The role of auditing in fraud detection — maintaining a professional scepticism

Speaker:
Colin Murphy
Auditor General of Western Australia, Office of the Auditor General

Abstract:
With the legislative power to investigate the affairs of the departments and agencies of government, to scrutinise, examine and form opinions, the 1992 Royal Commission into the Commercial Activities of Government and Other Matters described the Auditor General as providing ‘the public’s first check and best window on the conduct of government’ (p. 19).

In this address, Colin Murphy will speak on the role of the Auditor General in encouraging public sector accountability and transparency, and the responsibility of auditors in ensuring effective corporate governance in the public sector environment (through requirements to consider fraud and to form an opinion on internal controls) together with fraud detection in a public sector context.

Sound public administration is reliant on a regulatory framework facilitating ethical behaviour and discouraging corruption. The work of Western Australia’s Integrity Coordinating Group (ICG) in recognising this framework will also be discussed. Created to promote and strengthen integrity in WA public bodies, the ICG members are all independent officers of Parliament: the Auditor General, the Commissioner for Public Sector Standards, the Corruption and Crime Commissioner and the Ombudsman. Strategies include the encouragement of coordinated research, ongoing evaluation and monitoring and fostering operational cooperation and consistency in communication and education.

In this broader context, Colin Murphy will consider the specific responsibility of auditors in regards to corporate fraud. This responsibility has come to the fore in recent years as a consequence of a growing public and regulatory interest in corporate fraud — highlighted by several spectacular failures of corporate governance. A key tool for auditors in this area is the Australian Auditing Standards Board’s Auditing Standard ASA 240 (‘The Auditor’s Responsibility to Consider Fraud and Error in an Audit of a Financial Report’), which was adopted in 2006 to specifically increase the external auditors’ responsibility with regard to fraud detection. This Standard establishes mandatory requirements and provides explanatory guidance for auditors. All Australian auditors must consider this Standard — and in Western Australia legislation provides the Auditor General with additional powers in this regard. In particular, the legislation establishes the requirement to form an opinion on the adequacy of management controls. As ineffective internal controls have been identified as the most important factor contributing to workplace fraud, this legislative function places Colin Murphy at the forefront of the prevention of public sector fraud in Western Australia.