In Brief

Corporate fraud has resurfaced in the headlines, troubling those who might have believed the profession had moved past its audit failures of the past decades. Thought leaders throughout the profession are using the current moment to reexamine where the profession is headed. A series of discussions with the moderator covers what the profession can do to make audits more effective and how the next generation of accountants can meet the public’s expectations.


The financial news headlines noted during the current pandemic appear to harken to earlier times with the news of audit failures and corporate fraud. Notably, the Wirecard AG scandal reminds one of the previous failures of WorldCom and Enron. According to the Association of Certified Fraud Examiners (ACFE) 2020 Report to The Nations2020 Global Study on Occupational Fraud and Abuse, 43% of occupational frauds were detected by a tip, owners/executives committed 20% of the frauds with a median loss of $600,000, and 42% of fraud-sters were living above their means.

Prior to teaching accounting courses as an adjunct lecturer at John Jay College of Criminal Justice (CUNY), my work in auditing and fraud assessment was centered around compliance, internal controls, and materiality. As the news of Wirecard AG spread, I noted comments from inside and outside of the accounting profession and thought that something has got to give. I stood at the podium and sat before the webcam, telling students the old wives’ tale that an audit’s purpose is not to find fraud but to provide assurance that the financial statements are free from material misstatement. But I will say that I am troubled by these statements. Auditors should not be expected to provide reasonable assurance that fraud is not present, but material misstatement and corporate failings that cause financial loss and harm to stakeholders should be considered. White-collar crime committed by corporate executives could ultimately be found during audits if auditors leverage technology and understand the rationalization used by C-suite members. As an educator, I wanted to understand the career path and skill sets needed to ensure that accounting students and accounting firm staff members are equipped to conduct audits in a more effective manner.

Regulators still expect external auditors to use good execution, good documentation, and good judgment despite the fact we are in a pandemic.

To support my initial reaction to the changing dynamic of fraud, technology, and audit quality, I interviewed a thought leader, an academic, and a technologist to gain a better perspective on what can be done across the entire spectrum of the accounting profession to improve the efficacy of the audit. This virtual roundtable featured: Solon Angel, Founder & Chief Impact Officer, former Chief Strategy Officer of MindBridge Ai; Brian Fox, CPA, President & Founder of Confirmation (exited, acquired by Thomson Reuters); and Kecia Williams Smith, PhD, CPA, Assistant Professor and Director, Master of Accountancy (MACC) Program at North Carolina Agricultural and Technical State University. What follows are edited excerpts from my interviews with these experts.

Kecia Williams Smith

What role does regulation play in the current environment and how can audit firm leaders remained focused on audit quality in a rapidly changing regulatory environment?

As a former staff member at the PCAOB—let me note this is my personal view and not that of the PCAOB—I don’t think the mission of audit regulation has changed. Generally speaking, the mission of the PCAOB is to protect the capital markets and to ensure the issuance of fair and informative audit reports. That continues to be the mission. I believe the PCAOB has reaffirmed that sentiment.

What has changed over time is the environment. Inspectors are now focused on the changing environment in a pandemic while also making sure that audit firms are appropriately responding to auditing standards remotely. In a pre-pandemic environment, the inspectors could travel to the firm and have direct conversations with the engagement team—now, that interaction is different. Audit regulators must be conversant and ready to respond to several industry changes at the same time.

As it relates to emerging technologies, the pandemic has accelerated the use of these tools to facilitate working in a socially distant environment. Regulators have to be responsive and make sure that whatever technological tool being used still enables the auditor to meet the requirements in the auditing standards. Regulators still expect external auditors to use good execution, good documentation, and good judgment despite the fact we are in a pandemic. These things are still key for the execution of high-quality audits.

At the end of the day, auditors protect the public. Investors and other stakeholders rely on audit reports to make financial decisions. What can audit firms do to increase public trust and do damage control, and retrain staff to shift their mindsets while leveraging technology to make audits less cumbersome?

Audit firms can be transparent. Some U.S. audit firms have started issuing reports that articulate their commitment to audit quality. In the United Kingdom, such reports are required for certain public interest entities. These reports are one way that people can understand what audit firms are doing. Related to public trust, we were finally at a point where people were trusting audit firms after some of the major restatements of the past. With failures such as Wirecard AG back in the news, people may start to have a different view. However, key questions remain, such as: How are audit firms treating their people? How are they delivering high quality audits? How are they effectively using technology to make what they do more efficient? Having the public be aware of these matters will assist them in understanding what audit firms are charged to do.

Is it that the public doesn’t know what the auditor is doing? Or is the gap in the performance? Or is there a technological gap? There’s still a disconnect there with the effective use of technology. For standards setters trying to understand and trying to make sure that the standards are evergreen, refreshed, and reflect the current environment. The auditors that are at the audit firms have to make sure they’re being transparent. The board has to think, in this environment: What do we need to do to make sure that the public is aware of what our role is? What else do I need to make sure that we are executing high quality audits at the end of the day?

It’s interesting that you’re seeing some of these longstanding audit relationships are turning over. I think it’s because of shareholder pressure, investor pressure. When auditors have been a company’s auditor for over 100 years, it may be time for a set of fresh eyes. If audit firms have these longstanding relationships, given that the academic literature is mixed on auditor tenure, would you say this relationship serves to enhance or detriment audit quality? Audit firms don’t have to wait for an academic paper to tell them how they’re doing. Audit firms need to constantly think critically about what they’re doing, making sure they’re being professionally skeptical and making sure their procedures are varied.

What can academia do to prepare students for their career in the digital age?

The use of Microsoft Excel is a given. The digital age requires additional tools that are based on foundational Excel knowledge. In academia, you are always challenged with resource constraints. There is a boundary condition of whether the faculty has the required knowledge or financial resources to support emerging digital technologies. I am a firm believer of tapping the resources that you have. Several emerging technologies that are being widely used in practice are free for academic use.

Academic programs need to think beyond the textbook. Bring accounting professionals into the classroom. Have guest speakers share how they are using critical thinking skills and emerging technologies. You can start to evolve your program, even within those boundary conditions, when you think outside of the box.

Academics can prepare their students for this changing environment by encouraging them to read business news and trade publications, introducing them to emerging technological tools used in practice, and focusing them on thinking beyond the textbook.

Brian Fox

While working at BDO Seidman, I used It made the audit more time-efficient and validated the confirmation responses received. What advice would you have for firms that don’t use your application, with the expected increase of financial fraud due to COVID-19?

The Wirecard fraud in 2020 was the same technique used by Parmalat in 2003, which was the same as the McKesson & Robbins fraud from the 1930s, along with hundreds of others. Inflating revenue and hiding it by creating false bank statements or invoices and misdirecting the auditors as to where and to whom to send the confirmations is not a complicated or sophisticated fraud. That is the fraud that’s service helps one identify, just like it did with the Peregrine Financial Group, China Media Express, and Sheppard Major Play Fund, among others.

Quality staff—whether experienced hires or new hires—will no longer tolerate working for firms that assign them busy work that can and should be automated.

Firm leadership may be hesitant in making investment in technology while being challenged with employee retention. As a tech founder, what advice would you have for firms looking to attract, retain, and advance new hires?

Quality staff—whether experienced hires or new hires—will no longer tolerate working for firms that assign them busy work that can and should be automated. The expectation is that firms will invest in and utilize the technology tools available to assist in auditing. Failure to do so will result in lower quality staff and a lower overall value for your practice when you look to retire.

Solon Angel

How can small practices and practices where leadership is hesitant to invest in technology bust the myths of learning curves and accessibility to cutting-edge technology?

As usual with new methods and technologies, there is a bit of hesitation; the reality is that software is now built-in user-friendly ways that enable fast onboarding. The underlying technology might be more complex, but the interface is much simpler thanks to AI. Take Google for example; AI is part of the Google search engine, but it’s not hard to use. We did not need to be “trained” to start using Google, Uber, Amazon, and the many other AI-driven interfaces.

The same applies to an AI-driven audit tool like our product, MindBridge Ai. The underlying technology and automation of analytics and audit planning might be complex, but the user interface is simple and surfaces problems intuitively.

This is from a technology viewpoint only. Firms still need to update their procedures and methodologies to fully leverage AI-generated insights. The longer a firm waits to adopt new technology, the harder the integration will be.

While auditors are not mandated to provide absolute assurance, the standards do expect them to detect substantial risk of misstatements linked to fraud.

MindBridge Ai uses the entire population of data. While auditors aren’t required to provide absolute assurance that financial statements are free of material misstatements, how can auditors and financial experts who offer forensics investigations and advisory services leverage MindBridge Ai?

While auditors are not mandated to provide absolute assurance, the standards do expect them to detect substantial risks of misstatements linked to fraud, which is very hard without automation and leveraging AI.

At the core of MindBridge is a risk-scoring engine that enriches each transaction in a ledger. On top of this risk-scoring engine sits an audit layer that embeds the risk-scored transactions into audit relevant insights. These insights are used by our customers to augment auditors’ judgement and to design and execute more effective and efficient audits. With this approach, we can raise the bar on the definition of reasonable assurance.

How can firms use MindBridge Ai to do more in-depth fraud risk assessment, as opposed to relying on a checklist and hoping to be tipped off by an employee?

MindBridge applies analytics on all financial transactions to help auditors understand relationships, identify and quantify unusual activity or risks, and track evolving performance trends against expectations to streamline auditor risk assessment. Through MindBridge, auditors can use data to augment their judgement and focus their attention on the areas of the business with the highest risk of material misstatement.

Roundtable Questions

Accounting students could benefit from gaining more critical thinking, technical, and investigative skills as they prepare to enter the work-place. What advice do you have for colleges and universities who will be revamping their accounting programs to accommodate for the “CPA Evolution” changes expected to the exam in 2024?

Fox: Colleges should incorporate fraud training and discussions into each audit class and as stand-alone classes. Fraud training needs to become ubiquitous with audit training, to the point where they are viewed as one and the same. As long as we separate audit training from fraud training in the classroom, students will also separate the two in their thinking and application.

What advice do you have for accounting students who want to work in auditing?

Fox: Learn to think like a fraudster: Challenge the audit steps and see if you can figure out how you would circumvent them if you were a fraudster. Then you can take steps to correct the gaps in your audit.

Williams Smith: It is still a great opportunity to work as a public company auditor, or as a private company auditor. I came out of my undergraduate program 25 years ago; I have worked in public accounting, audit regulation, and now in academia. Over these years, I have really had three distinct careers in accounting. Accounting students need to understand there is so much opportunity.

I think auditing is your best entry-level foundation because you get to see so much of a company you are auditing, whether you’re an external or internal auditor. You have the ability to see the entire business from the steps in the audit, in planning, during risk assessment. Understanding the business, looking at how we are designing tests, and how are we addressing those risks when we are looking at testing controls or looking at substantive testing, provides an excellent foundation. Even if you stay in an auditing role for only a couple of years, it gives you so much insight that you can translate into any business. My main advice for accounting students is that accounting is still a great place to be and that there is still a need for great talent in the auditing profession.

What advice do you have for CPAs who have decades of experience and are now looking to upskill, become current on technological advances?

Fox: Look into the classes offered by the ACFE (Association of Certified Fraud Examiners). They have the best training on fraud detection.

Williams Smith: Accountants and CPAs have to shift into lifelong learning. Look for opportunities to increase your knowledge. Both the IMA and AICPA offer data analytics certifications and tools for current practitioners. If you disavow yourself from the notion that technology is going to make you obsolete, then you can embrace it. The quicker you embrace that, the quicker this will excite you. Set a goal to complete a couple of online courses about emerging technologies and do it a bit at a time, over a six-month period. You have to continue to be relevant.

What does innovation mean to you?

Fox: Seeing a new angle on something and then taking the action steps to put a solution in place.

Williams Smith: There’s a scene in the movie Hidden Figures where the main character, Katherine Johnson, is performing calculations and her supervisor comments that “we need to see beyond the numbers.” Sometimes we need to see beyond what is currently in front of us. That is what innovation means to me.

What vision do you have for our profession for 2050?

Fox: If we are to remain relevant as a profession, then we must own our responsibility to identify material misstatements due to fraud and design our audits to do so. We must become the leading experts at designing audits to catch material misstatements due to fraud, or we risk losing our exclusive right to perform financial audits. It is time for us to celebrate those in our honorable profession who identify fraud and help catch the bad guys—to get to the point that the investing public, lenders, and regulators stop asking, “Where were the auditors?”

Williams Smith: My singular vision in 2050 is for the profession to be more diverse. Some of that is racial diversity, which we know we can see. But there is diversity on so many levels. For my entire career, the numbers related to African American accountants CPAs have hovered at the same place. My vision is that we can move that needle and to swing the gates open for diverse talent. This is a profession that really can increase the social mobility for people across all socioeconomic levels.

It is time for us to celebrate those in our honorable profession who identify fraud and help catch the bad guys.

We know that accounting will evolve. We know that accounting is the language of business. We know it is a great profession. It provides opportunities, but it has not traditionally provided opportunities for a lot of people. That is why my focus is on diversity and inclusion, in order to facilitate a better profession in the future.

The other point is just to continue to be relevant. I think accountants by our nature are not ones to focus and toot our own horn. But we have to make sure we are staying relevant, because we are the language of business. For whatever sized business for the gig economy, we are still necessary. We are still necessary for financial literacy, to help people maintain their economic stability. There are so many places we are needed, and we just need to make sure that we stay relevant in the next 30 years.

I recently started incorporating meditation into my daily morning routine. If you could provide one mantra professionals can reflect on as they navigate challenges in their career journeys, what would that be?

Fox: Be the good guys helping to catch the bad guys and protect the public. That is, after all, why we are called Certified Public Accountants. We have a higher calling, and it is time for our profession to live up to it.

Williams Smith: The statement that I embraced while I was in my PhD program was “Keep calm and carry on.” [Note: This comes from a motivational poster produced by the British government in 1939 in preparation for World War II. The poster was intended to raise public morale, and while it was rarely used it has recently resurfaced in the public consciousness.] Accounting can have upsides and downsides. When you are taking the exam, when you are working long hours in public accounting, when you are studying for a master’s degree, when you are in a PhD program … Keep calm and carry on, because the benefit is going to be on the other side.

Iralma Pozo, CPA, is an independent consultant and adjunct lecturer in accounting at John Jay College in New York, N.Y. She is the author of the self-published Advisory Pearls of Wisdom: Tales, Tips, and Thoughts as Told by a CPA Who Has Worn Many Hats.