Fraud Auditing, Detection, and Prevention Blog

Using the Science of Fraud to Improve Fraud Auditing

Jul 18, 2022 10:30:41 AM / by Leonard W. Vona

Fraud Trivia: Famous Scammers - answers to the last blog

What is the name of the first “confidence man”? William Thompson

What is the name of the first “confidence queen”? Bertha Heyman

Who sold an imaginary country? Gregor MacGregor

Who sold the Eiffel tower? Victor Lustig

Lastly, who is famous for selling Brooklyn Bridge, Madison Square Garden, Metropolitan Museum of Art, Grant’s Tomb, and the Statue of Liberty? George Parker

Why is this important to the audit profession?

All fraudsters are con men, con women, or con persons. Some are just better than others. For the most part, these scammers used their gift of gab to trick individuals. All fraudsters trick someone. As auditors, we need to be able to see beyond the trickster. When we examine documents, interview individuals, test controls, or whatever audit procedure we perform, we need to be able to pierce the trick to get to the truth. The more we understand fraud, the better we can do our job. That is why this month, my blog is about the importance of fraud education. It is the number one tool to make audit the number one reason for fraud detection.

Importance of Fraud Education

As many of you know, the ACFE Global Fraud Conference occurs in June each year. Yes, I spoke at the conference. The title of my presentation was Fraud Risk Universe: Identifying All Fraud Risks Threatening Your Organization.

The essence of my presentation was the phrase “consider fraud in your audit”. What does this mean? How do we do it? Do you have the skills to design an audit plan to identify and uncover fraud in core business systems or financial statements? The starting point is your ability to identify the fraud risks that are part of your scope. Then it’s having the know-how to build your audit plan to detect the fraud scheme.

Before you start reading, auditors need to understand that there is a science to fraud and a practice learned through working in the profession. So, as in many of my blogs, what is science?

The Science of Fraud: Why is this important?

Science generates solutions for everyday life and helps us to answer the great mysteries of the universe. In other words, science is one of the most important channels of knowledge. Source: Science for Society UNSECO

Science is important for a variety of reasons including that it:

  • Increases our fundamental knowledge
  • Creates new technology
  • Dreams up new applications
  • Offers a pathway to share ideas
  • Gives us a better worldview

Source: Rosie research.

Let’s take a closer look at the first three reasons as we answer the question of why the science of fraud is so important to the audit profession.

Increases our fundamental knowledge

Thirty years ago, I thought I understood fraud. I presented at seminars; I spoke at conferences. However, I now know, what I did not know then. So, how much more is there to know about detecting fraud as an auditor? I think we as a profession need to better understand the fraud universe and improve our ability to identify all the fraud risks facing our organizations.  This includes considering both the known historical fraud risk statements and the unknown fraud risk statements that will eventually impact our organizations.

We need to study how scammers are tricking us. That does not mean thinking like a criminal, but rather better understanding the concept of sophistication of concealment. With this, we have a better understanding of how we can calibrate our audit procedures to locate and find the fraud scheme.

Creates new technology

In 1982, I participated in my first class on Fraud Data Analytics. The course was taught by an individual named Gordon Smith. I knew then as I know now that data analytics was the key to finding fraud in core business systems. I am not suggesting that the use of data analytics is new technology, although it is a hot topic in the profession.

The new technology will be building a data profile of each fraud risk statement in the fraud universe. Currently, we are searching for data anomalies, and exceptions to internal controls and focusing on transactions rather than patterns in the entire database. This is to be expected because in so many ways, it is consistent with the historical audit approach.

The new technology to detect fraud will require us to change the way we plan and conduct audits. How many of you remember when risk assessment was first introduced into the audit profession? COSO?

Dreams up new applications

Ask yourself, how did Microsoft windows, the cell phone or the personal pan pizza change our lives? Someone dared to be different. True innovation.

To quote the movie Lion King, It is time! As a profession, we auditors need to reinvent our approach to detecting fraud. I believe the approach requires us to start with identifying the fraud risk statements in our audit scope. What are the elements? What do the elements look like? How does it operate and how do scammers conceal the truth? This will require a superior knowledge of each element of the fraud risk statement.

I believe the biggest challenge for retooling our audit approach, is a concept I call the “degree of certainty.’ In designing our new audit approach, how certain does an auditor need to be to suggest a fraud investigation? This requires us to understand the difference between what evidence we can gather in a fraud audit or a fraud investigation.

If we are serious about making audit the number one reason for detecting fraud, then we must dare to be different. I know we are comfortable with conducting an audit with our tried-and-true methodologies. But if Bill Gates did not dare to create windows, we all would still be trying to navigate our computers with DOS commands.

Historical Fraud Trivia

Who caused the failure of a bank via illicit stock trades?

Who almost caused the failure of a bank due to illicit stock trades?

What carpet cleaner was listed on Forbes?

Which was the first widely publicized case of computer crime to conceal a financial statement fraud?

Look for the answers in the next blog.


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Leonard W. Vona

Written by Leonard W. Vona

Leonard W. Vona has more than 40 years of diversified fraud auditing and forensic accounting experience. His firm, Fraud Auditing, Inc., advises clients in areas of fraud risk assessment, fraud data analytics, fraud auditing, fraud prevention and litigation support.