Detecting and Preventing Financial Statement Fraud: The Roles of the Reporting Company and the Independent Auditor

• NCJ Number: 114927
• Journal: Yale Law and Policy Review Volume: 5 Issue: 2 Dated: (Spring/Summer 1987) Pages: 514-535
• Author(s): M S Raab
• Date Published: 1987
• Length: 22 pages
• Publication Format: Article
• Publication Type: Issue Overview

Annotation

This article discusses the problem of financial statement fraud, analyzes proposals from the U.S. Congress, the National Commission on Fraudulent Financial Reporting, and Price Waterhouse to prevent fraudulent financial statements, and recommends seven cost-effective actions to combat the problem of financial statement fraud.

Abstract

Even though a very small proportion of the thousands of financial statements issued each year are fraudulent, investors may think a problem exists and thus lose confidence in the reporting system. The 99th Congress in its second session considered H.R. 5439, a bill that would place the responsibility on the independent auditor for uncovering only the fraud having a material effect on the accuracy of the financial statement. Other provisions of H.R. 5439 would require the auditor to report an error or irregularity to government authorities if the issuer of the statement did not report or correct the problem within 90 days. The National Commission on Fraudulent Financial Reporting (NCFRR), also known as the Treadway Commission, proposes reforms dealing with the independent auditor, the reporting company, enforcement objectives, and education. Among it suggestions for reform, Price Waterhouse would give new duties to independent auditors and would increase the quality control of the accounting profession by setting up a statutory organization that would be self regulating. Even though these proposals place more responsibility on the auditing company, a survey conducted by the NCFFR shows that most fraud is carried out by those inside the reporting company. Expanding internal auditing controls and increasing sanctions against those within the company who perpetuate financial statement fraud would be effective. Several other cost-effective recommendations are given, along with the observation that current levels of financial statement fraud do not require wide-ranging changes in the accounting profession. 102 footnotes.