Future of audit – “The hunt for fraud?”
There is a gap between what stakeholders expect of an auditor and what auditors can and must deliver. This expectation gap in general harms the trust placed in auditors. The Commission on the Future of Audit (CTA) states in their report of late January that stakeholders in general expect that an auditor performs more procedures on certain areas than those for which the auditor is obliged based on the audit standards. One of those areas is fraud and the proposed measure on this subject is to add forensic expertise into audit teams performing statutory audits.
Fraud and the role of the auditor
Fraud is not a new area of discussion in the audit profession. The report from The Netherlands Institute of Chartered Accountants (NBA) of 2014, called ‘In the public interest’ was already evaluating fraud and the role of the auditor: “as gatekeeper to the detection of and fight against fraud, the auditor can and must play an important role.” This led to a mandatory fraud risk indicator training for certified auditors and an explicit report obligation on this subject towards those charged with governance.
Fraud and the International Standard on Auditing 240
An auditor conducting an audit in accordance with the International Standard on Auditing is responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error. Fraud is defined as “an intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage”. As part of the current International Standard on Auditing 240, an auditor shall perform several procedures and related activities to obtain information for use in identifying the risks of material misstatement due to fraud. Based on this, an audit approach needs to be implemented and carried out and if fraud or suspected fraud is identified during the audit an auditor needs to respond to this.
Forensic expertise in audit teams
Fraud is often explained using a triangle in which explanation is given to the motivation behind an individual’s decision to commit fraud. The three dependencies in this triangle are: Opportunity, Pressure and Rationalization. If we look closer to the opportunities, nobody needs an explanation that the opportunities to commit fraud have increased massively due to the digitalization. Auditors however still seem to grasp for old-fashioned audit methodologies. Data analytics (if data can be presumed reliable) can be used to enhance an audit approach, but also including technical expertise on for example cybersecurity could lead to closing the expectation gap with stakeholders. Including forensic expertise in audit teams is also good initiative, but in general it is of great importance that training in both forensic accounting and fraud awareness will be part of the learning process of the auditor.
Future of audit
It is expected that the audit market will change. But what would it mean for your company, registered in The Netherlands? We at Crowe Peak inform our clients and we could inform you in depth on possible changes and the impact for you company. If you have any questions on the future of audit, please contact the experts at Crowe Peak.