One of the oldest debates in auditing is around a firm’s responsibility to detect fraud. In general, auditing firms and their ilk say that responsibility is limited while regulators, investors, and investor advocates argue that the duty is broader. Auditing firms like to talk about the “expectations gap”; that is, the difference between the scope of a compliant audit versus what most people — people with varying degrees of understanding — believe the scope of an audit should be. Firms like to talk about the expectations gap because it’s helpful in managing liability. Sure, they have a “responsibility to the public” but that becomes pretty inconvenient inside a courtroom, so they talk about the expectations gap to try convincing people that their “responsibility to the public” is just within the confines of accepted auditing standards.
Everyone knows the auditing firms’ go-to explanation. And guess what. No one buys it! Here’s a guy:
“The bottom line is that if there’s fraud and the auditor did not discover the fraud, there’s a 99 percent chance that the auditor will be sued,” said Ralph Summerford, president of Forensic Strategic Solutions, a financial investigation firm that specializes in fraud examination. “It’s not just the large firms, but also the small firms.”
One correction: There’s a 100 percent chance that the auditor will be sued. Big audit firms have lots of money to defend themselves against suits, so they’ll continue to do so, but they’d be better off if they’d just drop the act and get on board with detecting fraud. Why? Well, for one thing, technology is getting fancy.
“In large volumes of data, computers are really good at picking out irregularities,” said Strayer. “We are really good at distinguishing the lion tail above the grass on the savanna, but we’re less good at seeing patterns. Computers are extremely good at seeing patterns and finding patterns. When we’re dealing with these huge volumes and you’re looking for ongoing fraud and ongoing inconsistencies and irregularities, the current technology is really great at identifying those trends.
That’s Adam Strayer of BDO, one of the largest accounting firms in the world. The technology is real, and it’s being used all the time, probably right this very second, in fact, because it doesn’t need sleep and doesn’t complain. And yes, it’s better at auditing than you, I and even anyone who really loves auditing could ever hope to be.
I have no idea when or if auditing standards will ever catch up to this fact, but maybe it could be helpful in moving beyond a hackneyed conversation.
Okay, this is dumb, but here’s a Deloitte press release about the firm hiring Robert Stack and now I can’t get the Unsolved Mysteries host’s creepy voice out of my head. The Deloitte Robert Stack joined the firm from Treasury where he was serving as deputy assistant secretary for international tax affairs. If I were him, I’d prompt all my staff with, “Perhaps you may be able to help solve an international tax mystery.”
Former Big 4 CEOs, where are they now?
Erstwhile Deloitte CEO Jim Quigley is in a letter written by Senator Elizabeth Warren to the Federal Reserve, calling for the removal of him and 11 other Wells Fargo board directors. So that’s something.
Previously, on Going Concern…
I mentioned the incredibly good fortune that Whole Foods’s CFO has. That guy must’ve done something right somewhere along the line. In Open Items: Big 4 First Year – Getting Fired.
In other news:
- Britain charges Barclays, ex-bosses over “unlawful” Qatari deal
- FTC to Sue to Block Merger of Fantasy Sports Sites DraftKings and FanDuel
- Millennials Are Helping America Save More Money
- Conglomerates Didn’t Die. They Look Like Amazon.
- Phoenix flights cancelled because it’s too hot for planes
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