Do you have everything you need to identify fraud (risks)?

21 April 2023

Since financial year 2022, it is mandatory for auditors to record fraud and continuity in the reporting of statutory audit engagements. What do they need to consider? And does an accountant have the in-house expertise to effectively identify fraud (risks)? Joankecht Forensics & Recovery provides support for fellow firms.

The impact of the obligation

What impact does the new obligation have on the audit work? In concrete terms, audit reports on financial statements from now on include two additional sections: ‘Audit approach to continuity’ and ‘Audit approach to fraud risk’. Those sections must describe specifically what the identified risks are, what work was carried out and – where possible and relevant – what the outcome was.

Why do auditors have to report on fraud?

The obligation means extra work. And with good reason. Fraud can have a huge effect on the reputation of organisations. Even worse, it can lead to major financial losses.

According to the Dutch Authority for the Financial Markets (AFM), a lot more can still be improved in identifying and handling fraud (risks). Which is why this topic is a recurring item on the supervisory agenda in the coming years. The AFM is launching all kinds of supervisory campaigns on the issue. One thing it wants to see is more depth in the auditor’s fraud (risk) analysis and in how the audit work on fraud risks is performed.

What does the AFM expect from the auditor and the corporate management?

So, the auditor is expected to make more of an effort. But what does this mean in practice? Let’s look at the ‘Audit approach to fraud risk’ section of the audit report. In it, the auditor describes how risks that could lead to a material misstatement due to fraud have been addressed. This starts with thorough risk analysis and documentation. More than before, the new approach looks at the possibility of fraud occurring.

The fraud analysis basically contains the systematic assessment of fraud and corruption risks carried out by the company itself, as well as internal control measures that mitigate these risks. The corporate management’s is therefore also expected to address the fraud risks.

Alertness to indications of fraud

Moreover, it requires a critical mindset in the execution of the audit. The AFM sees the use of forensic experience and fraud expertise as a plus in this regard. The auditor subsequently includes (a combination of) elements of the work performed in the audit report. He does this based on his professional judgement, taking into account the specific circumstances and complexity of the audit. It involves the following parts:

• the fraud risks that require attention in the audit
• a reference to any explanatory notes in the financial statements
• a brief overview of the work carried out
• an indication of the outcome of the auditor’s work
• key observations regarding the matter at hand

How much extra work is involved?

But how far does all this extra work go? The depth (and scope of reporting) depends on a number of factors. Consider the identified fraud risks, the size and nature of the organisation, for example, but also the findings resulting from the work. It means that the notes to the financial statements and the text in the relevant paragraphs in the audit report will become more elaborate as the suspicions and signs of fraud become more apparent, or the degree of continuity risks become greater. In other words, the less that is wrong, the shorter the report.

What expertise is needed?

Regardless of the complexity of the audit engagement, you will need additional fraud expertise. But does every accountant already have that specific knowledge? In many cases, no. So what’s the next step? Well, Joanknecht Forensics & Recovery offers tailor-made support, which allows us to train the audit team. But we can also support you in the planning stage of the audit. Or work alongside you in its implementation. And, of course, we’re always available for consultation.

Providing internal audit training
This allows the audit organisation to work independently on mandatory reporting.

Being involved in the audit process

Structural or bespoke

Want to know more?

Don’t hesitate to speak with our experts.

Frank Driessen | +31 40 240 94 38 | fdriessen@joanknecht.nl

Ronny Buiting | +31 40 240 94 15 | rbuiting@joanknecht.nl

Christian van der Heijden | +31 40 240 94 22 | cvdheijden@joanknecht.nl

Together we always reach an effective audit approach.