Fraudulent financial reporting: fresh thinking

Fraud, by its very nature, is deliberately hidden, and is therefore harder for auditors to spot than other irregularities affecting the financial statements. In this essay we focus on ways in which the skills and insights of auditors can be brought to bear to maximise the likelihood of identifying fraudulent financial reporting. Auditors should always look beyond the numbers. Their privileged exposure to an organisation, its culture and people, should be harnessed when planning and testing for the existence of fraudulent financial reporting. This means paying particular attention to:

• Organisational culture – how do people behave and communicate in the business?
• Management style – what tone is set at the top?
• Motivations and pressures – what factors might drive relevant individuals to manipulate the numbers?
• Behavioural controls – how does the organisation promote a culture of honesty and openness?

While primary responsibility for preventing and detecting fraud in an organisation rests with directors and management, auditors can also play a part in promoting a strong organisational culture, which proactively acknowledges and corrects mistakes, and where individuals have the courage to speak up when things go wrong.

We invite individuals and organisations to share with us not only their comments on the analysis and suggestions in this essay but on their own experiences and ideas in relation to the challenges of fraudulent financial reporting. These will help us to develop our contribution to the coming period of intense consultation and reflection that will determine the future of audit in the UK, and beyond.