5 tips to cultivate a sceptical mindset

• Healthy, informed scepticism is vital to high quality financial reporting.
• Screening new clients, especially those at high risk of money laundering, is imperative.
• Obtaining a detailed insight into a client will provide you with critical information from both a legal and ethical standpoint – customer due diligence is key.
• Working collaboratively with other colleagues and peers can help prevent bias as well as conflicts of interest that can lead to erroneous reporting.

A sceptical mindset is essential for accountants to avoid being negatively impacted by both fraud and errors.

Incidents such as the Financial Reporting Council’s £15 million fine for Deloitte for failing to apply professional scepticism in relation to software company Autonomy and Santander UK’s £100 million penalty for “serious and persistent gaps” in its money laundering controls bring into sharp relief the need for both vigilance and scepticism.

“High-quality financial reporting and audit are vital to provide users of financial statements with confidence in the accuracy of those statements and to uphold trust in corporate Britain,” says Elizabeth Barrett, Financial Reporting Council executive director of enforcement.

Keith Bowman, FCPA and CEO at the Ontario Public Accountants Council and W. Morley Lemon, FCPA, an Accounting and Audit Professor Emeritus at the University of Waterloo, Canada, suggest the way to achieve this is by the application of healthy, informed scepticism.

Being more sceptical is not just an attitude change, they say.

Rather, it is a number of factors, ranging from personal technical competence to moral courage, that can improve the quality of financial reporting.

Here, five ways you can cultivate a sceptical mindset and bring it to every aspect of your work.

1. Approach new clients with suspicion and always doubt change

Russia's invasion of Ukraine has highlighted the risks of money laundering and illicit finance, says the Office for Professional Body Anti-Money Laundering Supervision.

To this end, and as of 21 July 2022, accounting services in the UK have been restricted for people who are connected directly or indirectly to Russia.

Screening new clients, especially those assessed at high risk of activities such as money laundering, is imperative to ensure on-boarding of appropriate clientele.

Clients with political exposure to countries known for high levels of bribery and corruption are also worthy of special scrutiny, while overseas clients who own UK property are legally required to be on the Register of Overseas Entities.

While the pandemic has forced many clients to consider radically new ways of earning an income, it has also opened the door to ungenuine activities linked with fraud.

In the event of an existing client radically changing their business operations, or with a marked increase in revenue, questioning the changes and assessing answers with suspicion is essential.

2. Prioritise the hard questions

Ensure you obtain a detailed insight into a client by examining how they run their business, their business relationships and past involvements, their attitudes towards their legal obligations as a business owner, their criminal record, their source of income and financials compared to industry benchmarks, and their history of dealing with previous accountants.

This is critical information in determining the viability of that client from a legal and ethical standpoint.

You can also cross-check details supplied by a client with information reported in government databases such as the National Health Service or HMRC.

Remember that Customer Due Diligence is an ongoing process, not a one-off, especially if clients make any significant financial changes or their circumstances vary.

3. Monitor your thinking for bias

Professional accountants should strive for self-awareness of their own biases and the impact of these.

Availability of information can be a key bias – corroborating financial details and looking for opposing evidence are part of a sceptical mindset that can help prevent fraud and errors.

Rather than asking ‘Would I conclude from the evidence I have that this person has been truthful?’, try asking ‘Can I find evidence to disprove what this person has told me?’.

4. Don’t be all things to all people

Working collaboratively with others to gain different perspectives, discuss ideas and concepts with others who think in different ways, and avoid making decisions based upon the beliefs or messages you have previously been exposed to are all ways to reach better-reasoned conclusions.

Collaborating to offer services within an alliance drawn between independent smaller businesses also mitigates conflict of interest risks – balancing the desire to be a central business adviser to each client, for example across consulting, tax and advisory, with the need to maintain perspective.

5. Sharpen scepticism through practical experience

Read up and speak with your peers – every instance of fraud or erroneous reporting that has been detected is an opportunity to learn. So get used to asking ‘why?’.

Why did your colleague get suspicious about their client’s new side hustle? What was it about that property purchase that raised a red flag? What was the tip off that those expenses weren’t quite right? Have you seen any similar flags for your own clients?

Work experiences that develop skills related not only to critical thinking, but healthy scepticism can be immensely instructive, particularly when a strong supervisor or mentor is an integral part of the individual’s development, advise Bowman and Lemon.

As accountants move through the ranks, they will benefit not only from increased knowledge of acceptable accounting treatments and methodologies, but will be able to draw on previous instances where they have experienced error or fraud.