Fraud Specialists On Independent Audits

The recent audit failures involving Enron, WorldCom, et al., have left the accounting profession and governmental regulators scrambling to find better methods of detecting and preventing fraudulent financial reporting. Congress passed the Sarbanes-Oxley Act of 2002 (SOX) which requires companies to report on the operating effectiveness of their internal controls over financial reporting.  Additionally, the independent auditor is required to assess and report on the effectiveness of their client’s internal controls, and they must attest to management’s internal control assessment.  Notably absent from SOX is a requirement that independent auditors must employ fraud specialists in their independent audits of SEC filers. This study examines the benefits and costs associated with requiring the use of fraud specialists on independent audits of SEC filers.  Fraud specialists have expertise better attuned to fraud detection not ordinarily possessed by regular auditors.  First, the narrow but deep perspective of the fraud specialist enables them to find fraudulent activity that would be missed by regular auditors.  Second, unlike regular auditors, fraud specialists employ methodologies that are effective in the presence of management collusion.  They are more highly skilled at interviewing potential witnesses and fraud suspects and are trained in recognizing deception.  Third, fraud specialists are better trained in the use of antifraud technology, methods, and computerized forensic accounting software.  Fourth, fraud specialists have superior investigative skills and can conduct covert examinations, access restricted databases, conduct background checks, and locate hidden assets better than regular auditors.  Finally, they understand the legalities of gathering evidence of fraud and can operate without violating the rights of potential witnesses and fraud suspects. Qualitative analysis demonstrates that utilizing fraud specialists on independent audits has positive net benefits to financial reporting.  Recommendations are made regarding the types of fraud detection/deterrence skills and techniques that would be beneficial to independent auditors.

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SOX Section 404 Material Weakness Disclosures and Audit Fees

Auditing A Journal of Practice & Theory ◽

10.2308/aud.2006.25.1.99 ◽

2006 ◽

Vol 25 (1) ◽

pp. 99-114 ◽

Cited By ~ 258

Author(s):

K. Raghunandan ◽

Dasaratha V. Rama

Keyword(s):

Financial Reporting ◽

Internal Control ◽

Audit Fees ◽

Internal Controls ◽

Fiscal Year ◽

Section 404 ◽

Control Material ◽

Material Weakness ◽

Sarbanes Oxley ◽

The Mean

Section 404 of the Sarbanes-Oxley Act and Auditing Standard No. 2 (PCAOB 2004) require management and the auditor to report on internal controls over financial reporting. Section 404 is arguably the most controversial element of SOX, and much of the debate around the costs of implementing section 404 has focused on auditors' fees (Ernst & Young 2005). In this paper, we examine the association between audit fees and internal control disclosures made pursuant to section 404. Our sample includes 660 manufacturing firms that have a December 31, 2004 fiscal year-end and filed the section 404 report by May 15, 2005. We find that the mean (median) audit fees for the firms in our sample for fiscal 2004 is 86 (128) percent higher than the corresponding fees for fiscal 2003. Audit fees for fiscal 2004 are 43 percent higher for clients with a material weakness disclosure compared to clients without such disclosure; however, audit fees for fiscal 2003 are not associated with an internal control material weakness disclosure (in the 10-K filed following fiscal 2004). We also find that the association between audit fees and the presence of a material weakness disclosure does not vary depending on the type of material weakness (systemic or non-systemic).

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Assessing Internal Audit with Text Mining

Journal of Information & Knowledge Management ◽

10.1142/s021964921850020x ◽

2018 ◽

Vol 17 (02) ◽

pp. 1850020 ◽

Cited By ~ 1

Author(s):

Georgia Boskou ◽

Efstathios Kirkos ◽

Charalambos Spathis

Keyword(s):

Text Mining ◽

Financial Reporting ◽

Internal Control ◽

Audit Quality ◽

Internal Audit ◽

Internal Controls ◽

Annual Reports ◽

Previous Attempt ◽

Sarbanes Oxley ◽

Audit Information

Recently internal controls, corporate governance and risk management have received a great deal of attention. Regarding internal control, several research studies address the issue of internal audit quality. Noteworthy, according to Sarbanes–Oxley (SOX) the internal controls over financial reporting are assessed by the auditors and the management. In the present study, we assess internal controls over financial reporting by employing Text Mining techniques. We analyse the annual reports of 133 publicly traded Greek Companies. The textual parts of the annual reports that refer to internal audit mechanism are extracted. We adopt a Vector Space model and the term-document matrix records the occurrence frequencies of the terms. By applying feature selection, a set of significant keywords, which are used as predictors, is extracted. The Linear Regression model developed explains the variance of the data and highlights significant predictors. The model manages to successfully assess the internal audit function. By performing PCA, major underlying procedures and concepts related to internal audit quality are revealed. Inspite of the undoubted importance of the assessment of internal audit, no previous attempt has been made to assess internal audit and to extract internal audit information from corporate disclosures by using Text Mining techniques. Our results can be useful to internal and external auditors, managers, company decision-makers, regulators and researchers.

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The Impact of Enterprise Resource Planning (ERP) Systems on the Effectiveness of Internal Controls over Financial Reporting

Journal of Information Systems ◽

10.2308/jis.2011.25.1.129 ◽

2011 ◽

Vol 25 (1) ◽

pp. 129-157 ◽

Cited By ~ 38

Author(s):

John J. Morris

Keyword(s):

Financial Reporting ◽

Enterprise Resource Planning ◽

Internal Control ◽

Control Sample ◽

Resource Planning ◽

Internal Controls ◽

Erp Systems ◽

Individual Account ◽

Sarbanes Oxley ◽

The Impact

ABSTRACT: Software vendors that market enterprise resource planning (ERP) systems have taken advantage of the increased focus on internal controls that grew out of the Sarbanes-Oxley (SOX) legislation by emphasizing that a key feature of ERP systems is the use of “built-in” controls that mirror a firm’s infrastructure. They argue that these built-in controls and other features will help firms improve their internal control over financial reporting as required by SOX. This study tests that assertion by examining SOX Section 404 compliance data for a sample of firms that implemented ERP systems between 1994 and 2003. The results suggest that ERP-implementing firms are less likely to report internal control weaknesses (ICW) than a matched control sample of non-ERP-implementing firms. It also finds that this difference exists for both general (entity-wide), and individual (account-level) controls.

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INTERNAL CONTROL AND FRAUD PREVENTION: PRIOR RESEARCH ANALYSIS

Science and Studies of Accounting and Finance Problems and Perspectives ◽

10.15544/ssaf.2014.19 ◽

2014 ◽

Vol 9 (1) ◽

pp. 173-179

Author(s):

Stacey Mirinaviciene

Keyword(s):

Financial Reporting ◽

Internal Control ◽

Boards Of Directors ◽

Influencing Factor ◽

Fraud Detection ◽

Internal Controls ◽

Small Business Owners ◽

Prevention Measures ◽

Job Rotation ◽

Fraud Prevention

The focus of this study is to analyze prior research on fraud detection and prevention. Most researchers agree that strong internal controls are an influencing factor on fair financial reporting and fraud prevention and detection. Financial statement and employee fraud can be very expensive to businesses and the economy as a whole. The establishment and evaluation of the internal control methods and procedures can decrease fraudulent events and losses. Accounting professionals, CPA’s, and tax preparers are the first to detect “red flags” in business activities and must work together with boards of directors, CFO’s, and small business owners. Simple methods, such as ratio analyses can help to signal early signs of fraudulent events and prevent future damages. Implementation of fraud prevention measures are the most efficient deterrent. Some of the most effective controls like, job rotation, mandatory vacations, training, fraud hotlines, and surprise audits, need not be expensive and should be employed by all businesses. Unfortunately, the most important and effective fraud prevention techniques are seldom applied by businesses. Surprisingly, the least effective and most expensive measures, like external audits, are more frequently employed. As reported in this review of the literature, most businesses focus on fraud detection, while fraud prevention and implementing proper internal controls would result in better prevention of financial losses.

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Controls, Security, and Audit in Online Digital Accounting

Digital Accounting ◽

10.4018/978-1-59140-738-6.ch010 ◽

2011 ◽

pp. 318-383

Author(s):

Ashutosh Deshmukh

Keyword(s):

Financial Reporting ◽

Internal Control ◽

Annual Report ◽

Control Structure ◽

Internal Controls ◽

Section 404 ◽

Checks And Balances ◽

The Public ◽

Sarbanes Oxley ◽

Public Company

Internal controls have existed since the dawn of business activities. Internal controls are basically systems of checks and balances. The purpose is to keep the organization moving along desired lines as per the wishes of the owners and to protect assets of the business. Internal controls have received attention from auditors, managers, accountants, fraud examiners and legislatures. Sarbanes Oxley Act 2002 now requires the annual report of a public company to contain a statement of management’s responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting; and management’s assessment of the effectiveness of the company’s internal control structure and procedures for financial reporting. Section 404 of the Act also requires the auditor to attest to and report on management’s assessment of effectiveness of the internal controls in accordance with standards established by the Public Company Accounting Oversight Board (PCAOB).

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Determinants of the Persistence of Internal Control Weaknesses

Accounting Horizons ◽

10.2308/acch-10266 ◽

2012 ◽

Vol 26 (2) ◽

pp. 307-333 ◽

Cited By ~ 38

Author(s):

Bonnie K. Klamm ◽

Kevin W. Kobelsky ◽

Marcia Weidenmier Watson

Keyword(s):

Financial Reporting ◽

Internal Control ◽

Management Training ◽

Internal Controls ◽

Senior Management ◽

Data Availability ◽

The Public ◽

Sarbanes Oxley ◽

Material Weaknesses ◽

Specific Control

SYNOPSIS This paper analyzes the degree to which material weaknesses (MWs) in internal control reported under the Sarbanes-Oxley Act of 2002 (SOX) affect the future reporting of MWs. Particularly, we examine information technology (IT) and non-IT MWs and their breakdown into specific IT-related entity-level, non-IT-related entity-level, and account-level deficiencies. Analysis reveals that most account-level and entity-level deficiencies occur at a significantly higher rate in SOX 404 reports with at least one IT MW than in MW reports with only non-IT MWs. Further, the presence and count of both types of MWs and all three types of deficiencies are associated with increased future MWs, as are lower profitability, non-Big 6 auditor, and firm complexity. Specific control deficiencies related to senior management, training, and IT control environment have the strongest impact on future MWs. These results indicate that effective corporate governance of both the IT and non-IT domains is pivotal in establishing and maintaining strong internal controls over financial reporting. Data Availability: Data are available from the public sources identified in the paper.

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Former Audit Partners on the Audit Committee and Internal Control Deficiencies

The Accounting Review ◽

10.2308/accr.2009.84.2.559 ◽

2009 ◽

Vol 84 (2) ◽

pp. 559-587 ◽

Cited By ~ 117

Author(s):

Vic Naiker ◽

Divesh S. Sharma

Keyword(s):

Financial Reporting ◽

Internal Control ◽

House Of Representatives ◽

Audit Committee ◽

Discretionary Accruals ◽

Negative Association ◽

Internal Controls ◽

Sarbanes Oxley ◽

External Auditor ◽

Internal Control Deficiencies

ABSTRACT: This study examines the association between internal control deficiencies (ICDs) reported under Section 404 of the Sarbanes-Oxley Act (SOX, U.S. House of Representatives 2002) and the presence of former audit partners on the audit committee who are affiliated (AFAPs) and unaffiliated (UFAPs) with the firm's external auditor. We find a negative association between AFAPs and UFAPs on the audit committee and ICDs. We also find results that suggest the NYSE and NASDAQ three-year “cooling-off” rule applying to AFAPs may be unwarranted and deserves further empirical and regulatory attention. Further tests suggest AFAPs do not allow management to circumvent the disclosure of ICDs when conditions appear to suggest this may be so, and that AFAPs are negatively related to performance-adjusted discretionary accruals. Collectively, we interpret these findings to suggest that AFAPs and UFAPs on the audit committee are associated with more effective monitoring of internal controls and financial reporting.

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Fraudulent financial reporting detection: Corporate governance red flags

Corporate Ownership and Control ◽

10.22495/cocv4i4c2p1 ◽

2007 ◽

Vol 4 (4) ◽

pp. 254-261 ◽

Cited By ~ 4

Author(s):

Hugh Grove ◽

Tom Cook

Keyword(s):

Corporate Governance ◽

Financial Reporting ◽

Internal Control ◽

Boards Of Directors ◽

Code Of Ethics ◽

Audit Committees ◽

Business Strategies ◽

Stock Exchanges ◽

Fraudulent Financial Reporting ◽

Sarbanes Oxley

The recent fraudulent financial reporting by Enron, Qwest, and other companies was facilitated by poor corporate governance. As shown in this paper, ten timeless factors of corporate governance helped detect such reporting. Weak corporate governance facilitated both classic and recent financial reporting frauds, particularly the following factors: all-powerful CEO, weak system of internal control, focus on short-term performance goals, weak or non-existent code of ethics, and questionable business strategies with opaque disclosures. These factors implied ineffective boards of directors and audit committees. New corporate governance guidelines for boards and audit committees by the U.S. stock exchanges and the Sarbanes-Oxley Act appear to have good potential for strengthening corporate governance to help prevent earnings manipulations and fraudulent financial reporting. These new regulations should continue to strengthen strong corporate governance and control systems, especially in relation to the ten timeless factors for fraudulent financial reporting. If corporate governance guidelines are not followed, then, these stock exchanges can delist the offending companies

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An Opinion On Independent Auditors Opinions Of Substantial Doubt: A SOX-2002 Efficiency Evaluation

Journal of Business & Economics Research (JBER) ◽

10.19030/jber.v3i11.2827 ◽

2011 ◽

Vol 3 (11) ◽

Author(s):

Jeff Grover ◽

Angeline M. Lavin

Keyword(s):

Financial Reporting ◽

Corporate Disclosure ◽

Font Size ◽

Corporate Scandals ◽

Corporate Executives ◽

Sarbanes Oxley ◽

Ethical Misconduct ◽

Chance Occurrence ◽

Independent Auditors ◽

The Government

Given the recent events involving allegations of ethical misconduct by corporate executives and oversight neglect from the auditing community, the government was motivated to implement national reform to minimize the continued threat of corporate malfeasance. Due to the severity of these corporate scandals, Congress mandated and the President signed into law the Sarbanes-Oxley Act of 2002 (SOX-2002) to affect sweeping corporate disclosure and financial reporting reform to thwart continued scrupulous activities. In light of these events, the motivation of this study is to examine the effects of SOX-2002 in empowering independent auditors to provide unbiased opinions of an entity’s ability to remain as a going concern. The uniqueness of this study is that it attempts to determine if substantial doubt opinions signal bankruptcy greater than the chance occurrence of these events. If true, then these early warnings could be used to minimize the costs of bankruptcy. This study suggests that these opinions do signal bankruptcy filings greater than chance, which supports the position of auditor empowerment in a post-SOX-2002 period.

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Assessing Internal Control Over Cash Receipts at NADCo Communications: An Instructional Case

AIS Educator Journal ◽

10.3194/aise.2006.1.1.39 ◽

2006 ◽

Vol 1 (1) ◽

pp. 39-43 ◽

Cited By ~ 2

Author(s):

Robert Bromley

Keyword(s):

Financial Reporting ◽

Internal Control ◽

Final Section ◽

Internal Controls ◽

Certified Public Accountants ◽

American Institute ◽

Accounting Profession ◽

Web Based ◽

Sarbanes Oxley ◽

Supporting Materials

The audit of internal control over financial reporting required by the Sarbanes Oxley Act has radically changed the accounting profession. The evaluation and disclosure of the assessment of the internal control's effectiveness is now required by management and their auditors. This paper describes the use of an internal control assessment case, as well as web-based supporting materials that can enhance students' ability to analyse internal controls and improve their writing skills. The need for these skills has been well established by the American Institute of Certified Public Accountants (AICPA), the American Accounting Association (AAA) Albrecht and Sack (2000) and others in the accounting profession. These resources are presented below along with a section describing the learning objectives they were designed to achieve. The assessment of these materials is presented in a final section. The results were positive and provide accounting educators with resources that can improve students' ability to evaluate internal controls and communicate their findings.

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