Calibrate your professional skepticism: How to modulate your skepticism threshold to better spot red flags

Organizations usually detect occupational fraud via tips. External audits detect just 4% of frauds, according to the 2020 ACFE Report to the Nations. But an external auditor in Washington state defied the norm when she detected a $6.9 million misappropriation — the largest government asset misappropriation in the state’s history. This auditor found the loss by using red flags to finely calibrate her professional skepticism.

Professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence. This mindset is a foundational principle for all investigators, especially fraud examiners. (Professional skepticism is included in the ACFE Code of Professional Standards.)

But applying the right level of skepticism can be challenging. Eager investigators might be too skeptical, which could result in extra or unnecessary audit procedures, time spent and audit costs. Others might be too trusting or averse to conflict and ignore red flags that warrant further attention.