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The importance of detecting fraud

As standard-setters move forward with initiatives around fraud and going concern, Katharine Bagshaw looks into the concerns and proposed reforms – and shares some ICAEW perspectives on progress.

Fraud is a notoriously tricky subject at the best of times. But the erroneous and persistent belief that auditors who didn’t detect a material fraud must have been asleep on the job is as old as the profession itself. Why?

Misunderstandings stem partly from the belief that frauds are, or should be, obvious to anyone with eyes to see, which is rarely the case. Fraud is defined legally in high-level terms and trials go to court because what actually constitutes a fraud is a matter of legal opinion and often unclear without the benefit of hindsight. Misunderstandings also arise because fraud is sometimes assumed to involve misappropriation of assets. But many major recent incidents are more in the nature of financial reporting frauds. This is complicated by the fact that fraud requires an element of intent – you cannot be guilty of unintentional fraud.