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Auditors Expand Attack on Fraud
April 2004
Numerous stories of financial statement fraud and alleged misconduct have
been covered in the media in the recent past including WorldCom, Xerox,
Enron, Adelphia and Tyco, to name a few. To implement accounting reform
and corporate accountability, the Congress passed and the President signed
the Sarbanes-Oxley Act of 2002. While the Act applies to public companies,
closely-held businesses and not-for-profit organizations have also been
affected by the recent frauds.
At about the same time as the Sarbanes-Oxley Act was passed, the American
Institute of Certified Public Accountants (AICPA) issued a statement entitled
Consideration of Fraud in a Financial Statement Audit (Statement on Auditing
Standards No. 99, SAS 99). The new set of rules is just one component
of the AICPA’s ongoing, comprehensive antifraud and corporate responsibility
program. SAS 99 applies to all financial statement audits, regardless
of the type of entity (public company, closely-held company, not-for-profit,
etc.) being audited.
While the new standard does not change the auditor’s responsibility
for fraud detection, it does require the auditor to take extra steps to
uncover it. SAS 99 will result in a substantial change in audit practice
and more effective audits as it requires the independent auditor to obtain
a more in-depth understanding of their clients, including its internal
controls, to identify the risks of material misstatements in the financial
statements and determine what the clients are doing to mitigate those
risks. Accounting firm clients, bankers, users of audited financial statements
as well as the general public have increasing expectations on the ability
of the external auditor to detect fraud.
Whether you are a private business owner, a controller or a board member
of a not-for-profit organization, this new audit standard will affect
your organization’s interaction with the audit team.
Benefits of the new standard
Implementing new audit procedures can be challenging and uncomfortable
at times. However, the new standard has some significant benefits for
organizations. Examples include:
• Your auditors will discuss with management, owners and boards
fraud risk factors, both those related to fraudulent financial reporting
(i.e., cooking the books) and misappropriation of assets (i.e., stealing)
• Based upon the information your auditors gather as a result
of the expanded procedures called for in SAS 99, your auditors may:
- evaluate whether the programs and controls your organization currently
has in place address fraud risks factors identified and,
- make recommendations to help your organization deter and detect fraud
in order to prevent financial losses from misappropriation of assets.
How the new standard affects the audit procedures
The following are some of the effects an organization may notice during
the audit as the audit team applies the requirements of the new standard:
• Additional inquiries and communications by the audit team
• Additional emphasis on controls to prevent stealing, including
controls over cash disbursements
• Examination of journal entries and other adjustments
• Performance of a “retrospective review” of prior
accounting estimates made by management for biases
• Use of electronic testing approaches utilizing computer-assisted
audit techniques designed to “mine” the source data for
unusual relationships and trends
• Developing an understanding of the business rationale for significant,
unusual transactions including related party transactions and major
property sales and exchanges
• Introduction of an element of “surprise” in the
scope, timing and extent of procedures performed.
In conclusion, SAS 99 will have an impact on the way audits are done
for private companies and non-profit organizations. However, CPAs are
well qualified and trained to dig through financial records and ferret
out the type of information needed to draw conclusions about the existence
of fraud – a valuable asset to any organization.
Margaret J. Tanney, CPA, is a Shareholder with Alpern Rosenthal. She
can be reached at mtanney@alpern.com.
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