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• W129230944 abstract "ILLEGAL ACTS: WHAT ARE THE AUDITOR'S RESPONSIBILITIES? Society has always been concerned with violations of laws and regulations by all types of entities - businesses, nonprofit organizations and government units. Over the last two decades, highly publicized accounts of management improprieties have caused this concern to increase significantly. Congressional committees, government agencies and others have suggested auditors assume more responsibility for detecting and disclosing violations of laws or regulations, which are commonly referred to as illegal acts. Developing standards that articulate the auditor's responsibility for illegal acts has been a challenge. Identifying violations of the many laws and regulations that affect most entities requires legal expertise. Even with such expertise, the complexity of some laws and regulations makes it difficult to identify a violation. And even after an illegal act has been identified, evaluating management's assessment of its potential effects on the entity's financial statements is also a challenge for the auditor. This article analyzes and clarifies the auditing standards that describe the auditor's responsibility for detecting and reporting illegal acts. It also introduces some future issues that need to be studied and resolved. (See page 83 for a review of the historical developments that have brought the profession to where it is today.) AUDITOR'S HISTORICAL RESPONSIBILITY FOR DETECTING ILLEGAL ACTS The auditor's responsibility for detecting illegal or questionable acts by clients is not new. It first made front-page news in the mid-1970s, following Watergate. The related investigations led to initial disclosure of illegal political contributions by large corporations. These disclosures opened the door to other revelations involving questionable payments by corporations to domestic and foreign government officials. As a result, the accounting profession formally addressed the issue of the auditor's responsibility to detect and report illegal acts by clients. The issue was studied initially by the Commission on Auditor's Responsibilities (the Cohen commission). Based on its preliminary recommendations, the American Institute of CPAs auditing standards executive committee issued Statement on Auditing Standards no. 17, Illegal Acts by Clients, in 1977. This statement was the first professional standard to specifically address the auditor's responsibility to detect and disclose illegal acts. Many of the concepts in current professional standards were first articulated by the Cohen commission. It concluded the auditor cannot reasonably be expected to assume the responsibility to detect and disclose an entity's violations of laws in general because (1) auditors do not possess the legal training to recognize complex circumstances and processes that give rise to litigation and suggest its outcome and (2) many illegal or questionable acts involve small amounts in relation to financial statements. If society needs assurance on principally legal matters, the Cohen commission concluded this assurance should be provided by those most capable of doing so - management and its legal counsel. In discussing the auditor's responsibility, the Cohen commission acknowledged that certain illegal acts, such as tax evasion, are easily recognized by experienced auditors. It also introduced the concept of illegal acts that have a direct and material effect on amounts in the financial statements and said auditors normally consider the possibility of such acts when planning and conducting audits. Consistent with the recommendations of the Cohen commission, SAS no. 17 begins: An examination made in accordance with generally accepted auditing standards cannot be expected to provide assurance that illegal acts will be detected. In reporting on financial statements, an auditor holds himself out as one who is proficient in accounting and auditing. …" @default.
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• W129230944 title "Illegal Acts: What Are the Auditor's Responsibilities?" @default.
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