Working together to detect fraud
There is also an opportunity for all involved – company management and boards, auditors and regulators – to focus more on corporate culture and behaviors to support fraud detection. The fraud triangle, a model used to consider fraud risk, holds that three factors – opportunity, pressure and rationalization – are typically present when frauds occur. We believe that developments in technology and research could now make it possible to better evaluate pressure and rationalization, and to feed the results into the fraud risk assessment process. For example, consideration of the fraud triangle could be a part of a company’s system of internal control over financial reporting in addressing the risk of fraud and the audit profession could deploy people with different skills to look at all three factors to enhance our ability to detect fraud. We welcome dialogue with all stakeholders to explore opportunities in this area.
We know the audit needs to change and we want to play an active role. However, this will be futile unless the other two lines of defense against corporate fraud are strengthened as well. Ultimately, to combat frauds, all stakeholders must seize the opportunity to work together to strengthen the entire financial reporting ecosystem.
EY has set out a call to action based on the three lines of defense in its report titled Preventing and detecting fraud: how to strengthen the roles of companies, auditors and regulators.