Detecting Accounting Fraud Before It's Too Late

CHAPTER 10Warning Signs in the Accounts

There is nothing more deceptive than an obvious fact.

—Sherlock Holmes

A critical analysis of the accounts also allows the identification of warning signs. In most cases, the warning signs can be perceived after the accounting fraud occurred, although there are also warnings before the manipulation.

10.1 AUDITING OF ACCOUNTS

As mentioned before, auditing is not infallible, but the existence of a clean audit report is a good sign. If the report includes a favorable opinion with no exceptions, it means that auditors consider that the accounts have been prepared in accordance with the current accounting regulations.

Warning signs are produced if auditors issue an unfavorable opinion, or favorable but with exceptions. When the magnitude of the problems is very high and auditors don't have enough elements to emit an opinion, then they will refuse giving an opinion.

Let's remember the International Standards on Auditing ISA-ES-240 that indicates that it is the auditor's responsibility to obtain reasonable assurance that the accounts are free of errors due to fraud. Let's not forget that auditors can also be affected by the fraud. According to Calderon and Green (1991), the costs of defense, sanctions and compensations to be incurred by audit firms are relevant, accounting for 9% of their revenues. It is one more reason to use analytic procedures that allow evaluating warning signs and risk factors that could be an incentive to commit fraud ...