Anti-fraud groups stress professional skepticism

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The Anti-Fraud Collaboration — a group of organizations including the Center for Audit Quality, Financial Executives International, the National Association of Corporate Directors and the Institute of Internal Auditors — has released a new report on the importance of professional skepticism by auditors and finance professionals.

The report, “Skepticism in Practice,” discusses the importance of critically assessing potential fraud risks and being aware of some of the biases that can leave organizations exposed to criminal activities.

One of the most effective ways of safeguarding against fraud is giving a skeptical view to the representations of others when it comes to financial reporting. Many of those involved in financial reporting believe their organizations tend to have more trust than skepticism when it comes to deterring and detecting financial statement fraud. The report recommends having a healthy dose of skepticism.

“Oftentimes, we view the activities of others through the lens of our own experiences and biases,” said IIA president and CEO Richard Chambers in a statement Monday. “As a result, we may not recognize the potential these biases have in our ability to fully consider those activities and identify potential problems. That’s where skepticism comes in. It allows us to avoid being blindsided, and to not simply accept certain practices as appropriate. Importantly, skepticism helps us to root out fraud.”

Exercising the appropriate level of professional skepticism takes some time and training, and it’s important to strike the right balance, according to the report. The paper recommends some ways to shift organizations toward a better balance between trust and skepticism.

“This report emphasizes the importance of all members of the financial reporting supply chain to not only be aware of unintended biases that may exist, but also to recognize the potential impact that these biases can have on their ability to exercise skepticism,” said FEI president and CEO Andrej Suskavcevic in a statement. “And like unconscious biases, new technologies can pose a threat to skepticism that’s easily overlooked. The very fact that emerging technologies are greeted with great fanfare and anticipation reinforces the importance of maintaining skepticism in considering the information they deliver — or conceal.”

An important part of effective skepticism is asking tough questions, particularly during a crisis when there may be efforts to show success where none may exist.

“To emerge successfully from a crisis, it is crucial to focus on both good and bad outcomes,” said NACD CEO Peter Gleason in a statement. “When faced with surprising results, leaders should ask how an individual or a business unit got such phenomenal results. One solid piece of advice in this paper is to assume nothing, and check everything.”

The report recommends following two main steps for deterring and detecting fraudulent activity: recognize the limits of your own objectivity and don’t jump to conclusions. Auditors and finance professionals should look for any additional, possibly contradictory, information. They should look beyond the obvious or even what their gut is telling them (which can be simply a matter of confirmation bias), and they shouldn’t hesitate to seek more information to confirm and reconfirm their initial findings.

That’s especially important during the current coronavirus pandemic, when so many auditors and finance teams are working remotely and have access to sensitive financial information any time of the day and night, without their co-workers around.

“COVID-19 and the resulting remote-work environment are heightening the risk of fraud at public companies,” said CAQ executive director Julie Bell Lindsay in a statement. “Strong fraud detection and deterrence requires all participants in the reporting system — especially public company management, whose ultimate responsibility it is to design and implement controls to deter and detect fraud, but also audit committees, internal auditors and the external auditors — to exercise skepticism.”

The report is available here. There’s also a video where IIA CEO Chambers and Margot Cella, vice president of research and anti-fraud initiatives at the CAQ, discuss the role of skepticism in deterring and detecting fraud, how to effectively practice and improve professional skepticism, and some steps to overcome the challenges of the COVID-19 pandemic.

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Fraud Fraud prevention Audits IIA FEI CAQ Richard Chambers