Among the pandemic’s lingering side effects will almost certainly be financial statement fraud, audit industry leaders warn, calling on management and company directors to be their allies to keep corporate reporting accurate.
“The risk of financial statement fraud at public companies is real, and that risk has only increased during the Covid-19 pandemic,” said Julie Bell Lindsay, executive director of the nonprofit Center for Audit Quality. “The strongest fraud deterrence and detection requires extreme vigilance from all the participants in the financial reporting ecosystem.”
The center, along with a consortium of other market players, looked to recent financial fraud cases for a report released Tuesday offering lessons to guide boards, internal auditors, and external auditors as public companies prepare to release their annual reports in the coming weeks.
Revenue recognition, reserves manipulation, and inventory misstatements were among the most common areas for fraud involved in Securities and Exchange Commission enforcement cases dating from 2014 to 2019, according to the report. Those five years before the pandemic stalled supply chains and shuttered businesses were a period of relative market calm and stability. Still, the SEC brought as many as 204 financial fraud cases during that time, the report said.
Besides the center, which is overseen by leaders of the American Institute of CPAs and eight of the largest accounting firms, the report was produced by the Anti-Fraud Collaboration, which also includes Financial Executives International, the National Association of Corporate Directors, and the Institute of Internal Auditors.
Officials at the SEC and Department of Justice have also urged caution about extra risks related to the pandemic, with the SEC urging companies to clearly describe the impact to their business to investors.
Auditors, too, have taken steps since the beginning of the pandemic to address the heightened fraud risks related to remote workforces, changes in internal controls, and more.
Part of Grant Thornton LLP’s response has been to expand the use of forensic accounting experts to help audit teams identify possible fraud scenarios—added risks that could trigger additional testing and audit work, said Brad Preber, chief executive of the firm, which is one of the largest for U.S. accounting firms.
Training has also been part of the response to help frontline auditors recognize authentic business documents and signatures, conduct video interviews, and spot signs that something is off, he said.
“This is really our way of protecting the public markets by raising awareness about this fraud risk and the responsibility for everyone in the anti-fraud food chain, from the board of directors all the way down to the users of the financial statement, to play their role with enhanced skepticism in this environment so that we can reduce those fraud risks,” Preber said.
Kelly Richmond Pope, an associate accounting professor at DePaul University, said auditors play an important role in detecting fraud, often being the first to spot warning signs that they should flag for corporate leaders to investigate further.
The pandemic’s unique pressures on businesses, from staying within debt covenants to accommodating shifting customer demand, create more opportunity for fraud, but also offer what amounts to a live test of how internal controls and auditor skepticism are working.
“It’s never too late to rethink your approach as it relates to fraud,” Richmond Pope said.