Speaker: Professional Skepticism Can, Must Be Cultivated

Chris Gaetano
Published Date:
May 23, 2017

Salvatore A. Collemi, a CPA with years of external auditing experience under his belt, told his audience at the Forensic Accounting and Litigation Service Conference on May 23 that professional skepticism is severely lacking in today's business environment, but that it can be cultivated, and must be if we expect the audit to be worth anything. 

Collemi said he understood that some auditors might be hesitant to press too hard against what management is telling them, particularly if the company has been a client for years, but he stressed that being skeptical is part of the fundamental skill set of what makes an auditor an auditor. Without that, he said, the auditing profession wouldn't even exist. He also conceded that maintaining an appropriate level of professional skepticism isn't easy: The human psyche will naturally lean toward trusting people one has worked with for years. However, he said that it's important for both the client and the auditor to understand there's nothing personal in asking hard questions―it's just what a competent auditor does. 

Unfortunately, he said, there are too many auditors today who hesitate because they think if they press too hard, they're insulting the client's integrity, and so they don't go as far as they need to for a reliable audit. He also pointed out a reluctance for auditors to even consider that their client might not be entirely truthful with them. When this perspective is combined with lack of experience in handling fraud cases, it can lead auditors to overlook vital details. 

"Most auditors will never experience going through a fraud case. 'They'll never do that,' they'll think. 'It couldn't be my clients; my clients are perfect,'" he said. 

Tied up with this mindset are too many assumptions based on past history: The client has never committed fraud before, the auditor will think, so why would things be different now? But circumstances change all the time, and while everything may have been fine for the past five or even 10 years, that's no guarantee that things will be fine now. Collemi noted that the auditor often doesn't know much about people's personal lives and won't know whether something has changed that might lead them to commit fraud. 

"As far as past history, things change all the time, so you've got to be on your game. You've got to acknowledge that change is always going to be there, and things don't stay the same," he said. 

He also singled out a tendency among auditors to talk only to other accountants, which he said is another way to lose professional skepticism over time. He conceded that it's easier just to talk to other accountants―they know the lingo and can speak in terms the auditor understands. But it's just not enough. 

"There's more in the world than just us. Speak to the general counsel, speak to the audit committee if they have one, to the board of directors, to vendors and suppliers, to people involved in complex transactions, to other departments that are vital to the business. These are the types of interviews you've got to have, and you've got to speak their language," he said. 

So how exactly should auditors go about strengthening their professional skepticism? They must continually challenge their own assumptions. Someone might think that, because everything has been fine the last few years with a company, its financial records will be fine this year too, and there's no need to press too hard and stay too late. Collemi said there's no reason to think that, though. Same goes for people: Auditors tend to work with the same people for years and years and get far too comfortable with them. 

"'I think everything's fine, we can rely on what they are saying, don't worry about that information.' That's just the type of coziness you've gotta be careful about," he said. 

But challenging these assumptions regularly, he said, requires cultivating the right mindset. Auditors need to acknowledge that, yes, they are biased, and use that fact as a constant reminder that what's in their heads does not always reflect what's in reality. On top of this, he recommended that auditors, when planning out an audit engagement, brainstorm all the ways someone might try to deceive them, which often means trying to get into managers' heads and think of what they would do if they wanted to commit fraud. How would they go about circumventing internal controls? How would they manipulate the financial statement? Even if the auditors think this client wouldn't do that, they need to consider that it could and plan the engagement around these possibilities. 

"When you're in that mindset, [you're aware that fraudulent practices] could happen, so how do you prepare yourself to design audit procedures to mitigate that? What types of evidence do you need? [What are the] types of conversations you have to have to make sure you have everything you need and the numbers look good?" he said. 

Keeping this in mind, he also said it's important to throw curveballs at the client. If an audit is run the same way year after year, the clients will easily figure out the procedure and, if they're trying to do anything deceptive, work around it. The auditor should look in areas they don't normally look, focus on individuals they've never spoken to before, and develop new processes and procedures each year that the client can't adapt to. 

"You think the client doesn't know your game, doing the same audit, the same type of work? The client has you figured out," he said. "You've got to start throwing curveballs and keep your client on their toes."

Click here to see more of the latest news from the NYSSCPA.