Why Auditors Won’t Find Fraud

The stereotypic understanding of what an auditor does goes something like this. Auditors are like a government agency in that they go into a corporation, have free access to the books and records and have virtual police powers to make sure that all the numbers are right. When the auditor releases their opinion on the company’s financial statements, those numbers and all its attendant disclosures are correct. Why?….

….Because auditors are smart and independent and work in the best interests of the shareholder. If there is something amiss at the company, the auditor will find it because they are trained to find bad guys with pens. Auditors are cops with calculators. Like it or not, the auditor in essence becomes the guarantor of the company’s financial health.
Well, that’s not exactly right….

In reality…
“An auditor is a watchdog, not a bloodhound… As a matter of commercial reality, audits are performed in a client-controlled environment. The client typically prepares its own financial statements; it has direct control over and assumes primary responsibility for their contents…”

“The client engages the auditor, pays for the audit, and communicates with audit personnel throughout the engagement. Because the auditor cannot in the time available become an expert in the client’s business and record-keeping systems, the client necessarily furnishes the information base for the audit. Thus, regardless of the efforts of the auditor, the client retains effective primary control of the financial reporting process.”

Bily v. Arthru Young & Co.

Posted in Seminars & Speeches.