Friday, February 4, 2011

Auditing, Fraud & Black Swans

Via Sonia Jaspal's RiskBoard. 
Since the auditors are not required to comment on 100% accuracy of the statements, they use various auditing and sampling techniques to find corroborating evidence regarding the fairness of the financial statements. Auditors are not required to look for or detect all frauds. Hence, the sampling techniques are selected based on normal population. Fraud as such is an exception to the rule; an unpredictable event in most industries (except banking and financial services where some level is expected) hence, can be considered a black swan.
Audit techniques are not designed to identify black swans and find a solution for them. They are all focused on a set number of transactions and auditing steps. The macro level views of the situation in not seen though auditors might have a list of inherent risks. Then we are shocked that mass scale fraud of an organization was not detected by the auditors. A post facto analysis in most cases shows that auditors had reasonable ground to suspect fraudulent activities and should have reported the same. Let me give you a couple of examples here to put my point across to you.
Click Here to Read: Auditing, Fraud & Black Swans

1 comment:

  1. Yes, that is right. Auditors confirm financial statements to be reliable to all material respects. So the assurance is not absolute 100%.