to help CFEs — including those who are auditors — expose and mitigate threats to audit reliability.

On May 20, a federal judge will sentence to jail the last of six senior accounting executives — all CPAs — convicted of fraud for their roles in the audit inspection cheating conspiracy between the federal watchdog agency Public Company Accounting Oversight Board (PCAOB) and KPMG LLP. (See Sarbanes-Oxley Act of 2002 established PCAOB.)

“The Public Company Accounting Oversight Board was established by the Sarbanes-Oxley Act of 2002 to oversee the audits of public companies in order to protect investors and further the public interest in the preparation of informative, accurate, and independent audit reports.” (See PCAOB 2018 Annual Report, page 1.) Congress passed the act to prevent a recurrence of the devastating accounting scandals at Enron, WorldCom and other giant corporations that collapsed when their auditor-approved financial statements turned out to be wildly and fraudulently inaccurate.”

This case reflects the tension between public company auditors and the agencies that regulate them — not just in the U.S. but around the world.  A bond of trust should join auditors with all stakeholders to report accurate and complete findings. And regulators must thoroughly and effectively inspect those findings to protect the public.

The primary purpose of public company financial statement audits isn’t to find fraud but to verify data reported to the U.S. Securities and Exchange Commission (and equivalent regulators in other nations) and to assess the effectiveness of internal controls over financial reporting. Still, when done properly, such audits can shed valuable light on weak controls and overlooked red flags.

Worries about audit quality are far from overblown. From 2013 through 2017, the PCAOB inspected 1,089 Big Four audits. Thirty-two percent (353) received a failing grade. (See the PCAOB’s Firm Inspections Reports.)

The vast majority of auditors, of course, are honest and do their best to verify the accuracy of financial statements. But some, like members of any profession, occasionally succumb to pressure or temptation.

CFEs, many of whom are auditors, are qualified and positioned to help restore trust in audits. Here are two CFEs who tell how to go about it.



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