In his 2019 report on audit quality and effectiveness in the UK, Sir Donald Brydon, the former chairman of the London Stock Exchange Group, described the question of fraud as “the most complex and misunderstood in relation to the auditor’s duties.”1
The prevention and detection of fraud within a company is primarily the responsibility of the management under the oversight of those charged with governance. Auditors, along with other members of the corporate governance and reporting ecosystem, also have an important role.
Currently, auditors are responsible for providing reasonable assurance to shareholders that the financial statements are free from material misstatement, whether caused by fraud or error. Public opinion in many places, however, indicates that auditors are expected to play a role that extends beyond providing this reasonable assurance.2
While there have been some major corporate failures as a result of fraud over the past few decades, the figures are very small relative to the overall number of listed companies. These failures nevertheless reinforce the need to do more to discourage and prevent fraud and, where it cannot be prevented, to detect it as soon as possible.
As part of ongoing improvement efforts, the EY organization recognizes that it needs to evolve how audits are performed to better address fraud and is committed to leading the profession more widely to address stakeholder questions about the auditor’s role in fraud detection.
A new EY report, Preventing and detecting fraud: strengthening the roles of companies, auditors and regulators (pdf), outlines how to enhance the audit to help improve fraud detection. It describes the actions already taken by the EY organization to refocus and enhance the audit, including the incorporation of increased forensic techniques, and discusses the three lines of defense that could better help to prevent or detect fraud.