Auditing for fraud: Perception vs. reality;

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Auditing for Fraud: Perception vs. Reality
Alan J. Winters
American Institute of CPAs
John B. Sullivan
Deloitte & Touche*
When you come to a fork in the road, take it.
Yogi Berra
Many people, both in and out of the accounting profession, would say that Mr.
Berra's aphorism has guided the evolution of the auditor's responsibility to detect
fraud. Throughout its history, the profession has taken various positions on this
responsibility; sometimes adopting a position, abandoning it, and then returning to it.
This erratic evolution has been propelled largely by two factors. One factor is the
vagaries of auditors' beliefs about (1) what degree of fraud detection responsibility is
commensurate with an auditor's professional obligation and (2) what technical
prowess auditors command to detect fraud. The other factor is what responsibility the
public, in the form of users of the auditor's product; regulators and legislators; courts;
and financial press writers, expect auditors to assume.
This paper begins with a summarized history of the evolution of the auditor's
responsibility to detect fraud in financial statement audits, including both nonauthori-tative
and authoritative guidance and major influences outside the profession. We then
provide a critique of the effectiveness of audit approaches for detecting fraud. Finally,
we offer some suggestions for modifying those approaches and improving their effec-tiveness.
PNroongaruetshsioornit aotfi Pver oafnedss iAountahl oGriutaidtiavne ce-
From ancient times until around the turn of the twentieth century, auditing's
primary objective was to detect fraud and the technique used was detailed examina-tion
rather than selective testing (Brown 1962). For example, the prevention and
detection of fraud underlay the "hearing" of accounts during the Roman Empire as
well as audits of companies during the Industrial Revolution (Brown 1962).
During the five years that preceded and followed the turn of the twentieth century,
the primary objective of auditing began to shift. Contrasting passages from two promi-nent
auditing texts issued seven years apart illustrate this shift.
"The object of an audit may be said to be three-fold:
1. The detection of fraud.
2. The detection of technical errors.
3. The detection of errors of principle." (Dicksee 1905)
* The views expressed in this paper are those of the authors and are not necessarily those of the AICPA or
Deloitte & Touche.
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