How a pandemic could potentially increase the likeliness of fraud
Looking at how we are going to audit remotely and work remotely, we must think what in this new environment can be manipulated so that we miss a fraud?
We have seen this story in several cycles, many emerging during a downturn. The large frauds have been going on for several years. When they economy is good, and cash is accessible – either through equity or debt financing, it is easier to continue to perpetrate financial fraud. When you have a downturn in the economy and those cash capabilities tighten up – that’s when frauds begin to unravel – fraud relies on continued access to capital.
When you have a tightening of the economy such as 2000-2001, 2009 -2011 and today, that is when frauds come to light due to reduced capital. There will likely be an increase in frauds that come to light over the next 18-24 months as founder of Confirmation, Brian Fox discussed in this CNN article.
Take Wirecard and Luckin Coffee for example – two high-profile frauds that provoked much discussion:
Wirecard: The German payments company, Wirecard revealed auditors could not trace €1.9bn supposedly held in escrow accounts at two Asian banks. Wirecard claimed that the cash probably does “not exist”. Regulators, including the German banking regulator were slow to act and in fact primarily focused their enquiries into the whistle-blowers and short sellers of Wirecard stock, rather than Wirecard themselves.
Luckin Coffee: Expanded to take on Starbucks in China and attracted big-name investors like Blackrock and Singapore’s sovereign-wealth fund. On April 2, the Nasdaq-listed Chinese chain announced an ongoing internal probe amid allegations that its chief operating officer and other employees may have fabricated over 2bn yuan ($280m) in sales.
What auditors need to know and how they can prepare for the unexpected
Auditors have a significant part to play in fraud detection and firms need to get serious about their responsibility in finding fraud, especially in current remote working conditions.
At a recent webinar hosted by Inflo and Confirmation, this sentiment was reflected by the audience, with 62% of them agreeing that auditors should have a greater responsibility in detecting fraud.
Firms should be looking at their technology – fraudsters are some of the earliest adopters of technology, looking to stay one step ahead of authorities and auditors. Firms need to look at tools that can be used to strengthen controls.
The full discussion can be found on our Is technology that targets fraud the future of audit article.