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CPE for Government Auditors

An Auditor’s Responsibilities for Fraud in the Government Environment
Chapter 5: Ask Rude Questions

“Do you know of anyone committing fraud in your organization?” you ask, reading from your mandatory list of Statement on Auditing Standards 99 questions.  And the client responds, “Are you accusing me of committing fraud!?!”

Aren’t those rude,mandatory fraud questions fun? As the first step of AU-C Section 240, youstop just short of accusing the people running the program of committing fraud.  Just short.

The people responsible for running the program get understandably upset; nobody likes such direct and accusatory inquiries.  And you, unless you enjoy seeing people squirm, don’t like asking either.

 

2-5-1What is Required?

Financial audits require you, at a minimum, to interview and make inquiries as required by AU-C Section 240. This standard requires youto interview:

  • Management
  • The audit committee
  • The internal audit director
  • Front line staff

Additional interviews and inquiries should be made if they are needed to meet the audit objectives. The questions specified by AU-C Section 240 are indicated later in the chapter.

When conducting performance audits, you shouldinterview, at a minimum:

  • The board chair
  • Management of the program under audit
  • The contact person for the Governor’s Fraud Initiative
  • The internal audit director

Additional interviews and inquiries should be made if they are needed to identify and assess risks and/or meet the audit objectives.Questions can be tailored to meet the audit objectives.

Interviews may be face-to-face, over the phone, or by written questionnaires.Ideally, you conduct fraud interviewsface-to-facebecause then you can read the auditees’ body language, and the auditeesare able to disclose information to you confidentially. Interviews normally should be conducted one person at a time;however, this requirement can be waived at your discretion.For example, management may request that the Internal Audit Director be present.

 

2-5-2If You Ask, They Will Tell

Certified Fraud Examiners will tell you that one of the best ways to find fraud is to ask about it.  Supposedly, some people need to be prompted to share; they won’t naturally bring this up and seek to resolve it because the payoff isn’t there.

One auditor told me that the head of an Indian Tribal Council confided in him that fraud was rampant throughout his organization, but he knew that if he said anything, he would get drummed out of office.  Only upon hearing the auditor’s pointed AU-C Section 240 questions did he hint at what he knew.

When put on the spot, folks might tell you.

 

2-5-3 Be Prepared

Each fraud interview can consume an hour of your time—if the interviewee has very little to say: 15 minutes to prepare, 20 minutes to conduct, 25 minutes to document.

Be prepared to ask a version of these questions:

  • Do you have any knowledge of fraud or suspected fraud affecting the entity?
  • Are you aware of allegations of fraud?
  • What do you do to prevent fraud?
  • Are employees made aware of their responsibilities regarding ethical behavior?
  • If someone would commit fraud here, how would they do it?

I paraphrased those out of the AICPA Clarified Auditing Standards,but you really should look at the standard yourself: http://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-C-00240.pdf

These questions that AU-C Section 240 requires regarding fraud are not guaranteed to uncover fraud. But the questions do highlight areas on which you may want to focus to provide some modicum of assurance that fraud does not exist.

Nowyou might be thinking, “I’ll just skip a few of those more pointed questions and soften up the others.  They’ll get the hint, and I won’t have to be so direct.”  Nice try, but these questions aren’t that flexible.

If you want to comply with standards, you will have to inquire directly, without beating around the bush.  If you want to do your best at diligently trying to uncover fraud, then AU-C Section 240 pointed, rude questions make good sense.

Please do not try to conduct your fraud interviews using a questionnaire that you email to the interviewee.  That completely bypasses the intent of the standard.  People will not tell you on a questionnaire whether their boss is committing fraud. No one hates his or her career that much!

I got a real kick out a participant in my “Fraud in the Government Course” at the LBJ School.  She was an accounts payable clerk at a water utility and came to class so that she could answer the auditors’ questions.  The auditors sent her a questionnaire every year asking her, “If fraud were committed in this organization, how would it occur?” or something to that effect.  For years, she said that she didn’t know of any way.  This is exactly what the auditor wanted to hear.

But it bothered her that she didn’t have a good answer!  So she came to my class so that she could answer with a few examples!  Now she is going to worry the heck out of the auditor.  Sometimes, I think that in learning about fraud some individuals take away ideas to commit fraud themselves.

 

2-5-4Preparing Your Client

AU-C Section 240 is an unpleasant audit standard for everyone involved.

If you are an audit client, you might be thinking,“I’m not answering those questions!  No one said I had to, and I am going to call my lawyer!”  You can do that, but realize that good auditors go where their gut leads them.  And a thorough auditor could interpret your resistance as a red flag that you know something, and that further investigation is needed.  Not always, but that is the risk you take by making a big deal of this.  It is probably better to just play along, unless of course, you are guilty.  J

The only way you are going to come out okay in this interaction is to tell the client that you are required to ask these crazy questions.  Give them a preview of what is about to happen and why you have to do it.

You might start with, “This is an uncomfortable part of my job.  I am sure you have heard of all of the scandals involving fraud, like Enron, WorldCom, and Bernie Madoff.  As a result, my profession has come up with some mandatory questions that I must ask you.  I have a professional responsibility to do my best to detect fraud in every organization that I audit.  The standards to which I adhere require that I ask you some pretty pointed questions, and they are going to sound very rude.  But my standards also require that I ask these questions without softening or altering them.”

It is always a good idea to give the client a minute to think, and ask them to share their concerns or ask any questions.  Say, “What questions do you have about this interview?” Check out the phrasing of that question.  I recommend that you phrase your question that way because if you say something else like, “Do you understand?” They will automatically respond affirmatively as they don’t want to look stupid.  And asking, “Do you have any questions?” implies that they shouldn’t have any.  Sosaying, “What are your questions?” lets them know that they naturally should have some, and you welcome their questions!

You might also warn them that the word “fraud” will be used frequently during your inquiry.  The word “fraud” tends to get people upset. In the government-auditing world, the acronym FRA was used to label some engagements. FRA stands for Financial Related Audit, and it was a GAO term during in the 80s and 90s.When I used it in entrance conferences with clients, you should have seen them freak out!They thought I was saying that I was conducting a fraud audit (fra… fraud…). After a few anxious calls from auditees, audit management sent an urgent memo, “Never use that term AGAIN, EVER!”

Next, answer their questions politely, and ask their permission to proceed. You could say something like, “If at any time you want to stop, just let me know. May I proceed?”

Then begin the inquisition.

 

—–

Leita Hart-Fanta, CPA, CGFM

Resides in Austin, Texas and can be reached at leita@yellowbook-cpe.com.
512-996-8588
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