Why don’t auditors find fraud?

FOR decades, investors have lamented how rarely external auditors uncover corporate fraud. From Enron to Wirecard, the cry after each scandal is, where were the auditors? The Association of Certified Fraud Examiners’ biennial report on how workplace fraud gets detected has typically shown auditors are the ones uncovering the wrongdoing only 4 per cent of the time.

Bad news. The latest report out a few weeks ago said the number is down to 3 per cent. Whistleblower hotlines and other internal controls may have helped some companies themselves discover some malfeasance earlier, but what about when management is the perpetrator or a corporate culture is rotten? A survey of investors by the Centre for Audit Quality, a trade group for large accounting firms, found that 57 per cent thought the current system “frequently” failed to detect illegal acts.

Regulators fear auditors are failing in their role as a last line of defence for investors against corporate shenanigans. Audit firms argue that company executives are responsible for the accuracy of financial statements and that the role of an auditor is only to provide reasonable assurance — not a guarantee — that a financial statement is free from material misstatement.