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Discover how to combat financial fraud effectively with the Anti-Fraud Collaboration and the CAQ. Our resources emphasize four crucial themes in fraud prevention: promoting skepticism, fostering an ethical culture, risk management, and utilizing emerging technologies. Learn to detect and deter fraud more proficiently with our comprehensive guides and resources.

The Role of the Auditor: Assessing and Responding  to Fraud Risk provides insights into practices, tools, and considerations that can help auditors, especially those with less experience, enhance their professional skepticism and overall approach to assessing and responding to...

The Role of the Auditor: Assessing and Responding  to Fraud Risk

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Anti-Fraud

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Andi McNeal, CFE, CPA and Dennis McGowan, CPA

Introduction
In March 2024, the Association of Certified Fraud Examiners (ACFE) released Occupational Fraud 2024: A Report to the Nations (report). The cases in this report were submitted by Certified Fraud Examiners (CFEs) throughout the world who each responded to the...

<h3>Introduction</h3>
In March 2024, the Association of Certified Fraud Examiners (ACFE) released <a href="https://www.acfe.com/-/media/files/acfe/pdfs/rttn/2024/2024-report-to-the-nations.pdf">Occupational Fraud 2024: A Report to the Nations</a> (report). The cases in this report were submitted by Certified Fraud Examiners (CFEs) throughout the world who each responded to the ACFE’s 2023 Global Fraud Survey, answering a detailed questionnaire with 86 questions about one fraud case they investigated between January 2022 and September 2023. Drawing from 1,921 occupational fraud cases investigated by CFEs, this 13th edition of the ACFE’s study presents statistical analyses related to the methods used to commit, detect, and prevent occupational fraud, as well as the fraud perpetrators, the organizations they victimized, the losses those organizations suffered, and their responses to the frauds.

In this blog, we explore what this report means for all stakeholders with a responsibility for fighting fraud. 
<h3>Checks and balances</h3>
Before diving into the report, it is important to understand the system of checks and balances in our U.S. capital markets. In a recent <a href="https://thecaq.wpenginepowered.com/wp-content/uploads/2023/11/caq_perspectives-on-corporate-reporting-the-audit-and-regulatory-environment_2023-11.pdf">survey</a> conducted by the Center for Audit Quality (CAQ), we found that investors have an overall positive view of corporate reporting in the U.S. – believing that the system of checks and balances that is in place delivers reliable information. This has not always been the case. In the early 2000s, public confidence in the U.S. capital markets was notably undermined. A series of significant frauds at large public companies resulted in corporate giants like Enron and WorldCom collapsing, with devastating losses for employees and investors. In the wake of these calamities, there was public debate to understand what went wrong and what needed to be done to restore public confidence in our capital markets and protect investors.

The result was definitive legislative action that resulted in the near unanimous approval of the Sarbanes-Oxley Act of 2002 (SOX). These provisions recognized that audit quality was not solely the responsibility of auditors, and that no one stakeholder in the U.S. financial reporting ecosystem alone could produce both high-quality financial reporting and high-quality audits. Rather, it takes regulators, company management, audit committees, and external auditors all working in concert. Over two decades since its passage, SOX is recognized around the world for its effectiveness in promoting trusted financial reporting and high-quality audits.

[custom_quote text="A series of significant frauds at large public companies resulted in corporate giants like Enron and WorldCom collapsing, with devastating losses for employees and investors."]
<h3>Fighting fraud takes everyone</h3>
High-quality financial reporting and high-quality audits depend on all stakeholders in the financial reporting ecosystem. Similarly, protecting companies and investors from fraud requires the collective effort of all stakeholders. Gurbir Grewal, Director of the Securities and Exchange Commission (SEC) Division of Enforcement has stated that “restoring trust requires more than SEC enforcement actions. We must all work together to ensure companies are following the rules. […] When gatekeepers are living up to their obligations they serve as the first lines of defense against misconduct.”1
<h3>Fraud detection</h3>
In the ACFE’s 2024 Report to the Nations, the most common way a fraud came to light was through a tip from a whistleblower (43% of cases). The next two most common sources of fraud detection were internal audit (14%) and management (13%). External auditors detected fraud in 3% of the cases in the ACFE’s study. Some may look at this statistic and question whether auditors are fulfilling their responsibility to detect a material misstatement as a result of fraud. As CPAs, we know how much effort our profession puts forth to fulfill their professional responsibilities, including designing and executing audit procedures that are responsive to the assessed risks of material misstatement from fraud. We also know that even the highest-quality audits are only one component of a comprehensive anti-fraud program. In fact, external auditors are the last line of defense in many cases, due to the timing and scope of their engagements. So, to us, 3% of fraud cases being detected by external audit means that our system of checks and balances is working. In other words, a number much higher than 3% would mean companies are not taking the layered, proactive steps necessary to prevent and detect frauds.

[custom_quote text="As CPAs, we know how much effort our profession puts forth to fulfill their professional responsibilities, including designing and executing audit procedures that are responsive to the assessed risks of material misstatement from fraud."]
<h3>Active fraud detection methods</h3>
To further explore the role and effectiveness of various fraud detection mechanisms, the ACFE report analyzes the median loss and duration of frauds based on how they were uncovered. Their findings emphasize that proactive fraud detection efforts are essential to protecting against fraud risk in general. Active detection methods — such as thorough management review, account reconciliation, and surveillance/monitoring — are associated with much faster detection and much lower fraud losses than passive detection methods (e.g., the perpetrator confessing, or the victim being notified of the fraud by law enforcement). Organizations can dramatically reduce the impact of fraud by implementing internal controls and policies that actively detect fraud.

With active detection methods being so critical to early detection, companies have invested billions of dollars in systems to support strong fraud risk management programs that include internal controls and policies to achieve that goal. According to one report, companies spent up to $44 billion globally on fraud detection and prevention programs in 2023.2 As the ACFE report shows, programs that support internal parties detecting fraud — whether through employee tips, management review, or internal audit — increase the likelihood that the fraud will be detected sooner and minimize the losses incurred. When the external auditor is the one identifying the fraud, it often means the early detection methods have not worked, and it is likely the fraud has gone on for a longer duration, resulting in higher losses to the company and ultimately investors.
<h3>A closer look at frauds detected by the external auditor</h3>
New in this year’s study, survey respondents who selected that the fraud was detected by the external auditors were asked, “Through which audit procedure(s) did the external auditors first discover the fraud?”

<img class="alignnone size-full wp-image-15096" src="https://www.thecaq.org/wp-content/uploads/2024/06/2024_06_Fighting-Fraud-Chart-1.png" alt="" width="561" height="325" />
<h3>Standard audit procedures</h3>
More than half (58%) of the respondents where the fraud case was identified by the external auditor noted that the fraud was detected though standard audit procedures. Maintaining professional skepticism throughout the audit helps auditors remain vigilant to indicators of a possible misstatement due to fraud. The evidence that auditors gather throughout the audit does not always corroborate the anticipated results or available information. Disconfirming evidence obtained might also provide reasons to question the results or information. Check out this resource, <a href="https://caqantifraprod.wpenginepowered.com/wp-content/uploads/2022/02/afc_skpeticism-in-practice_2020-09.pdf">Skepticism in Practice</a>, from the Anti-Fraud Collaboration (AFC) to learn more about maintaining professional skepticism.

[custom_quote text="The evidence that auditors gather throughout the audit does not always corroborate the anticipated results or available information. "]
<h3>Fraud inquiries</h3>
The next most common way external auditors discovered frauds was through fraud inquiries (33%). Auditors should approach fraud inquiries with professional skepticism and consider ways to enhance their inquiries.
<ul>
 	<li>Consider who should be part of the fraud inquiry. Some research <a href="https://www.journalofaccountancy.com/news/2023/jan/auditing-best-practices-what-academic-fraud-research-reveals.html">suggests</a> that fraud inquiries conducted by two auditors can influence deceptive members of management to talk more freely and perhaps make them more likely to reveal information related to fraud.</li>
 	<li>Consider when to conduct the inquiry. There is research that <a href="https://www.journalofaccountancy.com/news/2023/jan/auditing-best-practices-what-academic-fraud-research-reveals.html">suggests</a> interviewees are more likely to “let their guard down” in inquiries that take place later in the afternoon when they are tired.</li>
 	<li>Consider resources available on common fraud schemes to enhance the auditor’s assessment of fraud risk, which can also assist the auditor in designing and performing fraud inquiries responsive to those common fraud schemes. In addition to the ACFE’s <a href="https://www.acfe.com/-/media/files/acfe/pdfs/rttn/2024/2024-report-to-the-nations.pdf">Occupational Fraud 2024: A Report to the Nations</a>, auditors can look to <a href="https://caqantifraprod.wpenginepowered.com/wp-content/uploads/2021/06/afc-mitigating-the-risk-of-common-fraud-schemes-2021-01.pdf">Mitigating the Risks of Common Fraud Schemes: Insights from SEC Enforcement Actions</a> from the AFC, which analyzes 531 accounting and auditing enforcement action releases (AAERs) related to financial statement frauds. This study provides observations on higher-risk areas susceptible to common fraud schemes.</li>
</ul>
<h3>The value of audits in the fraud landscape</h3>
In addition to examining how frauds were detected, the ACFE report explores the anti-fraud controls that were in place at the victim organization when the fraud occurred. External audits of the financial statements were the second most common anti-fraud control (84% of cases), surpassed only by a code of conduct (85% of cases). The ACFE also took a closer look at how the presence or absence of various anti-fraud controls related to the median loss and duration of the frauds in their study. Organizations that included external audits as part of their anti-fraud programs had losses that were 52% smaller and caught frauds twice as fast as organizations that did not undergo audits. This further reinforces the value of high-quality audits as part of a comprehensive approach to managing fraud risk.

<img class="alignnone size-full wp-image-15097" src="https://www.thecaq.org/wp-content/uploads/2024/06/2024_06_Fighting-Fraud-Chart-2.png" alt="" width="405" height="138" />
<h3>Conclusion</h3>
The AFC is dedicated to advancing the discussion of critical anti-fraud efforts and developing resources focused on enhancing the effectiveness of financial fraud risk management. The ACFE’s <a href="https://www.acfe.com/-/media/files/acfe/pdfs/rttn/2024/2024-report-to-the-nations.pdf">report</a> is a valuable tool to understand fraud that has been perpetrated, how it was detected, and the ultimate impact of the fraud schemes. We agree with Paul Munter, SEC Chief Accountant, Office of the Chief Accountant, who has <a href="https://www.sec.gov/news/statement/munter-statement-fraud-detection-101122">stated</a>, “Auditors are gatekeepers and therefore the importance of their responsibilities with respect to the identification of risks of material misstatement due to fraud and the detection of material misstatements in the financial statements due to fraud should not be underestimated.” This year’s ACFE report confirms that external auditors do identify fraud. It also confirms that companies with active and holistic programs to detect instances of fraud can minimize the duration and losses of fraud. All stakeholders can benefit from understanding the findings in the ACFE’s report and what it means for their role in fighting fraud.

&nbsp;

<hr />

Endnotes
<h6>1. See <a href="https://www.sec.gov/news/speech/grewal-sec-speaks-101321">SEC.gov | Remarks at SEC Speaks 2021</a>.</h6>
<h6>2. See <a href="https://www.fortunebusinessinsights.com/industry-reports/fraud-detection-and-prevention-market-100231">Fraud Detection and Prevention Market Growth Report [2030] (fortunebusinessinsights.com)</a>.</h6>

Fighting Fraud: A Shared Responsibility

Blog Post

We are pleased to submit the attached comment letter written in response to the PCAOB’s reopening of the comment period on its proposed Amendments to PCAOB Auditing Standards related to a Company’s Noncompliance with Laws and Regulations and Other Related...

We are pleased to submit the attached comment letter written in response to the PCAOB’s <a href="https://pcaobus.org/news-events/news-releases/news-release-detail/pcaob-to-host-virtual-roundtable-on-noclar-proposal-reopen-comment-period-until-march-18">reopening of the comment period</a> on its <a href="https://assets.pcaobus.org/pcaob-dev/docs/default-source/rulemaking/docket-051/pcaob-release-no.-2023-003---noclar.pdf?sfvrsn=fe43e8a_2&amp;utm_source=PCAOB+Email+Subscriptions&amp;utm_campaign=98790bd37a-EMAIL_CAMPAIGN_2019--forums2019_COPY_01&amp;utm_medium=email&amp;utm_term=0_c97e2ba223-98790bd37a-125440512">proposed Amendments to PCAOB Auditing Standards related to a Company’s Noncompliance with Laws and Regulations and Other Related Amendments</a> and related <a href="https://assets.pcaobus.org/pcaob-dev/docs/default-source/news/events/noclar-roundtable/noclar-roundtable-briefing-paper.pdf?sfvrsn=6a0fd9a2_3">roundtable briefing paper</a>. 

This comment letter is a supplement to the <a href="https://assets.pcaobus.org/pcaob-dev/docs/default-source/rulemaking/docket-051/91_caq.pdf?sfvrsn=7aea0318_6">letter</a> that we submitted on August 7, 2023. We continue to echo the comments and concerns raised in that comment letter. In this letter we provide the following: <span data-ccp-props="{&quot;134233117&quot;:false,&quot;134233118&quot;:false,&quot;201341983&quot;:0,&quot;335551550&quot;:6,&quot;335551620&quot;:6,&quot;335559738&quot;:0,&quot;335559739&quot;:0,&quot;335559740&quot;:240}"> 
<ul>
 	<li data-leveltext="" data-font="Symbol" data-listid="6" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1">Data we have compiled and analysis we have completed subsequent to our August 7, 2023, comment letter;  <span data-ccp-props="{&quot;134233117&quot;:false,&quot;134233118&quot;:false,&quot;201341983&quot;:0,&quot;335551550&quot;:6,&quot;335551620&quot;:6,&quot;335559738&quot;:0,&quot;335559739&quot;:0,&quot;335559740&quot;:240}"> </li>
 	<li data-leveltext="" data-font="Symbol" data-listid="6" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1">Alternatives to the proposed requirements that should form the basis for further outreach and consultation by the PCAOB; and <span data-ccp-props="{&quot;134233117&quot;:false,&quot;134233118&quot;:false,&quot;201341983&quot;:0,&quot;335551550&quot;:6,&quot;335551620&quot;:6,&quot;335559738&quot;:0,&quot;335559739&quot;:0,&quot;335559740&quot;:240}"> </li>
 	<li data-leveltext="" data-font="Symbol" data-listid="6" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1">Observations from the March 6, 2024 virtual roundtable.  <span data-ccp-props="{&quot;134233117&quot;:false,&quot;134233118&quot;:false,&quot;201341983&quot;:0,&quot;335551550&quot;:6,&quot;335551620&quot;:6,&quot;335559738&quot;:0,&quot;335559739&quot;:0,&quot;335559740&quot;:240}"> </li>
</ul>
As reflected in the results of the additional data we have compiled and analysis we have completed, and based on our observations from the roundtable, there is a wide range of views with respect to where enhancements are needed in the area of NOCLAR, as well as with respect to the proposed requirements. Given the range of perspectives on current practice and the opportunities for enhancement through a revision to the standards, continued multi-stakeholder dialogue is needed so that all impacted stakeholders have clarity on objectives, expectations, and responsibilities. Additionally, in our view, the PCAOB has not yet demonstrated that they have sufficiently studied the costs and benefits of, and the alternatives to, the proposed requirements. Further study and evaluation are needed.  

We believe that the significant and substantial nature of the changes that are likely needed to the NOCLAR proposal warrants re-exposure. We believe that an additional investment of time is needed to ensure that the effects of any changes made, including any downstream effects, are fully understood and consistently interpreted, as well as to ensure the purpose of the standard and expected changes to auditor behavior are clearly understood, that it is capable of being consistently implemented, and that it will ultimately benefit investors.  

Read the full comment letter <a href="https://www.thecaq.org/wp-content/uploads/2024/03/caq_pcaob_NOCLAR_2024-03.pdf">here</a>.

Comment Letter | PCAOB: AS 2405, A Company’s Noncompliance with Laws and Regulations

Comment Letter

Transparency and accountability are pillars of effective public policy development. Unfortunately, the roundtable that the PCAOB held this week on its proposal related to company noncompliance with laws and regulations (NOCLAR) failed to live up to these principles. Specifically, the...

Transparency and accountability are pillars of effective public policy development. Unfortunately, the roundtable that the PCAOB held this week on its proposal related to company noncompliance with laws and regulations (NOCLAR) failed to live up to these principles. Specifically, the roundtable failed to address the concerns outlined in 78% of the comment letters the PCAOB received, including from those investors, audit committee members, auditors, academics and others who are concerned with the PCAOB’s proposal.  

“Today’s NOCLAR roundtable was a missed opportunity for the PCAOB to further understand the views highlighted in numerous comment letters from engaged stakeholders,” said Julie Bell Lindsay, Chief Executive Officer, CAQ. “Not only did the roundtable surface disagreement as to the actual scope or intention of the proposal, but we are concerned that the lack of diverse stakeholder representation – particularly from investors and audit committees, two important audiences – resulted in dialogue that did not meaningfully address stakeholder concerns. Given the discussion at the roundtable, we believe that the appropriate response is to re-propose the standard, with an economic analysis, to begin to address these concerns.”

Statement on the PCAOB’s NOCLAR Roundtable Event

Statements

Understanding how consumers perceive and utilize financial and non-financial corporate information is crucial for promoting transparency, trust, and stability in financial markets. To address this, the Center for Audit Quality (CAQ) is engaging investors to understand their attitudes on assurance...

Understanding how consumers perceive and utilize financial and non-financial corporate information is crucial for promoting transparency, trust, and stability in financial markets. To address this, the Center for Audit Quality (CAQ) is engaging investors to understand their attitudes on assurance and corporate reporting issues specific to U.S. capital markets.

To reach a broad range of institutional investors, the CAQ has partnered with KRC Research, a global public opinion research consultancy, to conduct independent quantitative and qualitative field work involving a diverse group of investor community stakeholders. Two reports released in 2023 offered qualitative insights into institutional investors’ beliefs, concerns, and expectations regarding corporate reporting in the U.S.

Throughout 2024, KRC Research will conduct quarterly quantitative surveys on topics of interest to investors based on previous research findings. <a href="https://www.thecaq.org/wp-content/uploads/2024/02/caq_institutional-investor-survey-q1-2024_2024-02.pdf">This resource</a> presents results from KRC’s Q1 2024 survey, focusing on noncompliance and fraud.

The Q1 survey research was conducted online from January 29-31, 2024 among 104 institutional investors. Qualified respondents were screened to ensure they are professional investors employed at companies with a minimum of $500M in assets under management, are in decision-making positions, and manage U.S.-focused portfolios. Detailed information of survey respondents can be found in the appendix.

<a class="button" href="https://www.thecaq.org/wp-content/uploads/2024/02/caq_institutional-investor-survey-q1-2024_2024-02.pdf">Read the survey</a>

Institutional Investor Survey | Research Findings, Q1 Survey

Company Management

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The Association of Certified Fraud Examiners

In the continued pursuit of reducing fraud worldwide, the Association of Certified Fraud Examiners (ACFE) has joined the Anti-Fraud Collaboration (AFC) as its newest member. This milestone and strategic partnership will strengthen shared goals of both organizations and provide resources...

In the continued pursuit of reducing fraud worldwide, the Association of Certified Fraud Examiners (ACFE) has joined the Anti-Fraud Collaboration (AFC) as its newest member. This milestone and strategic partnership will strengthen shared goals of both organizations and provide resources that support efficient and effective financial fraud risk management programs across all industries. 

<img class="size-full wp-image-14232 aligncenter" src="https://thecaq.wpenginepowered.com/wp-content/uploads/2024/01/ACFE-AFC_Logos.jpg" alt="AFC Logos" width="1000" height="150" />

First formed in 2010 by the Center for Audit Quality (CAQ), Financial Executives International (FEI), The Institute of Internal Auditors (IIA) and the National Association of Corporate Directors (NACD), the Anti-Fraud Collaboration is committed to protecting companies from fraud through the development of anti-fraud resources and thought leadership to help educate members of the financial reporting ecosystem. The AFC believes that every member of the financial reporting supply chain plays a critical role in detecting and deterring fraud. The AFC focuses on anti-fraud policies and procedures, controls, emerging technology, regulatory matters and enforcement updates, and more as the global fraud ecosystem continues to evolve. 

The ACFE offers a leading-edge professional certification, year-round events and training, and research capabilities that support the world’s largest association of anti-fraud professionals. More than 90,000 ACFE members around the world include CPAs, auditors, investigators, law enforcement officers, security professionals and more who work to prevent, detect and deter occupational fraud. This global community includes more than 60,000 active Certified Fraud Examiners (CFEs) who earned their credential by demonstrating expertise in four major disciplines that comprise fraud examination: financial transactions and fraud schemes; law; investigation; and fraud prevention and deterrence. 

Together, AFC partners share the responsibility of maximizing utilization and impact of the Collaboration’s resources across fraud deterrence, detection and risk assessment initiatives. 

Recent resources created by the Collaboration include the “<a href="https://antifraudcollaboration.org/category/priorities/technology/">Fraud and Emerging Tech Series</a>,” an on-going spotlight of the drivers and disruptors behind the rapid digitalization of financial reporting, audit and fraud risk management programs. In addition to addressing the current landscape, the Collaboration created “<a href="https://antifraudcollaboration.org/designing-and-executing-a-strong-fraud-risk-management-program/">Designing and Executing a Strong Fraud Risk Management Program</a>“ to provide guidelines for implementing a robust and effective fraud risk management program. 

The Collaboration plans to release several new resources in 2024 focused on culture and emerging technologies, as well as highlight key findings from the ACFE’s biennial research study as a part of this new partnership, Occupational Fraud 2024: A Report to the Nations.

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