Magazine article The CPA Journal

Letters to the Editor

Magazine article The CPA Journal

Letters to the Editor

Article excerpt

CAN INTERNAL CONTROL STOP MANAGEMENT FRAUD?

Professor Manuel A. Tipgos provides an interesting discussion "Why Management Fraud is Unstoppable," December 2002, but I would ask him to reconsider several points.

First, the Foreign Corrupt Practices Act of 1977 included an amendment to the Securities Exchange Act of 1934 which clearly stated that:

(2) Every issuer which as a class of securities registered pursuant to section 12 of this title and every issuer which is required to file reports pursuant to section 15 (d) of this title- (A) make and keep books, records and accounts, which in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer; and (B) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that-(i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary (1) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements and (I) to maintain accountability for assets: (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

Doesn't this amendment impose responsibility on top management for internal control?

Second, doesn't the Treadway Commission Report, in Exhibit 1-2, imply that the entire organization, including the board of directors and the chief executive officer, is within the internal control environment? It seems clear to me that internal control is not below the top level of executives. It would help to have the author's support for the statement that "[an] important shortcoming of the Treadway Commission was its failure to authoritatively state that management is not above the controls recommended." My reading of the report does not support such a shortcoming.

Finally, AU section 110.03 states that "Management is responsible ... for establishing and maintaining internal control that will, among other things record, process, summarize, and report transactions..." The annual reports of many publicly owned companies include a statement, signed by key executives, often titled "Responsibility for Financial Reporting" that explicitly acknowledges this responsibility for internal control.

Professor Tipgos' conclusion posits an interesting historical hypothesis: "[T]he accounting profession is truly the backbone of our financial markets because of its integrity and the confidence it has earned over 100 years of protecting the public trust! Why has there been a failure to adhere to clear management responsibilities for internal control? Why has the profession not aided management in its responsibility? Professor Tipgos' thoughts on those questions would be interesting.

Mary Ellen Oliverio, PhD, CPA Pace University

The Author Responds

To implement the provisions of the Foreign Corrupt Practices Act of 1977, an amendment to the Securities Act of 1934 was made requiring management to maintain a system of internal control to ensure accurate record-keeping, accountability for corporate assets, and adherence to GAAP. Professor Oliverio asks whether this amendment imposes .a responsibility on top management to be responsible for internal control."The answer is "yes," and this responsibility to implement a system of internal control is reinforced by the Treadway Commission and the Committee of Sponsoring Organizations (COSO) report of 1992. We can probably generalize that all public companies have implemented a reasonably adequate internal control consistent with the "house of controls" proposed by COSO.Also, it must be emphasized that COSO requires total commitment from top management (the tone at the top) to promote control awareness or"commitment to controls" at all levels of the organization. …

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