Investigating Assets: The CPA's Role in Detecting and Preventing Fraud
Slotter, Keith, The FBI Law Enforcement Bulletin
Fraud and abuse cost U.S. employers an average of $9 a day per employee, totaling in excess of $400 billion in fraud loss to domestic organizations. Median losses committed by executives represent 16 times more damage than those committed by their employees, and the most costly abuses occur in companies with fewer than 100 employees.(1) These statistics confirm what law enforcement authorities have known for years - companies lose billions of dollars to fraud annually, much of it perpetrated against corporate America. During the past decade, however, those in the financial community, particularly within the accounting profession, viewed this information with both interest and dismay. In fact, the level of fraud and, perhaps more important, public outcry compelled certified public accountants (CPAs) to alter the way they conduct business and make the search for fraud a specific requirement in each audit engagement. These changes present new opportunities for law enforcement to work with the accounting community in detecting, preventing, and investigating a myriad of financial crimes long before companies report such frauds for criminal investigation, if they report them at all.
THE TRADITIONAL AUDITOR
Historically, auditors mainly have reviewed financial statements to form an opinion concerning the accuracy of a company's represented financial position. In order to render this opinion, auditors constructed an audit plan to conduct tests of company records and transactions. In the past, this plan outlined procedures used to search for possible errors and irregularities that materially impacted a company's financial statements-the auditors never specifically addressed the issue of fraud. Most audits resulted in a clean opinion of the veracity of the client's financial report. If auditors detected material problems and corporate management refused to take proper action, the CPA firm simply withdrew from the assignment. Subsequently, the company passed the job to another firm that either did not conduct as diligent an audit or employed a "more creative" approach.
The failure of the Penn square Bank of Oklahoma City in 1982 marked a new era in financial institution fraud. The severity of this failure forever influenced the accounting profession and the way in which auditors conduct financial reviews. As greedy bank officers used the banks they controlled as their own treasure troves for personal enrichment at the public's expense, over 1,000 financial institutions failed in the United States. The savings and loan crisis rocked the United States and cost taxpayers over $200 billion, more than the amount spent on the Vietnam war.(2)
After the dust cleared, the fingers of disgruntled investors, stockholders, and industry experts pointed directly at CPAs across the nation and deemed them derelict in their duties to both their clients and the public. How could failed institutions have received clean bills of health just months prior to financial collapse? CPA firms across the country found themselves in civil court defending their reputations on charges of negligence. The typical large firm spent over 12 percent of its revenues on defense litigation.(3) The Big Six(4) accounting firms began dropping clients at a rate of 50 to 100 per year. Despite implementing lower risk strategies, the accounting profession, as a whole, understood that for every firm that dropped a client, 20 more firms stood ready to step in and replace that one. CPAs became inundated with a barrage of lawsuits claiming negligent conduct and oversight. The industry began to look for ways to reduce risk and enhance law enforcement cooperation.
SETTING NEW STANDARDS
Due to this unpredictable and litigious economic climate, the American Institute of Certified Public Accountants (AICPA) began reviewing the changing role of the CPA. In 1989, the AICPA addressed the client's expectations regarding the auditor's responsibility to detect fraud during an audit(5) but only provided illusory assurance and offered little guidance as to the exact requirements of the CPA or how to detect errors or irregularities. …