Tone at the Top: Management's Role in Accounting Fraud
Source: The CPA Journal
This article reviews several recent research studies that provide insight into the role of CEOs and CFOs in accounting fraud. Auditors and consultants can use the findings to help their clients prevent and detect fraud. Highlights include:
- One study showed that the CEO or CFO is implicated in 89 percent of financial statement fraud cases (CEOs in 72 percent of the cases and CFOs in 65 percent), and a second study also supports the conclusion that accounting fraud usually involves CEOs and CFOs.
- A third study suggests that CEOs participate in accounting fraud for personal gain (by maximizing equity incentives) and that CFOs typically get involved because they succumb to pressure from CEOs. A fourth study, however, found no link between fraud and equity incentives.
- A fifth study suggests that CEO accounting fraud is often driven by narcissism – that is, “an inflated view of himself and the company's performance” – combined with a high degree of power.
- A sixth study concludes that despite the audit committee's oversight role, CEOs and CFOs continue to drive the audit selection process, which can compromise auditor independence. But the Sarbanes-Oxley requirement that CEOs and CFOs certify the financial statements (Section 302 certifications) has helped improve the integrity of financial reporting.
In light of these studies, the authors recommend that fraud programs focus on the CEO and CFO. They also recommend that audit committees and external auditors (1) develop an understanding of the CEO's personality and power, (2) assess the CFO's ability to withstand pressure from the CEO, (3) monitor management's role in auditor selection, and (4) determine whether the CEO and CFO take Section 302 certifications seriously or view them as “check the box” requirements.
For the complete article, read “CEOs, CFOs, and Accounting Fraud.”
From The CPA Journal, A Publication of the New York State Society of CPAs, January 2012, www.cpajournal.com.