Executive Summary
- The Center for Audit Quality (CAQ) and Anti-Fraud Collaboration (AFC) convened a multi-stakeholder dialogue amongst members of the financial reporting ecosystem at an inaugural Fraud Forum during the 2024 International Fraud Awareness Week. Participants explored the current and future state of the fraud risk landscape, discussed the prevalence of financial reporting fraud, considered existing roles and responsibilities from the perspective of their roles, and shared insights into key considerations for strengthening fraud deterrence and detection practices.
- Fraud is an inherent risk when considering the external pressures that are always present in the US capital markets, and it poses a substantial risk across all organizations. However, most participants believed that massive frauds are not pervasive across corporate America, that they have been observed less frequently in recent years, and are not thought to be likely at public companies. It is important to level set and define the type of fraud when discussing the pervasiveness and impact of fraud as not all fraud is identical, and companies do not necessarily face the same types of fraud risk, or risks at the same scale, even though the risk of fraud may be inherent.
- Fraud is generally considered a low likelihood event, but it can have a very significant impact. It was suggested that too much emphasis may be placed on the likelihood of fraud, rather than the impact of fraud, potentially preventing fraud from being detected more frequently. As the fraud risk landscape changes and evolves, so should the work of all gatekeepers (e.g., management, internal and external auditors).
- Participants emphasized the importance of considering the “human element” of fraud in fraud deterrence and detection efforts. Culture and ethics are two related and critical elements to consider when assessing and responding to fraud risks. A company can have an extremely robust compliance program on paper, but if the company’s culture and values do not embrace compliance, then its programs will likely not be effective.
- Hotlines and reporting programs are an area to which financial reporting stakeholders can pay more attention for purposes of informing their fraud-related procedures. In addition to assessing a hotline for its effectiveness, using the data that is collected from the hotline is also important as it can reveal a trove of valuable information, regarding the company’s culture and trust in using the hotlines in addition to potential indicators of fraud.
- Overall, the financial reporting landscape is becoming more complex and the ways through which fraud is committed in the future could be very different from what they are today. Therefore, it is important for management and internal auditors as well as external auditors to identify the fraud risks and add fresh perspectives every year during fraud-related audit procedures. There was a general consensus that standards and principles can only go so far in the fight against fraud due to the “human element” of both the perpetration and detection of fraud.
- Remaining vigilant, including exercising professional skepticism and having a questioning mind, remains vitally important for every member within the financial reporting ecosystem in the fight against fraud. As financial reporting fraud continues to be at the forefront of the public interest, finding the balance between standards, regulations, and investor protection is important to the durability and attractiveness of our US public markets.
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