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• W242639500 abstract "The recent failure of Enron--even though fraud charges have yet to be proven--has renewed the hue and cry from Congress, regulators and the investing public: Why can't auditors catch these problems? The answers run the gamut: Auditors lack independence from their clients, the audit process is not designed primarily to detect fraud, the number of audit failures is minuscule compared with the number of audits, it is not possible--because of collusion--to detect all material frauds. While these explanations may be perfectly valid, the isn't buying them. In a 1998 study, Bonner, Palm-rose and Young determined that after a failed audit plaintiffs were more likely to sue auditors who didn't detect questionable transactions. And McEnroe and Martens' 2001 study found that only 41% of auditors--vs. 71% of investors--said auditors should serve as public watchdogs. The message seems clear: The wants independent auditors to detect and deter fraud. Unfortunately, there is no foolproof method for uncovering fraud. Unlike visible crimes--such as robbery or assault--fraud's hallmarks are deception and stealth. The company insiders who might be tempted to commit financial statement fraud constantly attempt to cover their tracks. And many of them are good at it--so good, in fact, that investigators will never catch them all. Historically, CPAs have counted on internal controls as the main defense against fraud. Although there is no question that controls are a vital part of any organization's risk management program, their preventive effect on fraud is questionable for two reasons. First, internal controls provide only reasonable assurance against fraud. Second, if upper management is hell-bent on showing stronger earnings, it can find ways to override controls. Therefore, to catch offenders in the act, CPAs must start thinking like them. THE POWER OF FEAR English philosopher Jeremy Bentham originated classic criminological theory in the 18th century. It holds that a person's propensity to commit a crime is determined by his or her perception of related risks and rewards--the greater the risk of detection and apprehension, the less likely a person is to violate the law. So what potential fraudsters are concerned about--from the CEO to the average rank-and-file employee (see Pam's Parable, page 109)--is getting caught; they're not thinking specifically about internal controls. Following classic criminology, their willingness to commit fraud is inversely proportional to their perceived risk of being discovered. This concept--the perception of detection--can be summarized as follows: Those who perceive they will be caught engaging in fraud are less likely to commit it (see How Fraudsters Think, page 110). This graphic illustrates the potential fraudster's thought process. First, some sort of pressure creates a motive. For a CEO, it may be the need to create the appearance of greater corporate earnings. Next, the executive concocts a scheme--for instance, to add phony sales and receivables. Since a CEO doesn't have access to the company's books and records, he or she then enlists the aid of someone in the accounting department--often the CFO. Finally, the fraudster weighs the risk of being caught. If he or she anticipates little or no risk, the fraud proceeds. But if the executive foresees the possibility of detection, he or she either develops another, less risky scenario or abandons the plan. PREVENTION VS. DETERRENCE Although many people use the terms prevention and deterrence interchangeably, they refer to different concepts. Prevention implies removing the root cause of a problem--principally the financial pressures that motivate a person to commit fraud. Deterrence, on the other hand, is the modification of behavior through the threat of sanctions. From the perpetrator's perspective, there is no sanction more negative than being caught. …" @default.
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• W242639500 date "2002-05-01" @default.
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• W242639500 title "Let Them Know Someone's Watching; from the Boardroom to the Mailroom, All Fraudsters Think Alike" @default.
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