COVID-19, fraud and re-evaluating the role of the auditor (Sponsored)

Nov 30, 2020
Fergal McManus explains how Confirmation can play a critical role in ensuring business continuity, both during and after the COVID-19 pandemic.

The auditing world has changed dramatically in the space of less than a year due to COVID-19, with remote auditing becoming the new norm.

On the one hand, these changes have accelerated the adoption of processes and technology that deliver improved operational and cost efficiencies. On the other, however, the global economic downturn caused by the pandemic has created opportunities for fraudsters.

“When we moved into the lockdown in March, auditors had to make the shift to remote auditing very quickly,” says Fergal McManus, Account Manager for Ireland and the Channel Islands at Confirmation, which is part of Thomson Reuters. “Our process is an integral part of the audit engagement, and it lends itself to remote auditing.”

Auditors did have some breathing space in the early days. “In April and May, there was a slowdown in terms of deadlines,” he notes. “There was an extension of certain deadlines for filing in the second quarter, and that had a knock-on effect. Audit firms have had to catch up with that delay since. Adopting new technologies was always part of their plan; the lockdown just accelerated it. Firms are unlikely to go back now they have shifted to remote auditing and have seen that it works. There is a shift to remote working among clients as well, of course, and if the client stays remote, auditors will also have to stay remote.”

Interestingly, the switch to remote auditing and the increased use of the Confirmation platform has resulted in more fraud cases being uncovered. “For as long as companies and auditors have existed, some people have tried to find ways to defraud them,” says McManus. “That is something we have to live with. There have been many audit-related fraud cases over the past 20 years, but our technology mitigates against fraud at an important point in the process. Third-party confirmations by parties independent of the company being audited are vital in preventing and uncovering fraud. That’s what our platform offers.”

The security of the process is critically important. “There are other ways to get confirmations, such as on paper by post or fax, but these options leave gaps for the fraudster to exploit,” he explains. “The auditor communicates directly with the bank on our platform. Both parties are validated by us, which means that the communication is completely secure.”

Fergal is quite passionate about the need to root out fraud. “The knock-on effect of fraud on wider society is highly corrosive. Fraudsters have a huge impact on employees and investors, and I am very proud of the role our platform plays in mitigating fraud in this part of the audit.”

He mentions two high-profile frauds that involved a manual confirmation process. In the case of Wirecard, the German payments company revealed that auditors could not trace €1.9 billion supposedly held in escrow accounts at two Asian banks. Wirecard was forced to acknowledge that the cash probably does “not exist”. When one of the Asian banks was presented with a copy of one of the fake confirmation documents, they described them as “something somebody just dreamt up”.

In another case, Commerzialbank Mattersburg, a commercial bank in Austria, reported that it had large balances of €60 million each with five other Austrian banks. “Guess what happened when examiners called those banks looking for the money?” McManus asks. “It didn’t exist. The amount of money missing amounts to around half of the total assets of this small regional bank.”

Remote auditing is not the only change afoot, and these recent frauds are triggering a ripple effect globally that is changing the future of the audit industry. “Audit reform has been talked about for quite some time,” says McManus. “Regulators have tinkered around the edges up to now. Sir Donald Bryson, in his 2019 Report of the Independent Review into the Quality and Effectiveness of Audit, states that ‘the purpose of an audit is to help establish and maintain deserved confidence in a company, in its directors, and in the information for which they have responsibility to report, including the financial statements’.”

In August of this year, the UK’s Financial Reporting Council announced that the Big 4 have until 2024 to separate their audit practices from their broader tax and advisory practices, McManus adds. “The idea is that, if a firm cannot subsidise the cost of an audit with the fees it can generate from its other services, then audit quality, along with fees, should rise. It’s clear that there has been a mindset change towards not only the purpose of an audit, but a review of audit quality offered by firms.”

These changes will drive increased investment in technology by audit firms, McManus believes. “The world wasn’t prepared for a pandemic, but we can prepare for its aftermath. We must embrace change and re-evaluate the role of the auditor. The current circumstances bring opportunities to do things differently – for example, by using new, or flexing the use of existing, technology resources. Combining technology with firms’ expertise and judgement is key for the future-focused auditor.”

The practicalities are clear. “We have 4,000 banks on our platform,” Fergal points out. “Earlier this year, when bank employees pivoted to working from home, they couldn’t respond to paper requests, but they could respond to requests via Confirmation, a secure web platform. We are well-positioned, and so are our customers, in that our process is suited to remote auditing. Our technology will continue to play a critical role as the audit industry evolves.”

Companies and auditors must continue to invest in technology, he adds. “This is crucial for business continuity so you can still do your work and still communicate with your peers and your clients. We’ve been checking in regularly with our customers, and we’re hearing from them that, thanks to technology like Confirmation, they’ve been able to achieve some level of business as usual. That’s pretty remarkable right now. Technology is also a must for security. It adds deeper analytical and consulting capabilities to audit firms. And in general, it usually just makes work easier and saves money.”
Fergal McManus is Account Manager, Ireland and the Channel Islands, at Confirmation, which is part of Thomson Reuters. For more information, visit www.confirmation.com.