AT-A-GLANCE

For the past quarter century, every two years the Association of Certified Fraud Examiners (ACFE) has issued a comprehensive analysis of the impact of financial fraud. However, with the rise of the coronavirus pandemic this past year, the ACFE has supplemented the biennial report with quarterly updates assessing specifically the impact of COVID-19 on fraud within organizations. This issue of the Audit & Accounting Alert summarizes the latest findings.

Our Worldwide Update is again split into two sections. The first covers COVID-19 news from organizations across the globe, while the second covers other news.

Gerald Herter – Editor

Fraud in the Wake of COVID-19

Latest report tracks the trending increase in fraud levels

In April 2020, the Association of Certified Fraud Examiners (ACFE) issued the eleventh biennial Report to the Nations on Occupational Fraud and Abuse, an in-depth study of the causes and effects of occupational fraud throughout the world.  The stated goal of the report was to “compile detailed information about occupational fraud cases in five critical areas:

• The methods by which occupational fraud is committed,
• The means by which occupational frauds are detected,
• The characteristics of the organizations that are victimized by occupational fraud,
• The characteristics of the people who commit occupational fraud,
• The results of the cases after the frauds have been detected and the perpetrators identified.”

Based on survey data provided by certified fraud examiners (CFE) from 2,504 actual cases across 125 countries and 23 industry categories, the median response by CFEs of the annual loss to organizations from fraud is 5% of revenue, the same as in the 2018 survey. Applying that percentage to Gross World Product (GWP), the authors theorized that the potential cost of fraud worldwide is more than $4.5 trillion annually.

The survey covered the time period from January 2018 through September 2019, before the introduction of COVID-19 in early 2021. Consequently, the ACFE instituted a series of new surveys leading to reports in June, September, and December 2020, that assess the impact of the pandemic on fraud risks and anti-fraud programs in the prior month. The latest edition of  the Fraud in the Wake of COVID-19: Benchmarking Report was published on December 18, 2020.

The December 2020 edition of the quarterly report showed the trend from responses to twelve questions. The responses were evenly spread, with a quarter from companies with less than 100 employees, a quarter with more than 10,000 employees, and the rest in between. About half were from the United States. The vast majority of respondents perform fraud investigatory functions in the private sector, with about a quarter each coming from the banking and financial services or governmental and public administration sectors, with the others spread across the twenty-four industries surveyed.

The twelve questions focused on how COVID-19 is affecting four areas:

1. overall level of fraud
2. specific fraud risks
3. organizations’ anti-fraud programs
4. ability to fight fraud

The June edition already showed an overall fraud increase of 68%, while by December 79% of respondents were experiencing the upswing, with almost 40% indicating a significant increase. What’s more, most expect an even greater increase in the coming twelve months, with almost half anticipating a significant effect.

Of the twelve specific areas of fraud risk surveyed, all were found to be present and expected to increase. Cyberfraud was noted to be the most prominent. This area included business email compromise, hacking, ransomware, and malware. Other prominent areas noted were credit card fraud, fraudulent mobile payments, identity theft, and unemployment fraud.

With regards to anti-fraud programs, almost half of participants plan to increase their anti-fraud budget, increase or maintain their anti-fraud staffing, and spend more on anti-fraud technology, while only a small number expect decreases. Anti-fraud training and use of consultants will also increase, while, not surprising, the travel budget (because of COVID) for anti-fraud staff will see more decreases than increases.

About three quarters of the respondents indicated that the prevention, detection, and investigation of fraud were more difficult since the advent of COVID-19. The most prevalent obstacles involved physical restrictions, remote interviews, and lack of access to evidence.

Recognizing the increased complexities brought on by the pandemic and other pressing crises, KPMG in December 2020 published separate reports directed at audit committees and corporate boards, laying out several issues that will require expanded attention and diligence. Among the growing and increasing challenges addressed that surround the business and risk environment, are those that are fraud related.

Audit committees are called upon to “reinforce audit quality and understand the impact of COVID-19 on the external audit process.” Risk assessment, the internal control environment, and the impact of remote audit procedures must be re-evaluated. The Center for Audit Quality’s Focus on the Auditor’s Risk Assessment is referred to as a good resource for new insights into a number of areas, such as cybersecurity, including data security in a virtual environment, and the heightened risk of fraud due to COVID-19.

The key role of internal audit is also considered for the prevention, detection, and remediation of fraudulent acts. Furthermore, a company’s ethics, compliance and whistleblower programs are called out for special attention, considering the added economic, physical, and emotional pressure that employees are dealing with during the pandemic.

Corporate boards are tasked with priorities that respond to the same concerns facing audit committees, while recognizing the board’s broader role of overseeing management as well as “keeping sight of the bigger picture.” For example, the board should ascertain that structures are in place to assure cybersecurity protection from fraud and for regulatory compliance. Also, readiness and resilience plans should be assessed for effectiveness for responding as incidents occur.

The International Ethics Standards Board for Accountants (IESBA) in December 2020 also issued guidance in two publications: Navigating the Heightened Risks of Fraud and Other Illicit Activities During the COVID-19 Pandemic, including Considerations for Auditing Financial Statements, and COVID-19 and Evolving Risks for Money Laundering, Terrorist Financing and Cybercrime. These documents cover similar themes as discussed above, along with fraud issues from improperly exploiting governmental COVID-19-related programs.

Further details can be found at Fraud in the Wake of COVID-19: Benchmarking Report and Navigating the Heightened Risks of Fraud and Other Illicit Activities During the COVID-19 Pandemic, including Considerations for Auditing Financial Statements.

(https://www.acfe.com/covidreport.aspx) and (IRBA, IESBA and IAASB Jointly Issue Staff Guidance on Navigating the Heightened Risks of Fraud and Other Illicit Activities During the COVID-19 Pandemic | IFAC (ethicsboard.org).

Coronavirus (COVID-19) Updates

Periodic roundup of recent and upcoming actions and activities by audit and accounting organizations throughout the world.

IASB – International Accounting Standards Board (www.ifrs.org)

No new developments.

IFAC – International Federation of Accountants (www.ifac.org)

1. Agreed-Upon Procedures (AUP) Engagements: A Growth and Value Opportunity (the AUP Publication).Update published December 21, 2020, “describes AUP engagements, when they are appropriate, and identifies key client benefits. It also covers AUP engagements on financial and non-financial subject matters, provides six short case studies with example procedures that might be applied and two illustration AUP reports from ISRS 4400 (Revised).”
2. Choosing the Right Service: Comparing Audit, Review, Compilation, and Agreed-Upon Procedures Services (the Brochure). Update published December 21, 2020, “explains and differentiates the range of audit, review, compilation, and agreed-upon procedures services which practitioners can provide in accordance with relevant international standards. It can help current and prospective clients understand the range of services available, when they are appropriate, as well as their benefits.”

ACCA – Association of Chartered Certified Accountants (www.accaglobal.com)

No new developments.

CIMA – Chartered Institute of Management Accountants (www.cimaglobal.com)

No new developments

IIRC – International Integrated Reporting Council (www.theiirc.org)

1. Reporting on enterprise value – Illustrated with a prototype climate-related financial disclosure standard, published December 18, 2020, jointly with CDP, the Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative (GRI), and the Sustainability Accounting Standards Board (SASB). The five organizations “have co-authored an illustration of how their current frameworks, standards and platforms, along with the elements set out by the Task Force on Climate-related Financial Disclosures (TCFD), can be used together to provide a “running start” for development of global standards that enable disclosure of how sustainability matters create or erode enterprise value.”

WORLD ECONOMIC FORUM (www.weforum.org)

No new developments

Africa, Europe, India and the Middle East (AEIME)

FRC – Financial Reporting Council of the UK (www.frc.org.uk)
 

1. Interest Rate Benchmark Reform—Phase 2 (Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16), issued January 6, 2021. “The Amendments focus on the effects on financial statements when an entity replaces the old interest rate benchmark with an alternative benchmark rate as a consequence of the global regulatory reform of key interbank offered rates (IBORs).” Effective for accounting periods beginning on or after 1 January 2021, with early application permitted.
2. Extension of the Temporary Exemption from Applying IFRS 9 (Amendments to IFRS 4), issued January 6, 2021. “The Amendments extend the expiry date of the temporary exemption from applying IFRS 9 Financial Instruments from 1 January 2021 to 1 January 2023, to align the effective dates of IFRS 9 with IFRS 17 Insurance Contracts for entities within the scope of the exemption.”
3. Amendments to UK and Republic of Ireland accounting standards – UK exit from the European Union, issued December 21, 2020, to “update UK and Republic of Ireland accounting standards for changes in legislation following the UK’s exit from the European Union that come into effect at the end of the Transition Period.” Effective for accounting periods beginning on or after 1 January 2021, with early application permitted for UK entities in certain circumstances.
4. Amendments to FRS 102 – Interest rate benchmark reform (Phase 2), issued December 21, 2020. “These amendments respond to the financial reporting issues arising from interest rate benchmark reform, and are intended to adapt and simplify accounting requirements in that context and provide disclosure of the nature and extent of the risks arising, thereby minimising reporting costs for entities applying FRS 102 and enabling them to provide useful information to the users of their financial statements. The amendments are effective for accounting periods beginning on or after 1 January 2021, with early application permitted.”

ICAEW – Institute of Chartered Accountants in England and Wales (https://www.icaew.com/)

No new developments

EFRAG – European Financial Reporting Advisory Group(www.efrag.org)

No New Developments

Americas, Asia, Australia & New Zealand (AAANZ)

AICPA – American Institute of Certified Public Accountants(www.aicpa.org)

1. Assurance Services Executive Committee (ASEC) – Implications of the Use of Blockchain in SOC for Service Organization Examinations, White Paper published December 22, 2020. “The paper examines the skills and competencies auditors need to perform such engagements, the unique features of blockchain, the risks associated with using blockchain, and how the use of blockchain by service organizations may affect their SOC examinations.”

FASB – Financial Accounting Standards Board (www.fasb.org)

1. Reference Rate Reform – Scope (Topic 848), ASU 2021-01, issued January 7, 2021, “clarifies the scope of the FASB’s recent reference rate reform guidance.” Effective immediately.
2. Exposure Draft – Intangibles—Goodwill and Other (Topic 350) Accounting Alternative for Evaluating Triggering Events. Proposed Accounting Standards Update issued December 21, 2020, “intended to provide an accounting alternative that would reduce the complexity for certain private companies and not-for-profit organizations when performing the goodwill triggering event evaluation.” Comment period ends January 20, 2021.
3. Exposure Draft – Business Combinations (Topic 805) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. Proposed Accounting Standards Update issued December 15, 2020, “intended to address inconsistency and diversity in practice related to the accounting for revenue contracts with customers acquired in a business combination.” Comment period ends March 15, 2021.

GASB – Governmental Accounting Standards Board (www.gasb.org)

No new developments

COSO – The Committee of Sponsoring Organizations of the Treadway Commission (www.coso.org)

No New Developments

PCAOB – Public Company Accounting Oversight Board (www.pcaob.org)

No new developments

SASB – Sustainability Accounting Standards Board (www.sasb.org)

No New Developments

SEC – Securities and Exchange Commission (www.sec.gov)

No new developments

ADDITIONAL A&A NEWS

The 3 Biggest Lessons From COVID-19 for Accounting and Finance Pros
(The 3 Biggest Lessons From COVID-19 for Accounting and Finance Pros | CPA Practice Advisor)

U.K. Financial Reporting Council reports record fine against Deloitte for Autonomy audits
(U.K. Financial Reporting Council reports record fine against Deloitte for Autonomy audits | Accounting Today)

The Use and Characteristics of Foreign Component Auditors in U.S. Multinational Audits
(The Use and Characteristics of Foreign Component Auditors in U.S. Multinational Audits: Insights from Form AP Disclosures* – Burke – 2020 – Contemporary Accounting Research – Wiley Online Library)

Data preparation for CPAs: Extract, transform, and load
(https://www.journalofaccountancy.com/issues/2020/dec/data-preparation-for-accountants.html)

U.S. Accounting Standard-Setter Looks to Tackle Controversial Topics in 2021
(U.S. Accounting Standard-Setter Looks to Tackle Controversial Topics in 2021 – WSJ)

The SEC fires a warning shot about COVID-19 disclosures
(The SEC fires a warning shot about COVID-19 disclosures | Accounting Today)

Accounting Today’s complete coverage of the coronavirus impact
(https://www.accountingtoday.com/coronavirus?utm_source=newsletter&utm_medium=email&utm_campaign=ACT_Weekly_IRS+Watch_reset20200101%2B%27-%27%2B04012020&bt_ee=UFThhPnxqwgF6drHIeCA4zKTxxilQnMChK%2Bu7UcHs1OB9lm8aLso1E6Ek1HHMcwk&bt_ts=1585756935482)

Accountancy Age’s Resource on UK regulations on accountancy during coronavirus
(https://www.calcpa.org/sitecore/content/Sites/Public/home/news-and-resources/coronavirus2?utm_source=ESP&utm_medium=email&utm_campaign=calcpa%2Deducation%2Dfoundation&_zs=PoR2g1&_zl=ttUe6)

California CPA Society Coronavirus Resources and Information
(https://www.calcpa.org/sitecore/content/Sites/Public/home/news-and-resources/coronavirus2?utm_source=ESP&utm_medium=email&utm_campaign=calcpa%2Deducation%2Dfoundation&_zs=PoR2g1&_zl=ttUe6)

Accountingweb’s Coronavirus Content Series
(https://www.accountingweb.com/content/coronavirus-content-series)

Accountancy Daily Corona Virus Resources
(https://www.accountancydaily.co/coronavirus-0)

China Briefing’s Coronavirus Insights for Your Business in China
(https://www.china-briefing.com/landing/coronavirus-updates)

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