The Saudi Organization for Certified Public Accountants (SOCPA) issued a strong warning to practitioners in the financial and accounting sector, emphasizing that the risk of fraud resulting from management's circumvention of internal control mechanisms represents one of the most significant challenges to the reliability of financial statements. SOCPA stressed that this type of risk is mandatory under International Standard on Auditing (ISA) 240, and external auditors cannot assume its absence or disregard it due to its complex nature and potentially material impact on the financial position of entities.
The fundamental difference between error and cheating
In its detailed analysis of risks, the Authority explained in its "Guide to Effective Risk Assessment" that misrepresentations in financial reports typically stem from two sources: unintentional error or deliberate fraud. The crucial difference between them lies in the element of "intent"; fraud is a planned act intended to mislead users of financial statements, while an error occurs without prior intent. The Authority emphasized that the danger of management overstepping its control lies in the ability of executives, by virtue of their position, to manipulate accounting records, giving them a unique opportunity to carry out fraudulent activities that may be difficult to detect using traditional methods.
The importance of professional skepticism in the modern business environment
SOCPA emphasized the need for auditors to maintain "professional skepticism" throughout the audit process and not to rely solely on superficial appearances of the figures. It noted that standard error detection procedures are often insufficient to uncover complex cases of fraud involving collusion or sophisticated falsification. This directive comes at a time when the Kingdom is experiencing significant economic activity that necessitates the highest standards of transparency to bolster confidence in the financial market and attract foreign investment, as the accuracy of financial statements is a cornerstone of investment decisions.
Economic context and promoting transparency
This move by the Authority aligns with the goals of the Kingdom's Vision 2030, which aims to enhance governance and transparency in the business sector. Maintaining the integrity of financial reporting not only protects shareholders but also strengthens the national economy and reduces systemic risks. Management's disregard for regulatory controls not only threatens a specific entity but can also impact transaction categories and account balances, necessitating a rigorous professional response and a thorough risk assessment.
Ongoing initiatives to improve quality
It is worth noting that the Saudi Organization for Certified Public Accountants (SOCPA) continues its awareness and oversight efforts, having recently launched the "Accounting Disclosures" initiative. This initiative aims to raise professional awareness of the content of international standards and highlight highly sensitive aspects of financial statements, thereby contributing to increased auditor efficiency and greater confidence in accounting outputs, which will positively impact the business and investment environment in the Kingdom.
