Forensic Services, Audits, and Corporate Governance: Bridging the Gap

In audits conducted in accordance with generally accepted auditing standards (GAAS) or the standards of the Public Company Accounting Oversight Board (PCAOB), auditors have a responsibility to plan and perform audits to obtain reasonable assurance that the financial statements are free of material misstatement, including material misstatements caused by fraud. Corporate frauds and audit failures at Enron, WorldCom, and other companies have further increased public focus on fraud, and the public is demanding greater vigilance from all parties involved in organizational governance. As a result of the passage of the Sarbanes-Oxley Act of 2002, audit committees of publicly traded entities not only are responsible for the appointment, compensation, and oversight of independent auditors but also are required to establish a system for the receipt, retention, and treatment of complaints received by the issuer. Further, they have been given authority to hire advisers, funded by the issuer, to carry out their duties.Independent public accountants and internal auditors will continue to serve important roles in the process. Forensic accountants have emerged, however, as vital allies in the fight against fraud. Forensic accountants with appropriate education, training, and experience can provide additional assistance to audit committees and financial statement audit teams so they may better carry out their responsibilities.

While many definitions exist for the general term forensic¹, the AICPAs Forensic and Litigation Services Committee (FLS) believes that forensic accounting consists of two major components: litigation services that recognize the role of the CPA as an expert, consultant, or other role; and investigative services that make use of the CPAs skills that may or may not lead to courtroom testimony. Forensic accounting may involve the application of special skills in accounting, auditing, finance, quantitative methods, certain areas of the law, and research, and investigative skills to collect, analyze, and evaluate evidential matter and to interpret and communicate findings.

Statement on Auditing Standards (SAS) No. 99, Consideration of Fraud in a Financial Statement Audit (AICPA, Professional Standards, vol. 1, AU sec. 316), provides guidance that has the potential to improve audit quality in detecting material financial misstatements, whether caused by fraud or error. SAS No 99 includes the suggestion that an auditor may respond to an identified risk of material misstatement due to fraud by assigningforensicspecialists.²

In addition, many of the suggested procedures in SAS No. 99 are forensic in nature. Such procedures involve the performance of substantive tests or the application of methods and techniques of evidence collection that presume the possibility of dishonesty at various levels of management, including override of internal controls, falsification of documents, and collusion. Examples include interviews of financial and non financial personnel in greater depth or breadth than is customarily the case, unannounced recounts of inventory items, tests of accounts not ordinarily performed, and tests of accounts traditionally or frequently deemed low risk, among many other procedures.

The FLS believes that additional guidance may be needed to assist the forensic accountant, audit committees, financial statement audit teams, and others who use the services of the forensic accountant. The goal of such guidance would be to enhance the validity, reliability, consistency, and transparency of such work and related results. Respondents answers to the following questions are needed to proceed effectively. In addition, the FLS welcomes other questions, comments, and suggestions. Comments should be sent via the Internet to James Feldman at jfeldman@aicpa.org and received by October 15, 2004.

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¹ According to the Random House Websters College Dictionary, forensic is defined as pertaining to, connected with, or used in courts of law or public discussion and debate.

² Statement on Auditing Standards (SAS) No. 99, Consideration of Fraud in a Financial Statement Audit (AICPA, Professional Standards, vol. 1, AU sec. 316.50).