Academic journal article Journal of Accountancy

How Many Audit Traps Can You Spot? CPAs Must Be Able to Spot the Possible Early Warning Signs and Risks of Accounting Chicanery, Fraud, Inaccurate Financial Reporting, and Business Failure

Academic journal article Journal of Accountancy

How Many Audit Traps Can You Spot? CPAs Must Be Able to Spot the Possible Early Warning Signs and Risks of Accounting Chicanery, Fraud, Inaccurate Financial Reporting, and Business Failure

Article excerpt

Financial managers and auditors alike can learn valuable lessons from accounting scandals and audit failures. These lessons serve to improve the quality of financial statement audits by helping CPAs identify possible early warning signs and risks of accounting chicanery, fraud, inaccurate financial reporting, and business failure.

Presented below are circumstances and observations that should grab the attention of an auditor if he or she observes these situations at a client. These "attention grabbers" have been compiled based on a review of accounting scandals and business failures.

A company culture of arrogance and management entitlement. Management that engages in deceptive accounting practices or fraudulent financial reporting often exhibits high levels of arrogance, pride, greed, and hubris. They often have a reputation for being unusually aggressive, taking high risks, living close to the edge, and swinging for the fences in business dealings. In some cases, management may believe that they are entitled to financial success and rewards no matter how they are achieved because they created the company and its past successes. Effective internal control starts with a proper "tone at the top." Culture and values are critical elements of control because all other controls are derived from them. Culture drives behavior. A few bad apples will flourish in a culture of arrogance, excessive risk taking, and little accountability. …

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