CAPE TOWN - A new auditing standard has been introduced to prevent auditors from not applying an appropriate level of professional scepticism when they encounter anomalies in accounts.
South African Institute of Chartered Accountants Assurance project director Hayley Barker Hoogwerf said yesterday that the response of some auditors to anomalies was often that the amounts were not material, and were not investigated further, which may well be an area where auditors were going wrong.
However, experience showed perpetrators of fraud started out committing small acts of fraud to test the system, then expanded on these activities once they realised it had gone undetected.
The anomaly needed to be nipped in the bud at the early stages of the fraud, and auditors should report all errors or fraud risk factors to management regardless of how small they may be, so management could take necessary actions, Barker said.
“Fraud is often overlooked,” Barker said. “Such evidence may include alterations of documents, concealment or destruction of evidence, obstruction of justice, a pattern of conduct in terms of repetition of certain behaviour, personal gain as evidenced by lifestyle, and false statements.”
Fraud has become a pandemic around the world and is likely to get worse during the Covid-19 pandemic, certified fraud examiner Mario Fazekas said during a recent webcast which dealt with auditors’ responsibilities relating to fraud and a new accounting standard relating to this.
International Standard on Auditing 240 (ISA 240) states that misstatements in the financial statements can arise from either fraud or error, with the distinguishing factor being intent. ISA 240 now focuses the auditor’s attention on fraud that causes a material misstatement.
The Association of Certified Fraud Examiners had identified five main categories of financial statement fraud schemes: Timing differences, where the accounting period was kept open longer than it should and revenue ‘stolen’ from other reporting periods; fictitious revenue by way of fictitious transactions; concealed liabilities and expenses; improper asset valuation, and improper disclosures where for example related party transactions were not disclosed or incomplete.
Sam Antar, former chief financial officer of US consumer electronic firm Crazy Eddie, former CPA and convicted felon, said in the webcast: “As a criminal, I feared two things, scepticism and cynicism.”
Auditors should assume neither honesty nor dishonesty of clients and be neutral in recognising the possibility of material misstatement due to fraud. “The attitude or mind-set is where auditors are going wrong in that auditors are overly concerned with their clients’ reactions to the auditors’ actions,” he said.
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