Auditors' Responsibility for Detecting Fraud: Putting Ethics and Morality First

Article excerpt

The public accounting profession has been held virtually blameless for its role in the events that led up to the recent global financial meltdown - which, to many, seemed to be a "crisis with countless victims but no perpetrators" (Francesco Guerrera, "Crisis with Countless Victims but No Perpetrators," Financial Times, November 15, 2010). The destruction of wealth in excess of over $30 trillion has resulted in permanent losses for some and a decade of recovery for others. Some might characterize these failures as the breakdown of ethics and morality within the profession (William Stephens, Carol Vance, and Loyd S. Pettegrew, 'Embracing Ethics and Morality: An Analytic Essay for the Accounting Profession," The CPA Journal, January 2012). This author, however, suggests a more practical and reasoned explanation: generally accepted accounting principles (GAAP) and generally accepted auditing standards (GAAS) are not designed to uncover fraud, and auditors are not taught that they have a responsibility to protect society and the public interest. (The Exhibit shows the number - or lack thereof- of fraud, ethics, and social responsibility courses at 10 accounting schools.)

The following discussion asserts that the profession is no less ethical or moral than in the past, but that it has abandoned the vision of one of America's founding fathers of auditing, George May, in his "zeal to protect the public trust" and to "use accounting as a social force" (Twenty-Five Years of Accounting Responsibility: 1911-1936, Price, Waterhouse & Co., 1936). The profession has abdicated its responsibility to the public it serves.

A Young and Honorable Profession

It is easy to forget that the public accounting profession is also a new profession. Unlike the evolution of medicine, engineering, or law, which took place over thousands of years, the attest function of the public accounting profession is barely more than 100 years old. The foundation of our knowledge is primarily rules- and principles-based, unlike the fields of medicine and law, which are primarily case-based.

The accounting profession's newness is demonstrated by the fact that it has not yet formally codified a single set of professional standards, defined by the AICPA and Public Company Accounting Oversight Board (PCAOB), relating to auditing, attestation, quality control, ethics, and independence. In fact, according to the most recent PCAOB Standards and Related Rules, as of January 2011:

The AICPA has not made conforming changes to the PCAOB' s Interim Professional Standards to reflect the requirements and intent for standards issued by the PCAOB and approved by the SEC. Therefore, there may be conflicts between a PCAOB standard and the PCAOB' s Interim Professional Standards (AICPA, Release No. 2003-006).

Furthermore, no comprehensive global accounting framework for presenting financial statements currently exists. While billions of dollars of investment capital cross borders daily and the largest U.S., U.K., Japanese, and French corporations do business in a global environment, basic convergence (or, more recently, condorsement) between U.S. accounting principles and practices and the newly empowered International Financial Reporting Standards (TFRS) is not expected until 2015 or later under the new SEC timetable (unanimously approved in February 2010).

Institutional ethics have not broken down; the profession and its members remain highly ethical. A CPA's institutional role is to serve as the moral and ethical compass within our democratic society, to ensure that financial disclosure and reporting of government and private enterprises are truthful, honest, fair, accurate, and responsible (Richard H. Kravitz, "Socially Responsible Accounting: A Call for Reform in the Profession," The CPA Journal, November 2009). The AICPA clearly defines a CPA's role in society as one characterized by a "commitment to objectivity, integrity, competence; excellent performance on behalf of clients, employers, and the public; and accountability for the highest professional and business ethics" (AICPA Annual Report, 2007-2008). …