FRAUD AFTER SARBANES–OXLEY: IMPLICATIONS FOR INTERNAL AUDITORS

• Published in: Internal Auditing 2018-11, Vol.33 (6), p.20
• Main Authors: Palma, Mikaela, Hermanson, Susan D, Mautz, R D
• Format: Article
• Language: English
• Subjects: Accounting policies; Administrative expenses; Audit fees; Auditing; Audits; Estimates; Executive compensation; Fees & charges; Financial reporting; Financial statements; Fraud; Internal auditors; Inventory; Investments; Loans; Professional practice; Public Company Accounting Reform & Investor Protection Act 2002-US; Regulation of financial institutions; Revenue recognition; Stockholders; Violations
• ISSN: 0897-0378

Finance Monthly estimates that the annual global cost of financial statement fraud exceeds € 3.2 trillion (over $4 trillion).1 While Coenen reports that the median cost of one case of financial statement fraud is roughly $2 million, individual frauds can cause much greater damage.2 For instance, misleading financial reports issued by Enron led to: * shareholders suffering a $78 billion loss in value; * failure of one of the world's largest accounting firms, Arthur Andersen LLP;and * a class-action lawsuit that was eventually settled for nearly $7.2 billion.3 This landmark case largely motivated the passage of the Sarbanes-Oxley Act of 2002 (SOX), a legislative attempt to protect investors from fraudulent financial reporting.4 Despite the sweeping reforms in SOX that were intended to promote ethical accounting and auditing practices, fraudulent reporting remains problematic. Seven of the top eight categories closely correspond to the typical frauds identified in the Committee of Sponsoring Organizations of the Treadway Commission study.7 These include: * accounts/loans receivable, investments, and cash (n = 27); * revenue recognition issues (n=16); * inventory, vendor, and cost of sales issues (n=16); * expense recording (e.g., payroll and selling, general, and administrative expenses) (n=12); * liabilities, payables, reserves, and accruals (n= 11); * deferred, stock-based, or executive comp issues (n=1 0) ; and * Property, Plant, and Equipment, intangible, or fixed-asset issues (n = 6). [...]while preventive actions are possible and advisable, one can safely assume that even the best precautions will not eliminate financial reporting fraud. Available at: https://www.forbes.com/ 2006/07/13/leadership-sarbox-governance-cx_hc _0713sa rboxgoesgloba l.html#a47a24265c01. 7 Beasley, M.S., Carcello, J.V, Hermanson, D.R., and Neal, T.L., Fraudulent financial reporting: 19982007, an analysis of U.S. public companies, Committee of Sponsoring Organizations of the Treadway Commission.