As a result of the Sarbanes-Oxley Act and other reforms, a variety of structures and procedures were put into place to try to prevent or detect fraud. A number of these reforms involve auditors and the audit profession, in the implicit assumption that auditors have an important role to play in preventing and detecting corporate fraud. But a recent Grant Thornton survey (here) shows that many CFOs still do not feel constrained by their auditors’ oversight, notwithstanding the reform measures.
Given the inherent limitations of any outside party to discover the presence of fraud, the restrictions governing the methods auditors are allowed to use, and the cost constraints of the audit itself, this presumption is not aligned with the current auditing standards.
The accounting leaders’ frustration is palpable; they apparently recognize, as do the CFOs that responded to the Grant Thornton survey, that management bent on misrepresenting their company’s financial condition can conceal the misrepresentations from the auditors. But the reason there is nonetheless an expectations gap is that investors and others do rely, as they must, on company’s audited financial statements. Merely naming the problem as an expectations gap, or citing the limitations of current auditing standards, does not address the problem, which is that investors and others rely on the audited financial statements in ways the auditors apparently wish they wouldn’t or believe they shouldn’t. It almost seems as if the auditors’ message to those who would rely on financial statements is – don’t (or, at least, not so much).
It is nevertheless a significant concern that nearly two-thirds of CFOs believe they can fool their auditors. And apparently the auditors agree with the general proposition as well. This ought to make anyone who needs must rely on audited financial statements very uneasy.