Auditors and fraud: Expectation gap
If the guidance on fraud is so clear from the perspective of the auditor, why does there seem to be an expectation gap between the auditors and the clients?
Regardless of whatever guidance exists, clients are inclined to mistakenly expect that auditors can, must, and will find fraud if it exists within the company.
The client sometimes fails to acknowledge that the auditors clearly outline their audit and review responsibilities with engagement letters. Those letters usually state that the auditors provide reasonable assurance that they will detect material misstatements, but not absolute assurance.
The client also often does not consider the fact that immaterial frauds may never be found. If a fraud is not large enough to “make a difference” in the financial statements, then it stands to reason that it most likely will not be detected. Detecting an immaterial fraud would be like finding a needle in a haystack.
The expectation gap boils down to misconceptions on the part of the client. Management and employees wrongly believe that reviews and audits can and should always detect fraud. Auditors also bear some responsibility for the expectation gap, and they might consider addressing this issue verbally with the client. That discussion should echo the engagement letter and address any concerns or unrealistic expectations held by the client.
