Experts: Fraud, Ethics Top List of Profession’s Concerns

New York (Dec. 14, 2002) — With the nation’s auditors under the microscope of both public and regulatory scrutiny, a consortium of experts from the accounting and legal professions revealed a host of new strategies to help ensure thorough audit standards as well as policies to manage exposure to risk.

The recent adoption of SAS 99 — Consideration of Fraud in a Financial Statement Audit — coupled with the passage of Sarbanes-Oxley, has changed the landscape of SEC audits, placing increased pressure of the auditor to ferret out fraud.

“Detection of audit fraud must include professional skepticism,” said James D. Feeney, audit partner at McGladrey & Pullen, at an auditing conference, here sponsored by the New York State Society of CPAs. Feeney said an auditor’s mindset must recognize the possibility of fraud, regardless of past experience with the client. “It could be a your closest golfing buddy,” he warned.

Feeney said some red flags for potential fraud include: declines in a client’s customer demand; highly complex transactions that the clients normally would not enter into, and repeated attempts by management to justify inappropriate accounting.

Dan Goldwasser, a partner in the New York law firm of Vedder Price Kaufman & Kammholz, and a long-time liability counsel to the profession, told attendees that the accounting profession is facing an “ethical crisis.”

“Ethical standards should be out in front of the law,” said Goldwasser. “But the accounting profession lags behind. Sarbanes-Oxley came about largely because the accounting profession communicated to Congress that it was unwilling to regulate itself.”

Goldwasser advocated education both in professional standards and firm standards and systems, as one initiative to help firms comply with ethical standards.

Robert Bayless, one of the point people in the SEC’s Division of Enforcement, said the division has investigated 504 cases in 2002 — with roughly one third of those being audit fraud — and levied fines and penalties of some $116 million. That's up from 112 fraud cases in 2001 and 103 in 2000.

“We’re seeing three types of fraud,” said Bayless. “Old fashioned fraud, ‘Number Magic’ fraud and ‘New Economy’ fraud.”

Bayless explained that old-fashioned fraud was defined by actions such as premature revenue recognition, games with inventory and ‘hokey’ asset recognition. Number magic was defined as changes in accounting methods and “cookie jar’ reserves, while new economy fraud consisted of asset swaps, off-balance sheet entities and ‘pro-forma’ reporting.

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