Collaboration, communication and skepticism amongst members of the financial reporting supply chain are essential to detecting and deterring fraud, explains the new Center for Audit Quality report “Deterring and Detecting Financial Reporting Fraud – A Platform for Action.” The report is the result of CAQ-sponsored roundtable discussions, four of which were conducted in the U.S. with one in London, as well as in-depth interviews with executives, directors, and auditors regarding financial reporting fraud at public companies.
“Those who took part in the discussions agreed that while supply chain participants work to deter and detect financial reporting fraud one company at a time, a collective sharing of ideas and resources could greatly advance efforts to mitigate financial reporting fraud,” CAQ Executive Director Cindy Fornelli explained.
There is no “silver bullet” to completely stop fraud reporting, since “people are clever and will always find ways to get around the rules,” said Michele Hooper, Co-Vice Chair of the CAQ Governing Board. “The theme in the work we’ve done over these two years is that there’s room for improvement across the supply chain.”
The report breaks down the ways to deter and detect fraud into three main categories: having a strong ethical tone at the top levels of the company that fraud is unacceptable, skepticism amongst all members of the financial reporting process, and strong communication and collaboration amongst key participants to understand the risks of fraud and participate in programs to prevent it. With each of these three themes of fraud prevention the report provides guidance for each member of the reporting process, including management, boards and audit committees and internal and external auditors, on how each position can assist in deterring and detecting fraud.
The CAQ has partnered with NACD, Financial Executives International (FEI) and the Institute of Internal Auditors to utilize the findings in this report to educate companies on avoiding reporting fraud. “These organizations already are actively engaged in efforts to mitigate the risk of financial reporting fraud and have offered to leverage their experience and resources in an ongoing collaboration with the CAQ and other interested stakeholders,” said Fornelli.