Report raises questions about companies’ safeguards against financial error, fraud

Financial Statement Fraud Solutions

The International Forum of Independent Audit Regulators (IFIAR) conducted a survey of audit regulators in 30 countries and found that more than one of every three recently inspected audits performed by a major accounting firm was deficient in some way. While this doesn’t necessarily mean the companies being audited have produced inaccurate financial statements, it does mean that auditors are confirming corporations’ internally produced numbers without gathering sufficient evidence of their accuracy.

This raises material questions about whether companies have adequate risk management solutions in place. IFIAR chairman Lewis Ferguson called the survey results “a source of serious, serious concern” and said they should serve as “a wake-up call to [accounting] firms and regulators alike. More must be done to improve the reliability of audit work performed globally on behalf of investors.”

The survey inquired about regulators’ inspections of audits performed on behalf of almost 1,000 publicly traded companies and nearly 100 major financial institutions.

For financial institutions, areas where deficiencies were found to be particularly common include:

  • Loan-loss reserves
  • Loan write-downs
  • Valuation of securities

For other types of companies, the most frequently cited issues were with:

  • Fair-value measurements
  • Internal safeguards against financial error and fraud

Ernst & Young, one of the “Big Four” accounting firms, released a statement asserting that it “will continue to work with audit regulators at a national level to respond to findings and observations and to improve audit quality.”

While the importance of reliable, independent auditing cannot be understated, companies should also focus on putting robust internal risk management solutions in place. This is particularly important for financial institutions that are constantly being asked to evaluate the creditworthiness of loan applicants.

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