Fraud: Who's Responsible?

Source: The CPA Journal

In this “point/counterpoint” discussion, two authors take a look at the responsibility of auditors to detect fraud. Vincent J. Love believes that the accounting profession has “taken a large share of the blame” for financial scandals. But he argues that unless outside auditors are actively involved in fraud, they should not be secondarily responsible unless “they failed to follow GAAS when auditing the enterprise and did not exercise reasonable professional judgment when planning the audit, designing the audit procedures, and evaluating the audit findings.”

Love believes that a properly executed audit reduces the risk of material error or fraud in the financial statements. But he says it is unrealistic for a fraud examination to “set the standard for financial reporting.”

Richard H. Kravitz, in contrast, believes that the accounting profession has been held “virtually blameless” in the events that led up to the financial crisis. Kravitz believes that fraud is discoverable; that “there are a finite number of fraud scenarios, schemes, and permutations;” and that “fraudsters are really not all that clever.” He says that the reason auditors often fail to detect fraud is their “lack of training, sophistication, and objectivity” and that audit designs and auditing firms' standard programs often fail to examine high-risk areas.

Kravitz suggests that the audit process should be changed to improve fraud detection and assign the accounting profession more of a “watchdog role.”

For the complete article, read “Auditors' Responsibility for Detecting Fraud.”

From The CPA Journal, A Publication of the New York State Society of CPAs, June 2012, http://www.cpajournal.com.