Copyright © Daniel Cullinane CPA.
In the wake of the corporate downfalls of companies like Enron and WorldCom, focus in 2011 is on auditors to find misdeeds before they hit the front page of the newspaper. Contributing to the reliance on auditors is the 2002 passage of the Sarbanes-Oxley Act. This act effectively tightens accounting controls and regulates the roles of internal and external auditors. Because of this act, the external auditor faces added responsibilities in detecting and reporting fraud.
The signing of the Sarbanes-Oxley Act (SOX) in 2002 changes the way publicly traded companies report their earnings. The act is geared toward making corporations accountable for misleading information in their financial reports. Under the Sarbanes-Oxley Act, a public company must hire an external audit team to review their accounting procedures and their financial statements. In addition, the act separates the internal and external audit duties. Before this act, some companies were able to engage their contracted external auditors into performing internal audits. Section 404 of the act outlines the duties and responsibilities of the external auditor.
Auditor's Responsibility for Detecting and Reporting Fraud
Under the Sarbanes-Oxley Act each public company should have an audit committee that oversees and governs the integrity of financial reporting within the company. This committee also oversees the auditors, both internal and external. Upon finding evidence of fraudulent accounting, the external auditor must communicate her findings to the committee or other governing body within the organization. The external auditor also reports findings of procedures that could possibly put the company at risk of possible fraud. Under the act, the auditor cannot assist in creating new procedures or guidelines for the company. They must maintain a professional distance and can only offer opinions and assessments of current systems.
Types of Accounting Fraud
The most common type of fraud auditors uncover is revenue recognition errors. Revenue recognition is reporting revenue that the company earns. Some companies may mistakenly report revenue that is not completely earned, which happens in cases where payment is for an annual period and the company reports all the revenue upfront. The correct reporting would recognize or report the revenue over a year. Auditors also find evidence of fraud in estimates of accounts payable and other accounting estimates. Some findings are not fraudulent but may lead to accounting errors or put the company at risk such as overlapping accounting duties. For example, the person who makes the bank deposit should not balance the bank statement.
Ways to Detect Fraud
External auditors review journal entries and interview the company's accountants on procedures to uncover potential risks. They will meet with management to gain an understanding of procedures and then test those procedures for SOX compliance. They also review any large or unusual transactions or journal entries that occur outside the normal scope of business. Auditors also ensure that there are proper controls in place to deter any possibilities of fraud.
AUDITOR'S RESPONSIBILTY FOR DETECTING FRAUD
Daniel Cullinane CPA
25 Plaza 5 25th fl Jersey City NJ phone 732-516-1648 fax 732-516-9778
2500 Plaza 5 25th fl Jersey City NJ 07311 phone 732-516-1648 fax 732-516-9778