The Benefits of Utilizing Electronic Confirmations for Clients and Auditors
Gisèle Couturier, Audit Senior Manager
As the business world becomes increasingly paperless, the auditing process has followed suit. Any organization that participates in an audit understands the potential difficulties surrounding confirmations. Just 15 years ago, the only way for auditors to confirm a client’s balance with a financial institution was to have the client prepare and sign paper confirmations, which were then mailed by the auditors. The requirement that the auditor mail all confirmations was an attempt to control the process, ensuring the confirmations were sent to valid addresses and returned directly to the auditor. In addition to being inefficient for all parties involved, history has proven that this process is not free from potential fraud. Enter Confirmation.com. Inspired by his experience at two “big four” firms, the founder of Confirmation.com sought to reinvent the confirmation process by transforming the standard paper method into a more efficient and reliable electronic process.
How Confirmation.com Works
Rather than drafting annual paper confirmations for the auditor, clients utilize an authentication and authorization process on the Confirmation.com website for each financial institution with which they do business. Each year-end, the auditors access their own Confirmation.com account, where they are able to request balance confirmations for authorized accounts as of a specified date. These requests can even be submitted by the auditors in advance. Designated bank personnel process the requests and notify the auditors that their confirmations are complete. This entire process can occur within as little as 24 hours. The auditor receives a quick response and can be confident that the confirmation has not been intercepted or subject to fraud at any point in the process. This reduces time spent mailing multiple confirmation requests, following up with banks, and tracking down missing confirmations that can hold up the audit.
To better understand how using Confirmation.com can uncover and reduce instances of fraud, consider the story of China-based media company China MediaExpress. Prior to 2011, the company exclusively used paper confirmations. Unbeknownst to the company’s auditors, the company had overstated its cash position by $160M in order to raise funds through sales of its stock. The CEO also benefitted by seeing his stock bonuses rise to approximately $6M in value. By diverting paper confirmations, the CEO had been able to falsify confirmation responses. When one of the company’s banks switched to electronic confirmations through Confirmation.com, the auditors became suspicious of fraudulent confirmations and resigned from the engagement. Within weeks of the first allegations of fraud, the stock plummeted by over 90%. Investors suffered huge losses and the stock was subsequently delisted from the U.S. stock exchange.
In another highly publicized fraud scandal, Confirmation.com helped uncover fraud by CEO Russell Wasendorf of Peregrine Financial Group. To hide the declining financial standing of this brokerage firm, the CEO skimmed funds from customer accounts over a period of 20 years. He falsified paper bank confirmations that were sent to an address that he owned. The confirmation responses matched the bank statements, which he was preparing and providing to the company’s accounting department. When the auditors decided to switch to Confirmation.com, the CEO refused to grant permission. Months later, he conceded, but knowing the end was in sight, attempted suicide before the confirmation responses were received. The company was shut down in July 2012, after authorities discovered he had embezzled $215M from customer accounts.
While BNN does not have any ties to Confirmation.com, financial or otherwise, we do have extensive experience using this service during our audits. Since the formation of Confirmation.com, other on-line confirmation companies have come into the market; however, Confirmation.com continues to be the industry leader. We can attest to the fact that this electronic process has significantly increased efficiency in our audit process and reduced the burden on our clients. Feedback from clients has been overwhelmingly positive. We often hear that they would like to see more of their financial institutions utilizing the service. It should also be noted that the service is free to financial institutions. Fees are paid directly by the auditors at the time an account confirmation is requested.
For more information pertaining to Confirmation.com, please visit Confirmation.com.
If you have any questions, please call your BNN service provider at 1.800.244.7444.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.