The Interrelationship Between Fraud and Financial Statement Assurance
By Jake Amoroso, Senior, Advisory Services
Ensuring accurate financial reporting is one of the most important and most often overlooked aspects of operating a successful business. Armed with accurate information, a company can pursue expansion in the form of loans, credit lines, horizontal and vertical mergers, etc.
Before delivering financial information, management must trust that their accounting and finance teams are providing information that is free of (at a minimum) fraudulent activity. Even then, many lenders require a review by a public accounting firm before granting access to financing — and lenders and investors often require additional levels of assurance over time. Overall, these engagements are not meant to detect fraud, but to provide users of financial statements with easily understood and trustworthy information.
Our discussion of the three levels of assurance begins with compilation engagements. A compilation engagement provides the lowest form of assurance. It does not ensure financial statements are free from material misstatement or fraud, or that they adhere to Generally Accepted Accounting Principals (“GAAP”). This type of engagement typically omits footnote disclosures and cash flow information. A compilation, when performed by a certified public accountant, represents financial statements compiled in a presentable matter with no testing procedures performed.
The next level of assurance is a review engagement. Reviews, unlike compilations, provide limited assurance that financial statements are free from fraud and material misstatements, and adhere to GAAP. This type of engagement analyzes current and past statements to identify unusual trends or transactions.
The final level of assurance, and the highest level, is audit engagements. Audits provide reasonable assurance that financial statements are free from material misstatements and are in compliance with GAAP. Publicly traded companies (and many others, across all industries) are required to have an annual audit. Audits include the analytical and inquiry steps involved in reviews and compilations, but there is more detailed testing and additional procedures to mitigate the risk of material misstatements. In addition, an annual audit reviews internal control systems to assist with the auditors testing and ensure the level of risk across each financial category is analyzed.
Audited financial statements provide the Valuation and Forensic Litigation Services (VFLS) team some assurance that certain minimum requisite procedures were performed. Audited financial statements provide notes that substantiate key financial points, detail balances, or even clarify why a number was presented a certain way.