Financial reporting frauds have historically occurred in waves and sometimes in tidal waves as in the period of Enron, Worldcom, Tyco, Adelphia, Quest, etc.\u00a0 When economic times turn challenging or become uncertain, fraud frequently increases.<\/p>\n
Given the time since a major wave of financial reporting frauds and the current economic environment, it may not be a coincidence that Paul Munter, the SEC\u2019s Chief Accountant, released a Statement titled \u201cThe Auditor\u2019s Responsibility for Fraud Detection<\/a>\u201d on October 11, 2022. \u00a0(At that time Mr. Munter was Acting Chief Accountant.)<\/p>\n In the Statement, Mr. Munter focuses on the auditor\u2019s gatekeeper responsibilities as they relate to financial statement fraud.\u00a0 The Statement discusses detailed considerations in a number of areas, including the auditor\u2019s role and responsibilities; the importance of a strong system of quality controls, risk assessment and responses; and good practices.<\/p>\n Mr. Munter\u2019s Statement begins with an important reminder about the nature of the auditor\u2019s role:<\/p>\n \u201cAuditors must plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error\u00a0or<\/em>\u00a0fraud.\u201d<\/p>\n In addition, the Statement highlights that:<\/p>\n \u201cThe PCAOB auditing standards further require auditors to exercise due professional care, which requires the auditor to exercise appropriate levels of professional skepticism <\/strong>[emphasis added] throughout the audit.\u201d<\/p>\n With respect to the auditor\u2019s responsibility, after noting several auditing standards that include fraud considerations, Mr. Munter goes on to say:<\/p>\n \u201cWe emphasize that the auditor\u2019s risk assessment and use of the fraud lens is a continual and iterative process that continues until the issuance of the audit report.\u201d<\/p>\n The Statement includes an important point concerning an auditor\u2019s quality control system, which is that budget, time, and other kinds of pressure could distract an auditor from appropriately identifying fraud risk.<\/p>\n In his discussion of risk assessment and responses, Mr. Munter emphasizes the importance of professional skepticism, noting:<\/p>\n \u201cFor instance, the mindset of \u2018trust but verify\u2019 may represent potential bias if it is anchored in the belief that management is honest and has integrity. Such a mindset may interfere with an auditor\u2019s ability to effectively evaluate signs of fraud when evaluating misstatements or to objectively challenge evidence provided by management.\u201d<\/p>\n With respect to appropriate \u201cgood practices,\u201d the Statement notes that examples of fraud risk factors in the auditing literature should not be considered a checklist.\u00a0 Rather, they should inform the process of building a tailored list of fraud risk factors for each engagement.<\/p>\n This \u201cearly warning\u201d Statement, which addresses many other important fraud related issues, is likely based on a desire to get out in front of any incentives that could result in increases in fraud in coming periods.\u00a0 It may also inform parts of the PCAOB inspection process.\u00a0 Auditors and companies should begin incorporating its points in their year-end planning now.<\/p>\n \n As always, your thoughts and comments are welcome!<\/p>\n","protected":false},"excerpt":{"rendered":" Financial reporting frauds have historically occurred in waves and sometimes in tidal waves as in the period of Enron, Worldcom, Tyco, Adelphia, Quest, etc.\u00a0 When economic times turn challenging or become uncertain, fraud frequently increases. Given the time since a major wave of financial reporting frauds and the current economic environment, it may not be … Continue reading Fraud \u2013 A Forewarning Message from the Chief Accountant?<\/span>