Can You Really Rely on Auditors to Catch Sponsor Fraud?
Contrary to popular belief, audits are not designed to be thorough enough to catch most fraud. And even with that low bar, the so-called "best" accounting firms (the "Big 4") have been repeatedly penalized for inadequate care and misconduct. How can investors protect themselves?
(Usual disclaimer: I'm just an investor expressing my personal opinion and not a financial advisor, attorney or accountant. Consult your own financial professionals before making any financial decisions. Code of Ethics: We do not accept any money from any sponsor or platform for anything, including postings, reviews, referring investors, affiliate leads or advertising. Nor do we negotiate special terms for ourselves in the club above what we negotiate for the benefit of members.).
Recently, I was talking with a fellow investor about a fund that seemed to have numerous potential yellow flags for fraud (like misleading marketing and the sponsor refusing to release common financial information to investors). He said to me, "I don't have to worry about fraud. They're audited by " (a Big 4 accounting firm that I won't name). "That proves they're on the up-and-up!"
That's a very common way of thinking. And unfortunately, there are two major flaws with it.
"Oh, ha ha. Were you expecting me to look for *fraud* with that audit?"