Helping Auditors in the Search for Fraud, and Why That Matters to You
Auditors, who play an important role in detecting fraud, bolster trust in the nation’s financial reporting system.
Auburn University accounting professor Dr. Greg Jenkins contributed to recently published research highlighting best practices for teaching and allowing auditors to detect fraud, which is vital in protecting the interest of stakeholders such as employees, investors and creditors.
Auditors should have a healthy dose of professional skepticism, along with the freedom of candid discussions on an engagement team and proper exposure to quality audit practices, says the research contributed by Jenkins, who serves as the Harbert College of Business Ingwersen Professor of Accounting.
Jenkins recently worked on a team with four other professors synthesizing contemporary auditing research. “We identified 40 fraud-related studies published in highly regarded accounting journals between 2016 and 2022, along with several unpublished studies,” Jenkins said.
Their work, recently accepted for publication in Accounting Horizons (now available online), led the team to offer several conclusions and recommendations. Among them is the need for what auditors refer to as professional skepticism.
“Professional skepticism calls on auditors to remain alert during their work for information that suggests the financial statements may contain misstatements and to recognize that things – such as a client’s explanations for a transaction – may not be as they appear,” Jenkins said.
Such work should be rewarded with positive feedback, the team said. Also, they recommend not penalizing staff (e.g., through a poor performance review) who respond skeptically to evidence inconsistencies when no misstatement is identified.
Better team engagement that promotes open and candid discussion is another need, the team said, and audit team leadership should set the right tone.
“Engagement partners should demonstrate their own professional skepticism to other team members by, for example, sharing their past fraud experiences,” Jenkins said.
“This encourages preparation for fraud brainstorming meetings and deeper discussions during those meetings. When engagement partners demonstrate their professional skepticism, brainstorming sessions are longer, have better attendance and include more extensive discussions.”
Another suggestion is for auditors to conduct sensitive interviews, such as those related to the possibility of fraud, in the afternoon.
“Client personnel are more likely to report fraudulent activities when auditors remind them of applicable whistleblower protections and during late-in-the-day interviews, when interviewees are tired and prone to ‘letting their guard down,’” Jenkins said.
The research also warns auditors to be aware of relationships between audit committee members and client management because close relationships may hinder the effectiveness of the audit committee’s oversight.
Since having the research findings recently published in the highly respected Journal of Accountancy, Jenkins said the response continues to be positive.
“Research can often be thought of as an esoteric exercise without much practical benefit, but the research that many of my colleagues and I are fortunate enough to conduct has value to the accounting profession and society more generally,” he said. “We work to understand problems that sometimes take a very long time to solve. However, contributing to greater transparency and trust in our financial reporting system is worth the time.
“It’s a privilege to be able to do this work, and I’m honored to have the support of Auburn University and generous alumni such as Dick and Terry Ingwersen.
“Our work has generated a good deal of interest from those in the accounting profession, particularly among financial statement auditors who must consider the possibility that an entity’s financial statements contain fraud. Sharing the results of research conducted by so many other accounting researchers has highlighted the important role that accounting scholarship plays,” Jenkins said.