When will they ever learn we don’t audit for fraud?

This one comes from Melanie:

I came across this article and thought is was very thought provoking, since 3 “Big-4” are making the headlines; legal action is being taken against them for not detecting fraud. In particular, this lawsuit is implying that as auditors, Deloitte should have uncovered the fraud. How could this be true, when the detection of fraud is not the responsibility of the auditor? Auditors are required to provide reasonable assurance that the client’s financial statements  are free of material misstatements based on sample testing.

Will the public’s perception that the job of an auditor is to uncover fraud ever change?  Should audit firms really be held responsible for problems arising from the financial crisis? What do you think?

http://online.wsj.com/article/SB10001424052970204010604576595133072373372.html

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About Mark P. Holtzman

Chair of Accounting Department at Seton Hall University. PhD from The University of Texas at Austin. Worked at Deloitte's New York Office. BSBA from Hofstra University.

5 comments

  1. Auditors have to use professional skepticism to see where fraud can occur. It will be interesting to see how the negligence claims pan out since that is basically saying Deloitte saw an area of risk and ignored it. I think it is likely that more comprehensive fraud detection will be something that the public expects from auditors, and I think we may eventually go with something like France has done with joint audits for large companies where the financial statements become increasingly more important. Currently, I believe any company with more than 1.5 billion in revenues must have two auditors complete an audit. Luckily for those of us starting a career in public accounting, we will have plenty of job security with any increased rules and regulations that come around. Though, We are likely to see increased work hours as well.

  2. I do not think the public's perception of an auditor's job will ever change because a majority of the public doesn't understand what an auditor actually does. Until some light is shed on how an audit is actually performed, the public's view on us auditors will never change and they will always blame us for not detecting fraud. As for auditors being held partly responsible for some of the problems that came from the financial crisis, I think that due to the change in economic conditions, audits should have been conducted with a little more scrutiny. I don't think auditors should be blamed for some of the problems because they weren't part of company management that made risky bets on sub-prime mortgages.

  3. I agree with HOCKEY93 regarding the lack of understanding from the public's perspective. I truly believe that it is impossible to completely eliminate fraud or prevent it from happening 100% of the time. The amount of involvement, cost, and strain it would put on companies would tremendously hurt their bottom line, and even drive them to bankruptcy.The role of an auditor is to provide an assurance opinion, not a guarantee. I think another problem is that investors are angry and feel that they need to blame someone. In other words, based on all the reading I did, Lehman Brothers never did anything illegal, they just made very risky and highly leveraged positions. EY's job was to make sure that they were not mistating any of the information presented, not to guarantee that the company is not doing something stupid or highly-leveraged.

  4. Yvonne:In regards to the Deloitte case, it is completely laughable and "utterly without merit" as the company mocks during a public statement. It is not our job to uncover fraud being that our audit is based on sample testing. Clients would never want to pay the amount we would charge in order to test every account, nor would we have the time. Also, in 2009 Deloitte resigned from being the auditors to TBW because TBW did not want to accept the audit opinion that Deloite was going to provide them because the auditors were beginning to uncover some sort of fraud scheme. If that doesn't point the blame to TBW, then I don't know what does. The lawsuit is ridiculous and is just going after the party still standing since TBW is no longer viable.

  5. I do not believe that the public’s perception of an auditor will ever change regarding fraud. In cases like this, the public is always looking for someone to blame and it is easiest to blame the auditors involved. What the public does not understand is that we do not audit for fraud, an auditor’s job is to perform sample tests. Detailed testing would be extremely costly and time consuming and clients would never agree to the extensive testing. Therefore, audit firms should not be held responsible for not detecting fraud during the audit process, nor should they be held responsible for any resulting financial problems.

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