The Center for Audit Quality is partnering with three other organizations to develop ways to deter and detect financial reporting fraud.

The CAQ is teaming up with Financial Executives International, the Institute of Internal Auditors and the National Association of Corporate Directors. They plan to concentrate on four main initiatives: advancing the understanding of conditions that contribute to fraud, developing techniques to enhance the application of skepticism, moderating the risks of focusing only on short-term results, and leveraging the role of technology in deterring and detecting financial reporting fraud.

The CAQ has also produced a report, “Deterring and Detecting Financial Reporting Fraud — A Platform for Action,” which includes input and research from other groups, such as the Association of Certified Fraud Examiners. “We view them as key partners in the war on fraud,” said CAQ executive director Cindy Fornelli during a press conference.

The CAQ conducted a series of roundtable discussions and interviews with board directors, audit committee members, internal auditors, investors, regulators, academics, and others. The report offers the perspectives of more than 100 roundtable participants, as well as insights gained from research and guidance on the topic of fraud.

The report highlighted a “fraud triangle” of three conditions typically connected to financial reporting fraud: pressure or incentive, opportunity and rationalization. Michele Hooper, co-vice chair of the CAQ’s Governing Board, who led the initiative, said there were three main ways to mitigate the fraud triangle: “a strong, highly ethical tone at the top that permeates the corporate culture; skepticism — a questioning mindset that strengthens professional objectivity on the part of financial reporting supply chain participants; and strong communication among supply chain participants.”

Fornelli said the CAQ hopes to work together with the other groups to reduce the risk of fraud, which if undetected can lead to a loss of confidence in financial markets, losses in shareholder value, and, in some cases, company bankruptcies.

“The CAQ report recognizes the central conditions within a company that can lead to fraud: pressure or incentive, opportunity, and rationalization,” said FEI president and CEO Marie Hollein in a statement. “Most importantly, this eye-opening report addresses the responsibilities of management and preparers in fraud prevention. Ethical leadership is a key component of FEI’s mission, and we are pleased to partner with the CAQ to educate companies on how they can effectively take action against fraud.”

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