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Where There's Smoke, There's Fraud

Sarbanes-Oxley has done little to curb corporate malfeasance. Therefore, CFOs should implement a range of fraud-prevention measures.

Laton McCartney, CFO Magazine
March 1, 2011

PCAOB Proposed Audit Report Changes

I understand the PCAOB is proposing changes to the standard audit report including possibily including in the report the auditor's responsibility as it relates to fraud. This is earth shattering! Change is the only constant and hopefully this is for the greater good, however, I'm sure there's an argument that the proposed changes are not so good. If investors/decision makers/regulators need and want new info in the audit report, why shouldn't they have it? After all the fraud scandals, bankruptcies and the financial crisis that took place last decade (and those that are on the way or yet to be uncovered), it's time to shake things up a bit and learn from our experiences (adjust the boilerplate). Everyone needs to be held accountable, including the auditors. Not sure if the SEC needs to approve the PCAOB proposed audit report changes or not, if and when those changes become reality. But the SEC already has enough on its plate with its budget issues ($1.2 or $1.4B apparently isn't enough), the Dodd Frank Act, the IFRS Yes or No Vote (coming soon hopefully), Convergence Projects, and much, much more... I'm curious where does this PCAOB proposed audit report change fit on the SEC Priority List and could it move to the top or bottom in a heartbeat? I'm looking forward to watching how this shakes out...

Posted by Bill Storey | March 23, 2011 11:24 pm

SEC Transparency Initiative

Check out this proposed Transparency Initiative for the US Securities and Exchange Commission on LinkedIn, http://slidesha.re/i78ZR0

Posted by Mark Rome | March 16, 2011 02:02 pm

Isolated Risk Management Framework

Excellent Article: However, trend of fraud is alarming in the developing where risk management is still being practised at rudimentary. The gradual shift to Enterprise Risk Management will likely be more efficient than isolated internal control or operational risk monitoring

Posted by Adewale Giwa | March 10, 2011 10:19 am

Check the other employees as well

Excellent article. I would like to add that according to 2008 Report to the Nation on Fraud and Abuse, The Longer Theyıre With You, The More They Steal. So please check the other employees as well. Clayton Nogueira- Brazil

Posted by Clayton Nogueira | March 08, 2011 10:43 am

Tone at the Top

This is an excellent article. Yet, I would like to underscore the importance of the control environment and its principles in preventing and deterring fraudster. Further, there is a problem that should be addressed in not only corporate America, but also worldwide; the responsibility of fraud prevention and detection is not clear enough. Therefore those who are accountable for such frauds are not only those who committed fraud, but also those who indirectly created the environment to make fraud possible. Fraud becomes global. I wish that the article had covered this dimension and the associated complexities of this facet.

Posted by Mohammed Masoud | March 05, 2011 01:23 pm

Clarification about COSO report

In regard to "Where There's Smoke, There's Fraud" (March 2011), I have one important clarification. The article states, "Last year, the Committee of Sponsoring Organizations of the Treadway Commission's report on corporate fraud concluded that fraud continues to increase in depth and breadth despite Sarbanes-Oxley . . ." In our COSO study, we were careful to point out that the vast majority of the frauds studied, which were based on SEC enforcement actions issued from 1998-2007, involved alleged bad acts that took place before SOX was passed. Specifically, only 61 of the 347 cases we studied involved misstatements after 2002. This is due to the long time lag from a bad act to its discovery to the completion of an SEC investigation into the act. We concluded in the COSO report (p. iii): "Given the small number of frauds examined in this study that involve time periods subsequent to the issuance of the Sarbanes-Oxley Act of 2002, further research will be needed once sufficient time has passed to allow for more observations of SEC fraud investigations involving post-SOX time periods before any conclusions can be reached about the effectiveness of that legislation in reducing instances of fraudulent financial reporting." Thus, we believe that the effect of SOX on fraudulent financial reporting is still an open question, and the recent COSO report was largely a pre-SOX study. Dana R. Hermanson Dinos Eminent Scholar Chair Co-author of "Fraudulent Financial Reporting: 1998-2007" (COSO report, by M. Beasley, J. Carcello, D. Hermanson, and T. Neal) Kennesaw State University Kennesaw, GA

Posted by Dana Hermanson | March 03, 2011 04:20 pm

Fraud

This article is excellent and based on facts. i highly appreciate it. Some of the points i want to add. Firstly, black hats are everywhere. Frauds can never be prevented as black hats are everywhere, but a reduction in frauds are possible. After the collapse of Enron, practice actions of NED's are vital. Non-executive Directors have to play vital role to prevent the company from fraud and error. some may arge that NED's are not responsible for running the company but they are responsible for transparency in the company's operations. Therefore, the must take practice steps to prevent the company from fraud and error. The stats you have given are shocking. I think almost every company across the globe is facing such a situation somehow. I think the provision of Whistle blowing facility provided by the sarbon oxley act can help somehow to prevent fraud and error but again there must be loyal people out there to prevent those people from loosing their jobs. But if implemented, this facility can help alot. I am a qualified Chartered Certified Accountant (ACCA) from U.K and a finalist student of C.A (ICAEW). I believe there is not a single head/activity of the company financial statements where there are 0 chances of fraud and error. let's say if there is sales, it can easily be overstated or understated to manipulate the profit figure or on other side the sales strategies may not be affective to get high sales. In this situation Automating the sales process by using sales proposal software can increase sales and track record of all the sales to prevent frauds which may be done with the sales figure. If we take tendering process of the company then this could be the major source of fraud commissions in the company. Company officials can choose the desirous vendors for commissions and ultimately company suffers the losses. In this case using tendering software can result in complete transparency in the tendering process as all the tender transactions will be online resulting in 0 chances of fraud. If we talk about merger and acquisitions. this is the major source of fraud. The authorized person may sell the company or merge with another company at a lower price to get high commissions and a senior position in the new company. On other side the authorized person may acquire a company on high price to get substantial commissions. All these frauds can be eliminated if online deal rooms are used. no one can even think of doing frauds in online deal rooms presence. Excellent article. thanks for this.

Posted by Cameron Nabeel | March 02, 2011 01:46 am

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