Auditors: What sets off alarm bells that a client is not being truthful?

MICHAEL J. CORKERY

Partner, Melville 

First, there are the physical cues: They may avoid eye contact or, when a difficult question is asked, their posture may change. In terms of verbal cues, a big one is a tendency to answer any question but the one you just asked—they might talk in circles, hoping you’ll go away, or deflect by saying, “Why don’t you go talk to so and so?” You tend to see this when there are questions about some sort of unusual activity, or when you bring up the fact that there might be a lack of segregation of duties. 

There are other red flags that don’t have anything to do with behavior, but with how the company is structured. For example, if there’s no mandatory vacation policy, you may want to heighten your already high level of professional skepticism. It could mean, for example, that the same person is preparing the bank reconciliations every month, without a second set of eyes to check. You really want someone else performing these functions at least once or twice a year. 

Regardless of how you figure it out, when people are being evasive, I’ve found it’s better to just excuse yourself from the situation, since you’re not going to get any further. If they become alarmed or agitated, it doesn’t make sense to confront them directly. It makes more sense to go back and see if you can dig a little deeper to get more information before initiating another conversation, or to talk to someone higher up in governance. 

PATRICIA A. MCGRATH

Principal, Williamsville

My current clients have all been helpful and forthcoming during their audits. That being said, I’m a seasoned auditor and, over my many years in the profession, I have encountered clients whose behavior raised questions about how truthful they were being. Most often, this has happened with a client who had significant cash flow issues, concerns about making payroll or concerns about remitting to vendors—in other words, they were pushed to their limits and ready to say or do anything to keep their business in operation, including stretch the truth. On a more one-on-one level, client behavior that raises eyebrows includes belligerent answers to requests for information or not responding to communications, whether via email or phone. Finally, I can’t help but wonder about how truthful a client is being with me when they are patronizing toward the audit staff.

When you realize what’s going on, it can be a very difficult conversation to have. But, as a CPA, I need to educate the client about the necessary financial statement disclosures and try to advise them on how they can improve their situation. 

MARCY L. GREENFIELD 

Audit Principal, Jericho 

When I consider things that trigger my professional skepticism, I think about the interviews with management and some accounting staff that we do as part of SAS 99 [Statement on Auditing Standards 99, Consideration of Fraud in a Financial Statement Audit]. We try to sit with them and see if there are any indications of fraud. We look at things like body language and eye contact, as well as behavior—for example, if they become defensive or unresponsive, or begin acting out of character. Seeing any of these signs during the interview would make me a little more skeptical than usual.

Another factor that sets off alarm bells is when we think there’s an incentive for falsifying documentation. For example, if they have loan covenants to meet or financing problems, or if they’re looking to sell or otherwise make the company more attractive, there may be an incentive for them to get creative when it comes to the numbers. Then, of course, there are telltale signs, such as if, suddenly, they can’t locate requested information, or if they dodge a question or won’t let us have access to some of their reports. Contradictions in their story or having no basis for some of their entries or estimates also make me suspicious. Sometimes, when you point this out, clients push back a little. I’ve had clients get testy in the past. We just let them know that, as part of our audit, we need to have an understanding of what we need in order to issue our report and be comfortable with it and, usually, they’re a bit more helpful after that. 

MARK SPRINGER

Auditor, New York City 

During an audit, we confirm the processes in scope and the associated controls with the stakeholders. The moment of truth comes when we go through the design effectiveness testing of the identified controls to confirm that they are designed as stated. If we find that the documentation we request to verify the design of the controls does not coincide with what was verified with the stakeholder, or that it takes the client a very long time to turn those documents over, it can be a cause for concern as to the accuracy of the statements provided by management. 

The opinions expressed in this section are those of the individual and should not be taken as representative of the firm for which he or she works.