Academic journal article Journal of Accountancy

Fraud Risk: Are You Prepared? the Mission: To Create Stronger Support for an Ethically Sound Business Environment

Academic journal article Journal of Accountancy

Fraud Risk: Are You Prepared? the Mission: To Create Stronger Support for an Ethically Sound Business Environment

Article excerpt

Incentives that reward individuals for short-term results, a culture that has been insufficiently vigilant, advances in technology and more sophisticated business transactions have increased opportunities for fraud and abuse and enabled fraudsters to flourish. Consider this: 75% of companies responding a 2003 KPMG fraud survey said they had experienced at least one instance of fraud--a 13% in crease over KPMG's 1998 survey. While employee fraud appeared to be the most common type, financial reporting and medical/insurance fraud were the most costly. And the number of cases more than doubled from 1998 to 2003.

The shakeout has been wrenching. Over the past two and a half years the stream of news about Enron, Global Crossing, Worldcom, Adelphia and other high-visibility fraud cases has resulted in a tremendous loss of market capitalization. To stem the tide and restore confidence in the capital markets, Congress passed the Sarbanes-Oxley Act of 2002, which clearly delineates the roles of senior management, boards of directors, audit committees and outside auditors. Although it's not possible to detect every instance of fraud, now all parties responsible for financial reporting and internal control must exercise greater vigilance.

Offering a view from the trenches about the daily challenges CPAs face in this arena, Sandra Johnigan, a Dallas CPA and chairperson of the AICPA's forensic and litigation services committee, shared her views with the Journal of Accountancy about why corporate fraud has become such a critical concern for the CPA profession and what--in addition to SAS no. 99 and other AICPA initiatives (see "Resources," page 62)--is being done to improve performance and rebuild the profession's image.

JofA: How is the public focus on fraud affecting the CPA profession?

Johnigan: If you work for a public company, serve on a public company board or audit public companies, you already" are dealing with the Sarbanes-Oxley Act and the Public Company Accounting Oversight Board [PCAOB]. Fraud was one of the driving forces responsible for both the passage of Sarbanes-Oxley and the formation of the PCAOB. They already have had a big effect on CPAs and how they carry out their responsibilities.

JofA: How concerned should I be with Sarbanes-Oxley if I'm involved with only private companies?

Johnigan: The initial focus has been on public companies, but this does not mean board members, owners, employees or auditors of private companies (including nonprofits and state and local entities) should ignore what's going on. Large ripple effects could end up having an impact on those in the private sector as well. If you are a consultant or auditor, your challenges are tied directly to the issues facing both public and privately held companies. One challenge is to make sure private-company owners and management understand the risk of fraud in their companies and accept responsibility for strong corporate governance and strong internal controls that will help prevent and deter fraud.

JofA: Are you surprised Congress was able to pass the act with the speed at which it did, given the far-reaching impact from both a regulatory and a profession-wide standpoint?

Johnigan: It's hard to believe now, but at one point Sarbanes-Oxley was given almost no chance of passage, at least in its current form. It had started out as a reaction to Enron, but as that was becoming old news and the legislation was faltering, along came WorldCom. WorldCom's problems were disclosed in late June 2002, when the company announced it had understated expenses by $3.8 billion. Exactly one month later, on July 25, 2002, the House and Senate approved the conference report on the Sarbanes-Oxley legislation by votes of 423 to 3 and 99 to 0, respectively. The president signed the bill on July 30. The focus on fraud was clear in the president's speech when he said: "This law says to every dishonest corporate leader: You'll be exposed and punished. …

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