why auditors fail to detect fraud presented by: dennis f. dycus, cpa, cfe, cgfm ...

Why Auditors Fail to Why Auditors Fail to Detect FraudDetect Fraud

Presented by:Presented by:

Dennis F. Dycus, CPA, CFE, CGFMDennis F. Dycus, CPA, CFE, CGFMwww.dennisdycus.com

[email protected]@bellsouth.net

AGA – Baltimore ChapterAGA – Baltimore Chapter

Baltimore, MDBaltimore, MD

May 9, 2012May 9, 2012

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Why Auditors Fail to Detect FraudWhy Auditors Fail to Detect Fraud

Willful Ignorance:Willful Ignorance:

If you keep your eyes shut, you If you keep your eyes shut, you won’t see anything!won’t see anything!

Go in with your eyes wide shut!Go in with your eyes wide shut!

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A little historyA little history February, 1997February, 1997 Barry Melancon, President of the AICPA Barry Melancon, President of the AICPA

at the ACFE’s Annual Conference in at the ACFE’s Annual Conference in VegasVegas

FRAUD is a four letter wordFRAUD is a four letter word SAS No. 53, SAS No. 53, Errors and ….Errors and ….

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Why Auditors Fail to Detect FraudWhy Auditors Fail to Detect Fraud Per SAS No. 82, Per SAS No. 82, Consideration of Fraud Consideration of Fraud

in a Financial Statement Audit,in a Financial Statement Audit, in the past in the past auditors failed to detect fraud because auditors failed to detect fraud because they did not know what it looked likethey did not know what it looked like And they had not been trained to look for itAnd they had not been trained to look for it

Although introduced with much fan fare, Although introduced with much fan fare, SAS No. 82 did not increase the auditor’s SAS No. 82 did not increase the auditor’s responsibility for the detection of fraudresponsibility for the detection of fraud

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Why Auditors Fail to Detect FraudWhy Auditors Fail to Detect Fraud For financial statement reporting purposes, it For financial statement reporting purposes, it

does not matter whether a misstatement is due does not matter whether a misstatement is due to an error or fraudto an error or fraud

But for audit purposes, it’s a huge differenceBut for audit purposes, it’s a huge difference SAS No. 99 did not increase the auditor’s SAS No. 99 did not increase the auditor’s

responsibility for the detection of fraudresponsibility for the detection of fraud It did require a significant amount of It did require a significant amount of

additionaladditional documentation as to how the documentation as to how the auditor considered the possibility of fraud auditor considered the possibility of fraud in an auditin an audit

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Why Auditors Fail to Detect FraudWhy Auditors Fail to Detect Fraud Fraud takes on the characteristics of its Fraud takes on the characteristics of its

surroundingssurroundings So what does fraud look likeSo what does fraud look like

Once the AICPA said the Once the AICPA said the F Word F Word (FRAUD)(FRAUD), , they could talk about itthey could talk about it

Prior to SAS No. 82, the only voice in the Prior to SAS No. 82, the only voice in the wilderness was the Association of Certified wilderness was the Association of Certified FraudFraud Examiners (ACFE) Examiners (ACFE)

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For the first time, SAS No. 82 For the first time, SAS No. 82 requiredrequired the the auditor to inquire of management about the auditor to inquire of management about the possibility of fraudpossibility of fraud Also required Also required brainstormingbrainstorming with staff with staff

Also referred to SAS No. 78, Also referred to SAS No. 78, Consideration ofConsideration of Internal Control in a Financial Statement Internal Control in a Financial Statement Audit, Audit, and the and the Tone at the TopTone at the Top

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In defining internal control, SAS No. 78, In defining internal control, SAS No. 78, breaks it down into five elementsbreaks it down into five elements

The first element is the TONE AT THE TOPThe first element is the TONE AT THE TOP All other controls are a function of the TONE All other controls are a function of the TONE

AT THE TOPAT THE TOP SAS No. 78, states that ……SAS No. 78, states that ……

THE TONE AT THE TOP IS THE TONE AT THE TOP IS EVERYTHINGEVERYTHING

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How do you think most How do you think most

frauds are detected?frauds are detected?

It’s not by the external auditor!It’s not by the external auditor!

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ACFE’s ACFE’s 2010 Report to the Nations on 2010 Report to the Nations on Occupational Fraud and AbuseOccupational Fraud and Abuse

Frauds are detected by:Frauds are detected by: 37.8% - Tips (Somebody Knows)37.8% - Tips (Somebody Knows) 23.0% - Internal Controls23.0% - Internal Controls 17.1% - Management Review17.1% - Management Review 9.3% - By accident (Dumb Luck)9.3% - By accident (Dumb Luck) 4.2% - External Audit (9% in 2008)4.2% - External Audit (9% in 2008)

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The auditor often fails to consciously decide The auditor often fails to consciously decide whether to retain an entity as a continuing whether to retain an entity as a continuing client or take a new entity on as a clientclient or take a new entity on as a client

Auditors should be very careful about initial Auditors should be very careful about initial impressionsimpressions

Failure to develop and maintain Failure to develop and maintain Professional Professional SkepticismSkepticism

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Professional Professional SkepticismSkepticism

It’s An AttitudeIt’s An Attitude

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REMEMBERREMEMBER

FRAUD AND STUPIDFRAUD AND STUPID

OFTEN LOOK OFTEN LOOK EXACTLY THE SAMEEXACTLY THE SAME

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Why Auditors Fail to Detect FraudWhy Auditors Fail to Detect Fraud Failure to Failure to know your clientknow your client

Do you know what a normal/usual transaction isDo you know what a normal/usual transaction is What’s there that should not be thereWhat’s there that should not be there What’s not there that should be thereWhat’s not there that should be there Do you understand the environment your client Do you understand the environment your client

works inworks in Little things can mean a lotLittle things can mean a lot Do you see what you seeDo you see what you see

Often fraud is right in front of you, just looking at Often fraud is right in front of you, just looking at you…. And you don’t see ityou…. And you don’t see it

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Why Auditors Fail to Detect FraudWhy Auditors Fail to Detect Fraud Failure to Failure to know your clientknow your client

Do you know what a normal transaction isDo you know what a normal transaction is What’s there that should not be thereWhat’s there that should not be there What’s not there that should be thereWhat’s not there that should be there

Little things can mean a lotLittle things can mean a lot Do you see what you seeDo you see what you see

Often fraud is right in front of you, just looking at you Often fraud is right in front of you, just looking at you and you don’t see itand you don’t see it

You never know when you may see indications of You never know when you may see indications of fraudfraud


Look for things that should be Look for things that should be there but are notthere but are not

Look for things that are there Look for things that are there but should notbut should not

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It’s not what you look at that matters; It’s not what you look at that matters; it’s what you see.it’s what you see. Henry David Thoreau

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The auditor’s failure to take into consideration The auditor’s failure to take into consideration who steals …..who steals …..

BASICALLY HONEST PEOPLEBASICALLY HONEST PEOPLE

The Fraud TriangleThe Fraud Triangle

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Fraud TriangleFraud Triangle

Need Rationale

Opportunity

Control Environment

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Why Auditors Fail to Detect FraudWhy Auditors Fail to Detect Fraud Failure to take an individual’s lifestyle into Failure to take an individual’s lifestyle into

considerationconsideration 43%43%

Over reliance on …..Over reliance on …..

DOCUMENTATIONDOCUMENTATION The workprogram and the Xerox The workprogram and the Xerox

machinemachine

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Failure to empower staff …..Failure to empower staff ….. You won’t find most fraud sitting behind You won’t find most fraud sitting behind

a deska desk Walkn’, Talkn’, Lookn’ and Listenn’Walkn’, Talkn’, Lookn’ and Listenn’ Someone knowsSomeone knows

Can we talkCan we talk

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Why Auditors Fail to Detect FraudWhy Auditors Fail to Detect Fraud Not knowing how to ask a question …..Not knowing how to ask a question …..

Without asking a questionWithout asking a question What message are you sending with your questionWhat message are you sending with your question

Failure to make yourself availableFailure to make yourself available They have something you wantThey have something you want You don’t have anything they wantYou don’t have anything they want

You may only have one chanceYou may only have one chance Don’t blow itDon’t blow it Remember the 85/15 ruleRemember the 85/15 rule


Use caution in asking questionsUse caution in asking questions As a rule, you should never ask a question that As a rule, you should never ask a question that

you don’t have a pretty good idea what the you don’t have a pretty good idea what the answer will be …….answer will be …….

Especially in courtEspecially in court

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Failure to know when someone is lying or Failure to know when someone is lying or telling the truthtelling the truth

People use words to lie, but the body People use words to lie, but the body always tells the truthalways tells the truth

Do you Do you reallyreally understand the answer …. understand the answer …. does it make sensedoes it make sense

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Failure to know when someone is lying or Failure to know when someone is lying or telling the truthtelling the truth

People use words to lie, but the body always People use words to lie, but the body always tells the truthtells the truth

Do you Do you reallyreally understand the answer …. does understand the answer …. does it make senseit make sense

But you got your But you got your DOCUMENTATIONDOCUMENTATION

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At the beginning of this presentation, I At the beginning of this presentation, I asked what did fraud look like. I don’t asked what did fraud look like. I don’t know, but I’ll know it when I see it. Look know, but I’ll know it when I see it. Look for things that are out of place; unusual for things that are out of place; unusual transactions; things that surprise you; transactions; things that surprise you; things that should not be there; things that things that should not be there; things that should be there but aren’t; explanations that should be there but aren’t; explanations that don’t make sense …..don’t make sense …..

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Detecting fraud is like going hunting ….Detecting fraud is like going hunting ….

The woods are full of animals ….The woods are full of animals ….

You just have to know what they look like You just have to know what they look like and where they hideand where they hide

Good HuntingGood Hunting

Let me leave you with one Let me leave you with one last thoughtlast thought

why auditors fail to detect fraud presented by: dennis f. dycus, cpa, cfe, cgfm ...

Documents

auditors responsibility

past auditors

consideration of fraud

occupational fraud

seeoften fraud

f word fraud

financial statement

audit purposes