How External Audits Fail to Detect Fraud

Despite being the number one anti-fraud control employed by organizations, when it comes to those who discover fraud the external auditor ranks as one of the lowest, at 3.8% according to the ACFE’s Report to The Nations 2016, and in the United States alone it is 4%.  There are a number of factors for why the external auditor is typically ineffective in

discovering fraud including breadth of the engagement, number of transactions, number of accounts, and the cunning of the perpetrators, especially if there is collusion.  Trying to overcome these factors has always been a hurdle for accounting firms, and despite the prescriptions of SAS 99, which requires auditors to employ analytical techniques during the planning phase, fraud is not typically the main focus of an audit.

The number one reason auditors do not discover fraud is because they do not actually believe it is their obligation to do so.  The truth is, as part of the professional standards auditors adhere to (AU 316), external auditors should consider risks for fraud and maintain a professional skepticism towards fraud throughout the engagement.  Unfortunately for auditors there is an emphasis on efficiency and discovering fraud can be a lengthy, tedious process, mostly because the fraudster has almost surely gone through steps to ensure fraud is not found.  Secondly many firms will explicitly tell their auditors not to worry about fraud, mostly because of reason number three, lack of training.  Most auditors are not trained in fraud detection and therefor asking them to do such during the audit is a fruitless effort and a waste of billable hours in the eyes of audit managers.

As your organization grows, and the risk of internal control breakdown increases, you should begin to consider an external auditor that emphasizes fraud detection.  None of them will guarantee the discovery of fraud if it exists but they can employ auditors who have the training in fraud detection and forensic audits, as well as being versed in types of data analysis used to detect fraud.  If your organization is one that requires an external audit then despite the added cost, if there is one, it might be more a better investment to hire an audit group that is committed to detecting fraud within reason instead of a group that is less expensive but does not help increase the chances fraud is detected.

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