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How auditors can tackle the COVID fraud triangle

29 January 2021: With a high level of fraud predicted as a result of a COVID “perfect storm”, a new guide by ICAEW’s Audit and Assurance Faculty reminds auditors of their key responsibilities and highlights specific areas for discussion among engagement teams.

The combination of poor economic conditions, an explosion in home working and changes to control environments is increasing the risk of abuse of government support schemes, ICAEW is warning. At the same time, the complexity of many schemes means that even if fraud isn’t committed, accounting errors are likely to be common. 

The new guide stresses the need for auditors to carefully consider the three corners of the ‘fraud triangle’ – opportunity, pressure/motivation and the reasons individuals might use to justify fraudulent behaviour – in the context of COVID grants, furlough schemes and other forms of financial support.

A report published by spending watchdog the National Audit Office in October last year estimated that fraud and error represent up to 10% of claims. Of a combined forecasted cost to government of £69.7bn for both the Coronavirus Job Retention Scheme (CJRS) and the first two Self-Employment Income Support Scheme (SEISS) grants, the October report estimated that up to £2bn could have been claimed fraudulently.

Michelle Cardwell, ICAEW Technical Manager for Audit, Assurance and Financial Reporting, said the objective of the guide was to remind auditors of their key responsibilities in relation to fraud but also to provide practical advice on areas worthy of focus. 

Emotional intelligence is critical

Cardwell advises that remote audits made the job of detecting fraud even harder than usual. “If auditors aren’t conducting audits in person, they’re potentially missing out on the behavioural clues that can be so useful in picking up on any untoward activity.” 

The emotional intelligence of auditors is critical in approaching the sensitive issue of fraud appropriately, Cardwell added. “Auditors need to be aware of the context and they need to consider their knowledge of weak points and controls in the business. They need to have open discussions as a team and exercise professional scepticism throughout.” 

The guide warns that although ISA 240 notes the primary responsibility for prevention and detection of fraud rests with management and those charged with governance of the entity, auditors also need to be especially vigilant – for some entities, government support schemes will be material.

“Audit partners should encourage the audit team to think about the people who produce the numbers and whether organisational dynamics could, for example, impact the effectiveness of certain financial controls,” the guide continues.

No additional UK audit requirements have been imposed in relation to government support schemes. However, auditors should check whether additional local requirements in other jurisdictions exist. 

Greater risk of errors

“While the risk of fraud is certainly heightened, the risk for errors may be even greater” says Anita Monteith, Tax Faculty Technical Lead & Senior Policy Adviser. “The rules for support schemes have changed a number of times since first introduced. For example, from 1 July 2020 onwards, flexible furloughs were introduced, allowing employees to work some hours while being on furlough for others, all within the same claim period”. 

Employers need to be able to show adequate records to support that their grant claim relates only to the hours not worked, Monteith adds. 

“The calculations on these claims in particular can be tricky. Likewise, care is needed to ensure that the Employment Allowance is claimed only where enough Employer’s NIC has been paid, so that a CJRS grant and EA were not claimed for the same cost.” 

Monteith concludes it is likely auditors may well need to call on their tax specialist colleagues for help in understanding claims.

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