Battling Auditor-Enabled Fraud

Even after the increased regulation associated with the Sarbanes-Oxley Act (SOX) in July 2002, the audit profession continues to deal with questions of whether they are truly independent from the companies who employ them and overall audit effectiveness. A recent report commissioned by the Center for Audit Quality (“CAQ”) specifically examines Securities and Exchange Commission (SEC) enforcement actions involving fraudulent financial reporting cases where the auditor was sanctioned.  The study covers the period 1998–2010, during which time there were 87 instances of SEC sanctions of this type against external auditors involving publicly traded companies.

The study, titled “An Analysis of Alleged Auditor Deficiencies in SEC Fraud Investigations: 1998–2010”, identifies the top five audit deficiencies in these instances as follows:

1. Failure to gather sufficient competent audit evidence (73 percent of the cases)

2. Failure to exercise due professional care (67 percent)

3. Insufficient level of professional skepticism (60 percent)

4. Failure to obtain adequate evidence related to management representations (54 percent)

5. Failure to express an appropriate audit opinion (47 percent)

The study also examines the root causes of these failures and makes suggestions for improvements.  A more detailed discussion of the study’s conclusions exists here.

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