Professional skepticism by auditors, finance professionals, and all participants in the financial reporting supply chain is crucial for the deterrence and detection of fraud, a new report from the Anti-Fraud Collaboration says. Organizations must critically assess potential fraud risks and be aware of potential biases that can lead to criminal activity, the Skepticism in Practice report asserts.
“Oftentimes, we view the activities of others through the lens of our own experiences and biases,” said IIA president and CEO Richard Chambers in a statement. “As a result, we may not recognize the potential these biases have in our ability to fully consider those activities and identify potential problems. That’s where skepticism comes in. It allows us to avoid being blindsided, and to not simply accept certain practices as appropriate. Importantly, skepticism helps us to root out fraud.”
The organizations that make up the Anti-Fraud Collaboration, the Center for Audit Quality (CAQ), Financial Executives International (FEI), the National Association of Corporate Directors (NACD), and the Institute of Internal Auditors (IIA), also surveyed their members to evaluate the balance of trust and skepticism in their companies. A majority believe there is an appropriate balance between the two, with 79 percent of NACD members and 46 percent of IIA members reporting a comfortable balance. Less than 10 percent of all the organizations’ members reported more skepticism than trust in their financial reporting systems. The largest proportion of respondents who said their organization had more trust than skepticism came from the IIA, at 42 percent, while one-in-three FEI members and one-in-five CAQ and NACD members reported more trust than skepticism.
The Center for Audit Quality described six characteristics of skepticism: a questioning mind, suspension of judgment until appropriate evidence is obtained, a desire to search for knowledge and corroborate information, an understanding that people’s motivation and perceptions may lead them to provide biased or misleading information, autonomy or independence of mind, and sufficient self-esteem to challenge assumptions and resist pressure.
NACD recommends empowering the audit committee to ask questions of management and auditors, to gain insights from auditors on understanding and mitigating fraud risks, to support the internal audit function, to encourage management to be vigilant, and to express positivity by demonstrating and supporting proper etiquette and good ethics.
The report authors pointed out that during a year of crisis, effective skepticism is even more essential when teams are making efforts to show success amidst a wide range of challenges. To effectively deter and detect fraudulent activity, the Collaboration recommends recognizing the limits of team’s objectivity and avoiding the temptation to jump to conclusions. Auditors and finance professionals should seek out a wide range of information, particularly that which might be contradictory to initial assumptions. 
Elizabeth Mullen is an editorial consultant for Internal Audit 360°.