Financial Auditing Fraud - What You Should Know

A major obstacle to addressing the problem of financial auditing fraud is related to the difficulty in identifying the fraud soon after it occurred. Because it is often fraud committed by managers, it is well hidden from auditors, investors and other stakeholders, and is usually discovered by chance once the company is in financial difficulty. It is therefore important to use early warning signals or "red flags".

Red flags are events, pressures, opportunities or characteristics that may cause management to commit fraud on behalf of the company or for personal gain. They can be used as an early warning system by auditors and other stakeholders to assess the risk of fraud.

Although the red flag does not mean any fraud has necessarily taken place, it does mean that there are circumstances which may warrant more in depth checking of data to ensure fraud has not taken place.

It is important that auditors and managers take notice of the opinion of lenders and investors concerning red flags. Negative perceptions of lenders and investors because of red flags can translate into a weaker share price, difficulties in obtaining funding or loans, and the off-loading of shares.

Institutions must act now to ensure they are establishing red flag compliant practises. They should review their current accessible data sources and procedures to uncover any potential gaps. Many companies may need to find necessary tools and resources to fill these gaps.

Red flag rules present an opportunity for businesses and organisations to take a look at their current identity thefy detection and prevention tools and proceses.

Auditing fraud is becoming more prevelant in recent years, which has been attributed to an increase in the advantages received from committing fraudulent acts and the decrease in the risk of being punished. Many companies fail to prosecute perpetrators of fraud, particularly when it involves managers.

The detection and prevention of fraud becomes increasingly critical as its frequency increases. Controls which help in the prevention of fraud are well known to auditors and accountants. As long as internal controls do not exist within an organisation, the problem changes from prevention to detection.

Fraud detection continues to be difficult even in cases involving blatant material misstatement of accounting records. Detection becomes even more difficult when the culprits, enlist apparently independent auditors to become part of the scam. Most fraud is still discovered by accident or through colleague-complaints. It is estimated that only 20% of financial fraud is detected by auditors.

About the Author

John McE writes articles on a number of subjects including Financial Auditing. Careers in Audit are the world's leading job board for audit professionals! Find a job in auditing today!

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