The role of auditors in fighting fraud

Corporate fraud remains a growing threat to every type of organisation, costing global business $5 trillion annually, according to the Financial Cost of Fraud 2021 report. Trust in businesses and other institutions has been on a steady decline for decades, and reports of fraud could continue to erode it. As business leaders look to shepherd their organisations into the new normal following Covid-19, trust may be a critical factor to accelerate recovery and regain customers.

Company directors, of course, are primarily responsible for the prevention and detection of fraud, but audit can also come in as a key tool to help restore trust.

In the Middle East, issues relating to fraud and corruption are of concern because of the lack of anti-fraud legislation in place. PwC’s Global Economic Crime and Fraud Survey 2020 found that corporate fraud was on the rise across the region, with nearly half of all Middle Eastern companies reporting at least one occurrence in 12 months.

The UAE is leading the region in terms of corporate governance and transparency, according to Transparency International. The country is also making great strides in boosting its financial services sector. For example, the Dubai International Financial Centre (DIFC) was established in 2004 in a bid to create a safe and enhanced regulatory environment for companies to do business. Similar financial business districts have been developed in Abu Dhabi, via the Abu Dhabi Global Market, in Saudi Arabia via the King Abdullah Financial District and in Qatar with the Qatar Financial Centre.

How auditors can help fight fraud

By following international standards on auditing, which are published by the International Auditing and Assurance Standards Board, auditors can provide better reporting to businesses and enhance the quality of their audits.

Auditors alone cannot prevent fraud, but they help enhance trust in financial statements and take certain steps where they suspect that irregularities may have occurred. Auditors have a duty to report fraud, and their findings could lead to investigations by management or law enforcement authorities.

It’s essential that auditors look routinely beyond the numbers in company accounts. As experts in financial reporting, the work of auditors involves interacting with many different personalities. They can observe how people respond to challenge and gain a first-hand experience of company culture. Their privileged exposure to an organisation, its culture and people, should be harnessed when testing for the existence of fraudulent financial reporting. They can use behavioural and cultural insights to help companies identify areas that may be vulnerable to fraud, ultimately helping to prevent it, or detect it if it has already occurred. This means paying particular attention to, for example:

• Organisational culture – how do people behave and communicate in the business?
• Management style – what tone is set at the top?
• Motivations and pressures – what factors might drive individuals to manipulate the numbers?
• Behavioural controls – how does the organisation promotes a culture of honesty and openness?

Read: How chartered accountants can play a key role in the fight against climate change

Fraud has always existed and is always likely to. However, the inevitability does not mean we should accept it, more that organisations and auditors must be constantly vigilant and innovative in their approach to combatting it. Auditors must remain professionally sceptical and be alert for inaccurate or misleading information. The global crisis presents an opportunity to lead with trust, and doing so will better prepare organisations to maintain business continuity, to learn, emerge stronger, and thrive.

Michael Armstrong is the FCA and ICAEW regional director for the Middle East, Africa and South Asia (MEASA)