Introduction

On April 24, 2013, a roundtable was held on the subject of

the expectation gap. The objective of this program was to
bring together the key players in the financial reporting
supply chain (corporate directors, financial executives,
external auditors, and internal auditors) to discuss each
groups expectations of the roles of the various players in the
deterrence and detection of financial reporting fraud.

The roundtable discussion provided an opportunity to bring

together all players in the financial reporting supply chain
to discuss an essential matter which are their expectations of
each other with respect to deterring and detecting financial
reporting fraud.

Within this discussion, participants worked to identify gaps in

their expectations, the roles each party should play, and
actionable items that can reduce any expectation gap therein
 Survey
Finding
Majority of survey respondents indicated that financial executives had
primary responsibility for deterring financial reporting fraud.

External auditors were more likely than the other financial reporting
supply chain members to suggest that boards and audit committees
bore primary responsibility.

When it came to detecting fraud, respondents more likely to identify

financial management as having the primary role and some
respondents cited internal auditors as having primary responsibility.

Several survey respondents cited internal auditors as having primary

responsibility.

Audit committees members and internal auditors were more likely than
the other two groups to place primary responsibility for fraud detection
on the external auditor.
 From the survey also found, board members are confident or
highly confident that management, internal audit and external
audit will be able to identify a material misstatement due to fraud.

Internal auditors expressed somewhat less confidence than the

external auditors and financial managements ability to identify a
material fraud.

Another interesting finding was related to the issue of skepticism

versus trust.

- Although both eternal and internal auditors identify skepticism

as key to performing their funtion, internal auditors were less likely
than external auditors to say that they exercise the appropriate
balance between trust and skepticism

- Internal Auditors were as likely to say that there is more trust

than skepticism in their company.
 Opening Panel

FEIs Hollein:- Each role that strengthen ones ability to deter and
detect fraud

NACDsGleason :- Audit committee members place must trust in

management than management place in them

CAQs Fornelli :- Discussed trust vs scepticism

 FINANCIAL MANAGEMENTS ROLE

perceived as primarily responsible in deterring & detecting

financial reporting fraud. (concern raised: when fraud occurs,
management is involved).

Managements role is to design, implement & execute

effective controls that address the risk of financial reporting
fraud.

in a approach for deterrence & detention, manager is

responsible in designing processes & procedures besides
monitoring their effectiveness in developing accurate &
complete financial statements.
 ROLES OF INTERNAL & EXTERNAL AUDITORS

internal audits role depends on how the company utilizes it,

so there will be little consensus on its role in fraud detection.

some of its functions may perform mostly financial reporting

controls testing & others may dedicate their internal auditing
teams to operational & compliance testing.

external audit approaches are different based on a risk

assessment.

the external auditors are best equipped to identify material

financial statement fraud because of their financial reporting
audit procedures.
 THE AUDIT COMMITTEES ROLE
Requirement for public company audit committees : at
least one member should be an audit committee
financial expert. - SEC

Expectations on audit committee members:

members should have financial literacy. (most expected)

members should utilize this expertise in asking challenging questions

of management when reviewing financial statements.

strong audit committee must be diversify of professional backgrounds.

a good committee might be someone with a private equity

background, CFO, or someone from an investment house.

members should have knowledge of industry and business processes.

members should engage management several layers down.

 COMMUNICATION BETWEEN PARTIES
open and honest dialogue with external and internal auditors can
help to determine whether they are doing the right thing.

importance of conversation outside the meeting: committees can

seek information from internal and external auditors about their true
concerns.

more frequent and robust conversations with the committee on fraud

deterrence and detection can be beneficial.

through clear communication about their various roles that the

players in financial reporting supply chain can operate well together to
achieve common objective (deter & detect fraud).

it is helpful to have additional staff members for the preparation of

financial reports attending the audit committee meetings.

audit committee members need to visit the company and have a talk
with the staff from time to time about what they were doing and why.