A key to fighting fraud – skepticism throughout the financial reporting process

Fraud can have a devastating impact on a company, its stakeholders and the marketplace, but detecting it is no simple matter.

Fraud can have a devastating impact on a company, its stakeholders and the marketplace, but detecting it is no simple matter.

I recently attended one of a series of webinars put on by the US National Association of Corporate Directors (NACD) to aid boards in the deterrence and detection of fraud. The webinars are designed to guide auditors, audit committee members, financial executives, and internal auditors in how to exercise skepticism in their respective roles. In my view, this is a laudable initiative that will increase awareness about the need for skepticism and its role in deterring and detecting fraud.

I found the NACD webinar “Skepticism and the External Auditor” interesting as it discussed some of the key elements of a skeptical approach by auditors and how in practice auditors exercise skepticism. But it left me some unanswered questions such as:

  • How does the auditor keep skepticism top of mind throughout the audit, among all members of the engagement team?
  • How do senior audit team members bring their experience and questioning mindset to bear in all aspects of the engagement?
  • How does the auditor demonstrate that skepticism has been appropriately applied during the audit?

Applying skepticism on an audit is a challenge. Applying it broadly within the financial reporting process may be more so. All participants in the financial reporting process – management, boards, audit committees, internal and external auditors – need to have open and constructive working relationships to ensure an efficient and effective process. So it is important that applying skepticism does not chill those relationships. How do you achieve an appropriate balance between strong working relationships and skepticism?

The US Center for Audit Quality (CAQ) provides some clues. During 2009 and 2010, the CAQ sponsored a series of discussions and in-depth interviews to obtain perspectives on fraud deterrence and detection measures that have worked, and on ideas for new approaches. The CAQ published its observations in its 2010 report Deterring and Detecting Financial Reporting Fraud: A Platform for Action. The report contains ideas for mitigating the risk of financial reporting fraud, as well as related points to ponder, and represents a first step in advancing longer-term initiatives and collaborations on the subject. It notes that participants in the financial reporting process naturally believe that the organizations with which they are associated have integrity, and are therefore predisposed to trust each other. But this bias to trust can also inhibit raising questions.

The CAQ puts forward the premise that skepticism does not mean a lack of trust. Rather it means there is a need for a “trust but verify” approach. The CAQ believes that when all parties recognize that exercising skepticism and promoting the cultural expectation that questions are healthy and appropriate, working relationships are strengthened. The increased collaboration that results also works to counteract the conditions that are present in most financial reporting frauds: pressure or an incentive to engage in fraud, a perceived opportunity, and the ability to rationalize fraudulent behaviour.

Keep the conversation going…have you lessons to share about fraud deterrence and detection in your organization? Can you answer some of my unanswered questions about auditors and skepticism?

Post a comment below; or email me directly.


Conversations about Audit Quality is designed to create an exchange of ideas on global audit quality developments and issues and their impact in Canada.

About the Author

Eric Turner, CPA, CA

Director, Auditing and Assurance Standards, CPA Canada