Auditors already know that they must be on the lookout for fraud, but they may be uncomfortable playing the bad guy with high-powered corporate clients.
Clients should understand up front that accounting and auditing firms are not only risking their reputation, but also their survival if they don't make finding fraud the central goal of their auditing services.
Michael P. Glynn, technical manager for audit and attest standards with the AICPA, sent that message to a crowd at the AICPA's 12th annual Financial Accounting and Auditing Conference held recently in Montgomery, Ala.
Glynn suggested asking the firm's most diplomatic partner to conduct those touchy early discussions with clients, the Montgomery Advertiser reported. But during the audit process, auditors must be sharp-eyed and work under the assumption that management has tried to override internal controls, he said.
"Design audit tests that are unpredictable," Glynn said. "Perform tests in areas that normally would be seen as low risk. Throw them a curve ball every now and then, just to keep the client on their toes."
Fraud detection can only improve with diligent auditors combined with whistleblowers who are unafraid of retaliation because their rights are protected.
According to a survey of members of the Association of Certified Fraud Examiners, less than 20 percent of fraud that is caught is turned up by internal controls versus 40 percent for inside tipsters, the Seattle Times reported.
The corporate whistle-blower is getting more attention and protection under the Sarbanes-Oxley Act, which requires companies to set up fraud hotlines by the end of the month.
Fraud detection is considered a growth industry in the post-Enron environment, and EthicsPoint is one new business that helps companies sift through whistle-blower tips through custom websites and toll-free tip lines. The Portland, Ore.-based company started in 2000, before Enron imploded, and now has nearly 700 clients.
EthicsPoint concentrates on companies that are not big enough to put their own system in place to capture whistle-blower complaints. The Certified Fraud Examiners say two-thirds of the fraud in its survey occurred within nonprofits and small companies
"The businesses that get it the worst are the not-for-profits and small businesses,â said Norman Gierlasinski, vice president of the Pacific Northwest chapter of the Association of Certified Fraud Examiners, âbecause they put total trust in their employees."