Evaluating Financial Fraud Risk During Audit Planning

Thomas E. McKee, PhD, CPA (licensed in N.C.; inactive in Tenn.) CMA, CIA

Corporate financial fraud–related accounting scandals involving companies like Enron, WorldCom, Parmalat, and Adelphia have cost investors hundreds of billions of dollars of lost market capitalization, ruined numerous lives, and created a continuing crisis of confidence in corporate governance mechanisms. Current auditing standards require auditors to assess the risk of material misstatement due to fraud; however, auditors' lack of direct experience with financial fraud makes it difficult for them to both identify relevant fraud risk factors and weigh them appropriately. Failure to make proper risk assessments and detect the relatively rare financial frauds can result in large financial settlements for audit firms and can have a major negative impact on the careers of the auditors involved.