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Dr. Crumbley is the Editor of the Journal of Forensic Accounting: Auditing, Fraud, and Risk,

The Fraud Side of Forensic Accounting D. Larry Crumbley, CPA, Cr.FA, CFD KPMG Endowed Professor Department of Accounting Louisiana State University Baton Rouge, LA 70803 225-578-6231 225-578-6201 Fax dcrumbl@lsu.edu. Dr. Crumbley is the

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Dr. Crumbley is the Editor of the Journal of Forensic Accounting: Auditing, Fraud, and Risk,

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  1. TheFraud Side of Forensic AccountingD. Larry Crumbley, CPA, Cr.FA, CFDKPMG Endowed ProfessorDepartment of AccountingLouisiana State UniversityBaton Rouge, LA 70803225-578-6231225-578-6201 Faxdcrumbl@lsu.edu Dr. Crumbleyis the • Editor of the Journal of Forensic Accounting: Auditing, Fraud, and Risk, • Former chair of the Executive Board of Accounting Advisors of the American Board of Forensic Accountants, • Member of the NACVA’s Fraud Deterrence Board,and • On the AICPA’s Fraud Task Force (2003-2004). A frequent contributor to the Forensic Examiner, Professor Crumbley is a co-author of CCH Master Auditing Guide, along with more than 50 other books and 350 articles. His latest book entitled Forensic and Investigative Accounting is published by Commerce Clearing House (800-224-7477). Some of his 12 educational novels have as the main character a forensic accountant. His goal is to create a television series based upon the exciting life of a forensic accountant and litigation consultant.

  2. Definition of Forensic Auditor Someone who can look behind the facade--not accept the records at their face value--someone who has a suspicious mind that the documents he or she is looking at may not be what they purport to be and someone who has the expertise to go out and conduct very detailed interviews of individuals to develop the truth, especially if some are presumed to be lying. Robert G. Roche, a retired chief of the IRS Criminal Investigation Division of the IRS

  3. Definition of Forensic Accounting • Forensic accounting is the application of accounting, tax, auditing, finance, quantitative analysis, investigative and research skills, and an understanding of the legal process for the purpose of identifying, collecting, analyzing, and interpreting financial or other data or issues in connection with: • Litigation services: providing assistance for actual, pending or potential legal or regulatory proceedings before a trier of fact in connection with the resolution of disputes between parties, or • Non-litigation services: performing analyses or investigations that may require the same skills used in 1, above, but may not involve the litigation process.

  4. Definition of Forensic Accounting Non-Litigation Services Forensic accounting non-litigation services are the professional assistance accountants provide not related to the litigation process. These services may involve accounting, financial, auditing, tax, quantitative analysis, and investigative and research skill as well as an understanding of the legal process to provide assistance in connection with matter or issues not involving the litigation process.

  5. The Bubble Deception There are 14,000 publicly traded companies in the United States. Expecting all of them to be honest is unrealistic. Like any town of 14,000, the market is bound to have its share of grifters and shoplifters. But the deception at Computer Associates was dangerous precisely because it wasn’t an aberration. By January 2001, all manner of companies were abusing accounting rules to mislead theirinvestors, seemingly without fear of being caught. A strange madness had gripped the market. Even its most solid citizens were running red lights and breaking windows. And the police were nowhere in sight. Alex Berenson, The Number, Random House, 2003, p. xxiii.

  6. Enriching Insiders I know that sounds crazy, but the stock market has gone from a place where investors actually own part of a company and have a say in their management to a market designed to enrich insiders by allowing them to sell shares they buy cheaply through options. Companies continuously issue new shares to their managers without asking their existing shareholders. Those managers then leak that stock to the market a little at a time. It’s unlimited dilution of existingshareholders’ stakes, dilution by a thousand cuts. If that isn’t a scam, I don’t know what is. Individual shareholders have nothing but the chance to sell their shares to the next sucker . A mutual fund buys one million shares of a company with your and your coworkers’ money. You own 1 percent of the company. Six weeks later you own less, and that money went to insiders, not to the company. Alex Berenson, The Number, Random House, 2003, p. xviii.

  7. Forensic Accounting Factors • Time: Forensic accounting focuses on the past, although it may do so in order to look forward (e.g., damages, valuations). • Purpose: Forensic accounting is performed for a specific legal forum or in anticipation of appearing before a legal forum. • Peremptory: Forensic accountants may be employed in a wide variety of risk management engagements within business enterprises as a matter of right, without the necessity of allegations (e.g., proactive). ----------------------------------------------- With a single clue a forensic accountant can solve a fraudulent mystery.

  8. One Small Clue A former Scotland Yard scientist tried to create the world’s biggest fraud by authenticating $2.5 trillion worth of fake U.S. Treasury bonds. When two men tried to pass off $25 million worth of the bonds in Toronto in 2001, a Mountie noticed the bonds bore the word “dollar” rather “dollars.” Police later raided a London bank vault and discovered that the bonds had been printed with an ink jet printer that had not been invented when the bonds were allegedly produced. Zip codes were used even though they were not introduced until 1963. Sue Clough, “Bungling Scientist Is Jailed for Plotting World's Biggest Fraud,” News.telegraph.co.uk, January 11, 2003.

  9. Forensic Accounting Defined Forensic accounting is the action of identifying, recording, settling, extracting, sorting, reporting, and verifying past financial data or other accounting activities for settling current or prospective legal disputes or using such past financial data for projecting future financial data to settle legal disputes. Source: Forensic and Investigative Accounting (CCH) -------------------------------------------------------- When the death of a company occurs under mysterious circumstances, forensic accountants are essential. Other accountants look at the charts but forensic accountants actually dig into the body. Douglas Carmichael

  10. Forensic Accounting Areas • Investigative Auditing • Litigation Support Forensic: Latin for “forum,” referring to a public place or court. Black’s Law Dictionary: Forensic, belonging to the courts of justice. Note: Corporate spooks are used to check on competitors.

  11. Forensic Auditing Forensic auditing is a type of auditing that specifically looks for financial misconduct, and abusive or wasteful activity. It is most commonly associated with gathering evidence that will be presented in a court of law as part of a financial crime or a fraud investigation. Source: B.L. Derby, “Data Mining for Improper Payments,” Journal of Government Financial Management, Winter, 2003, pp. 10-13 ---------------------------------------------------------------- “ Forget the stuffed white shirt, forensic accountants are more parts Philip Marlowe than Casper Milquetoast. They open the books and crack the code, transforming a dull science of numbers into a suspenseful mystery with a logical, even riveting resolution.” Cory Johnson

  12. Top Niche Services Source: Accounting Today.

  13. Forensic Accounting vs. Fraud Auditing Fraud Auditor: An accountant especially skilled in auditing who is generally engaged in auditing with a view toward fraud discovery, documentation, and prevention. -------------------------------------------------- “Economic crimes and fraud often do not involve obvious evidence like the smoking gun. Forensic accountants look behind the deals and handshakes and probe beyond the numbers to uncover the reality of financial situations.” Source: D.W. Squires, “Problems Solved with Forensic Accounting: A Legal Perspective,” Journal of ForensicAccounting., Vol. IV (2003),. P. 131.

  14. Forensic vs. Fraud Audit Google result, May 4, 2005 • Forensic Audit, 19,800 hits • Fraud Audit, 4,470 hits • Fraud Examination, 11,400 hits • Fraud Accounting, 3,790 hits • Forensic Accounting, 225,000 hits ---------------------------------------------- I don’t care what they say, but [forensic accounting] is here to stay. Danny & the Juniors ----------------------------------------------------------------------------------- I see skies of blue and clouds of white, and I think to myself, what a wonderful world. Louis Armstrong

  15. Specialties Within Forensic and Investigative Accounting • Employee Crime Specialist. • Asset Tracing Specialist. • Litigation Services Specialist and Expert Witness. • Insurance Claims. • Valuation Analysis. • False Claims Act Violations. • Due diligence investigations.

  16. Asset Tracing Three Italian lawyers said in a filing to be presented to a bankruptcy court that they had traced $7.7 billion in missing Parmalat funds. “We are preparing a filing in which we are asking for the insolvency status to be revoked because the money was robbed and not lost,” lawyer Carlo Zauli told Reuters. But he said it would be an illusion to believe proof of electronic transfers of the funds could be found and the lawyers representing the Parmalat Creditors Committee did not say where the money was being held or if it was recoverable. An Italian website, TGfin (www.tgfin.it), said a company linked to Parmalat founder Tanzi was holding the funds in the form of U.S. bonds in an account with Bank of America. Source: Emilio Parodi and Stefano Bernabei, “Wrap-up 2: Paramalat Fraud Probe Widens to Auditors, Ex-Banker, “forbes.com, January 8, 2004.

  17. Gross Profit Comparison • In a divorce situation, a business owner claimed only about $75,000 annual income. • He claimed he had borrowed and not paid back huge sums. • Wife said he was spending about $400,000 per year more than his salary. Four schedules for the courtroom: • What was known and alleged about husband’s expenditures. • Schedule comparing income with expenditures. • Amounts husband claimed he had borrowed.

  18. Gross Profit Comparison(cont.) • Company’s income statements side-by-side: New Gross Profit HisPer Industry ---- ------ ---------- $75,000 $475,000 • Husband had overstated COGS. Checks issued to vendors, into COGS. • Some of the vendors cashed the checks and returned the money to husband. Mark Kohn, “Unreported Income and Hidden Assets,” Forensic Accounting in Matrimonial Divorce, Philadelphia: R. T. Edwards, 2005, pp. 49-57. Mark Kohn, “Unreported Income and Hidden Assets,” in Forensic Accounting in Matrimonial Divorce, Philadelphia: R.T. Edwards, 2005, pp. 49-57.

  19. Unreported Beer Sales • Business owner reports only $50,000 business income, but has expensive cars, private schools, buying significant real estate. • Subpoenaed records of local beer distributors. Then went to the club and ordered some drinks, noting the pricing of the beer, etc. 1,000 cases of Miller’s 24 bottles 24,000 x $2 $48,000 per year • Found that reported sales were underreported by $500,000. Mark Kohn, “Unreported Income and Hidden Assets,” Forensic Accounting in Matrimonial Divorce, Philadelphia: R.T. Edwards, 2005, pp. 49-57.

  20. Home Improvements • Massive improvements to personal home, not paid for by personal funds. • Company showed many corporate payments to home remodeling contractors/landscapers. • But the industrial park not owned by company. • Only photocopies of invoices provided. • FC demanded original documents. • Finally, the original documents had white-outs of job locations and work descriptions. • Could turn over the originals and read the real data from the back side. Mark Kohn, “Unreported Income and Hidden Assets,” Forensic Accounting in Matrimonial Divorce, Philadelphia: R.T. Edwards, 2005, pp. 49-57.

  21. Finding Unreported Income/Hidden Assets • Look at the lifestyles. • Look at the expenses. • Look at the cash flow. • Look at the business operations. • Look at the industry ratios. • Consider using private investigators. • Use the net worth method. Mark Kohn, “Unreported Income and Hidden Assets,” Forensic Accounting in Matrimonial Divorce, Philadelphia: R.T. Edwards, 2005, pp.49-57.

  22. Fiction v. Reality The main difference between fiction and reality is that instead of using mask and gun, today’s villains use mouse and keyboard. Instead of hiding behind a lamppost in a trench coat and fedora, today’s forensic accountants are more likely to behiding behind their own computers, searching for clues amid mountains of data. Source; “Book ‘EM! Forensic Accounting in History and Literature,” The Kessler Report, Vol.1, No. 2. ------------------------------------------------------------------------------------ “Every investigation I did as a prosecutor, you have a particular target, but it always branches off because something else gets your attention. And that’s what is going to happen with a forensic accountant.” Tom Carlucci: E-library Rueter Library September 20, 2002

  23. Carmichael`s Position • Doug Carmichael, Chief Auditor for PCAOB, faults auditors for not adopting forensic techniques. • Carmichael wishes more “test of details,” not relying on test of controls. • He wishes more shoe-leather work. • Shoe-leather work is what we do! Kris Frieswick, “How Audits Must Change,” CFO, July 2003, p.48

  24. Forensic Accountants “Rather than combing torn clothing,” forensic accountants “comb through corporate books, looking for oddities that could signal swindles,” says Bruce Dubinsky. Investigations can be extremely complex, with crates and crates of documents and thousands of computer files. Investigators look for flags or patterns that would not normally occur. Source: Mark Maremont, “Tyco Is Likely to Report New Woes,” Wall Street Journal, April 30, 2003, p. C-1.

  25. Auditors Blamed: Deep Pockets • Trustee for United Companies (UC) said that Deloitte and Touche was guilty of negligence, malpractice, misrepresentation, breach of duty, and fraud. • D & T failed to warn United Companies of all of the losses it would absorb if the people who took out the loans defaulted, because the accounting firm was making millions and millions of dollars in fees. • Loan practice called securitization or bundled high-interest loans. • $685 million in liability damages. • Plaintiff’s Attorney: Role of auditors is to act as watchdogs for companies. “A good watchdog barks when somebody comes into the yard. D & T is supposed to bark when there is a problem.” • Defendant’s Attorney: “The problem was much larger than a watchdog could handle. Can a watchdog stop your house from getting hit by a hurricane? Of course not.” Source: Adrian Angelette, “Auditors Blamed, “Baton Rouge Advocate, October 23, 2003, pp. A-1 and a-8

  26. Auditors Blamed (cont.) • As part of the securitization agreement, UC agreed to pay the principal and interest on defaulted loans. • Creditors contend that UC failed to account for the interest it was paying, and D&T should have caught the mistake earlier. • After UC wrote off $605 million in debt, the company filed for bankruptcy. • Confidential mid-court settlement. Source: Adrian Angelette, “United Companies Settlement Reached,” Baton Rouge Advocate, October 31, 2003, pp. A-1 and A-12

  27. Find It, or I’ll Sue Accountants must be attuned to detecting fraud at every level of service, including standard accounting services, compilations, reviews, and bank reconciliations. If there is fraud and you don’t detect it, you are going to be sued, and you will likely lose, as the public perception is the accountant is the watchdog. Robert J. DiPasquale, Parsippany, N.J. Source: H.W. Wolosky, “Forensic Accounting to the Forefront,” Practical Accountant, February 2004, pp. 23-28.

  28. Investigative auditing LAW Accounting Criminology Forensic Accountant Forensic Accounting Knowledge Base

  29. Threads of Forensic Accounting • Forensic accounting (or at least accounting expert witnessing) can be traced as far back as 1817 to a court decision. [Meyer v. Sefton] • In 1824, a young accountant by the name of James McCleland started business in Glasgow, Scotland and issued a circular that advertised various classes of expert witness engagements he was prepared to undertake. • In 1856 in England, the audit of corporations became required.

  30. Investigative Accountants • Initially called investigative accounting, many of the forensic techniques, such as the net worth method, were developed by IRS agents to detect tax evaders. • Infamous mobster, Al Capone, was caught when Special Agents of the IRS stepped in and charged him with tax evasion. • Accountants caused the crime czar’s career to come to an end.

  31. Investigative Techniques “You know how it goes,” I said. “You get a case. You just keep poking around, see what scurries out.” p. 144. ------------------------------------------------------------ “How,” Susan said, “on earth are you going to unravel all of that?” “Same way you do therapy,” I said. “Which is?” “Find a thread, follow it where it leads, and keep on doing it.” “Sometimes it leads to another thread.” “Often,” I said. “And then you follow that thread.” “Yep.” “Like a game,” Susan said. “For both of us,” I said. Susan nodded. “Yes,” she said, “tracking down of a person or an idea or an evasion.” pp. 270 – 271. -------------------------------------------------------------------------------- Source: R.B. Parker, Widow’s Walk, Berkley Books, 2002.

  32. Al Capone Caper “Perhaps the most celebrated case of an accountant nailing a famous criminal was the case of Al Capone. For all of Capone’s colorful history of violent crime, the FBI could never gather enough evidence to convict him until FBI agent Eliot Ness had an idea. He gathered special agents of the IRS to track the flow of cash from Capone’s illicit activities. When the mobster failed to pay taxes on those earnings, the IRS nailed him for tax evasion. Capone went to jail and was never a factor again. IRS recruitment posters boast till this day: ‘Only an accountant could catch Al Capone.’” Source: “Book ‘Em! Forensic Accounting History and Literature,” The Kessler Report, Vol. 1, No. 2.

  33. Father of Forensic Accounting: • Maurice E. Peloubet (1946) Pretenders: • Max Lourie (1953) • Robert Lindquist (1986)* * Repeated, First sentence in N. Brennan and J. Hennessy, Forensic Accounting, 2001, p. 5.

  34. The Essence of Forensic Accounting by Maurice Peloubet (1946): “The preparation of data for and the appearance before government agencies as a witness to facts, to accounting principles, or to the application of accounting principles is essentially forensic accounting practice rather than advocacy.” Modern Version “Let’s face it, we in the forensic profession labor in an obscure corner of the vineyard. We are the carefully selected, trusted, highly trained guardians of one of the last great secrets remaining on the face of the earth - - the $600 billion[now $660], more or less annual problem nobody knows about.” Joseph W. Koletar, Fraud Exposed, John Wiley & Sons, Inc 2003, p. 228.

  35. Fictional Hero “Forensic accounting is turning up more frequently in the world of fiction, too. The financial intrigue of fraud and the investigative process of forensic accounting are a natural fit with mystery of suspense novels. Add exotic locations, colorful characters and a murder or two, and you have all the elements of a classic thriller. There is a selection of books featuring forensic accountants as the heroes of their own stories, as well. Lenny Cramer, perhaps the most prominent of this fictional group, is the star of a series of novels written by I.W. Collett and various co-authors. In one of these novels, Cramer tracks forged receipts to uncover a plot to steal Burmese religion treasures. Another features Cramer, while conducting an audit at Coca-Coca, uncovering a scheme to steal the company’s secret formula. In yet another, Cramer uses his forensic accounting skills to solve a series of murders in the New York art world.” Source: “Book ‘em! Forensic Accounting in History and Literature,”The Kessler Report, Vol. 1, No. 2.

  36. Panel on Audit Effectiveness • In 1998, the Public Oversight Board appointed the Panel on AuditEffectiveness to review and evaluate how independent audits of the financial statements of public companies are performed and to assess whether recent trends in audit practices serve the public interest. • In 2000, the Panel issues a 200-page report, Report and Recommendations, which includes a recommendation that auditors should perform forensic-type procedures during every audit to enhance the prospects of detecting material financial statement fraud. • Did not believe a GAAS audit should become a fraud audit. • In all audits the degree of audit effort in forensic- type steps should be more than inconsequential [p. 24].

  37. Audit Tests The Panel on Audit Effectiveness recommended that surprise or unpredictable elements should be incorporated into audit tests, including: • Recounts of inventory and unannounced visits to locations • Interviews of financial and nonfinancial client personnel in different locations • Requests for written confirmations from client employees regarding matters about which they have made representations to the auditors • Tests of accounts not normally preformed annually • Tests of accounts traditionally or frequently deemed “low risk”

  38. AICPA Fraud Task Force Report In 2003, the AICPA’s Litigation and Dispute Resolution Services Subcommittee issued a report of its Fraud Task Force entitled, “Incorporating Forensic Procedures in an Audit Environment.” The report covers the professional standards that apply when forensic procedures are employed in an audit and explains the various means of gathering evidence through the use of forensic procedures and investigative techniques.

  39. Forensic-Type Organizations • American College of Forensic Examiners (2750 E. Sunshine, Springfield, MO 65804; 800-423-9737; www.acfei.com. DABFA and Cr.FA; 2000) • Certified Fraud Examiners (Association of CFEs, The Gregor Bldg., 716 West Avenue Austin, TX 78701; 800-245-3321; www.cfenet.com). • Certified Insolvency and ReorganizationAccountant (CIRAs). Accountants, lawyers, consultants included in insolvency and bankruptcy matters. 3-part exam. 4,000 hours. 541.858.1665. AIRA, 221Stewart Avenue, Suite 207, Medford, Or. 97501. aira@airacira.org • Society of Financial Examiners. Financial examiners of insurance companies, banks, savings & loans, and credit unions. About 1,600. 174 Grace Blvd., Altamonte Springs, Fl. 32714. www.sofe.org. • Certified Forensic Financial Analyst (NACVA, Salt Lake City, Utah 84106; 801-486-0600). Also, Certified Fraud Deterrence (CFD) analyst. • National Litigation Support Services Association (NLSSA, III East Wacker Drive, Suite 990, Chicago, IL 60601; 800-869-0491). Not-for-profit. About 20 firms. $1,825. • Canadian Institute of Chartered Accountants (CICA) – CA.IFA – Alliance for Excellence in Investigative Accounting. • Certified Forensic Investigator(CFI) – Canada Early 1980’s. www.homewoodave.com • Certified Fraud Specialist(CFS), not-for-profit, educational anti-fraud corporation located in Sacramento, Calif., for those dealing in white-collar crime, fraud, and abuse issues. Association of Certified Fraud Specialists. http://acfsnet.org.

  40. Ink Analysis • Martha Stewart was undone by a blue ballpoint pen. • Stockbroker belatedly inserted a note to help cover up Ms. Stewart’s improper stock trading. Blue ballpoint ink used is different from ink elsewhere on the trading worksheet. • Prosecutors used forensic ink analysis in Rite Aid case to show that certain documents were backdated (ink used to sign letter was not commercially available until 3 months after the letter was dated). • Xerox laser printers now encode the serial number of each machine in tiny yellow dots in every printout, nestled within the printed words and margins. It tracks back to you like a license plate. • Advice for fraudsters: use pencils. Source: Mark Maremont, “In Corporate Crimes, Paper Trail Often Leads to Ink Analysts’ Door,” Wall Street J., July 1, 2003, p. A-1.

  41. Deductive vs. Inductive • Deductive: one goes from general to specific; fairly simple and economical. • Inductive: one starts with specific experiences and then draws inferences. Source: W.S. Albrecht and C.C. Albrecht, “Root Out Financial Deception,” Journal of Accountancy (April 2002), p. 33.

  42. Benford’s Law • Distribution of initial digits in natural numbers is not random • Predictable patterns: There is software to detect potentially invented numbers in many situations. Compare actual frequency with Benford’s frequency.

  43. Benford’s Law Uses • Investments sales/purchases • Check register. • Sales history/Price history. • 401 contributions. • Inventory unit costs. • Expenses accounts. • Wire transfer information. • Life insurance policy values. • Bad debt expenses. • Asset/liability accounts. Source: Richard Lanza, “Digital Analysis- Real World Example,” IT Audit, July 1, 1999,pp. 1-9.

  44. Federal Sentencing Guidelines Monitoring Mechanism Systems reasonably designed to detect criminal conduct by its employees and other agents and by having in place and publicizing a reporting system whereby employees and other agents could report criminal conduct by others within the organization without fear of retribution. FCPA Sec. 8A1.3(k)(5). ------------------------------------------------------------------------------- The U.S. Supreme Court has overturned some of these concepts. Look for Congress to take action.

  45. Fraud Some accountants believe that ethics is a place in England. Essex, U.K. ------------------------------------------------------ A statement made by Mark Twain about New England weather applies to fraud and corruption: “It’s hard to predict, but everyone agrees there’s plenty of it.” ----------------------------------------------- As Sherlock Holmes said, “the game is afoot.” ------------------------------------------------------- Read My Lips; It’s The Fraud, Stupid.

  46. Termites, Rust, and Fraud • Just as termites never sleep, fraud neversleeps. • Just like termites, fraud can destroy thefoundation of an entity. • -------------------------------------------------- • Likerust, fraud never sleeps. • -------------------------------------------------- • Auditing without forensic techniques is like trying to live without water.

  47. Sarbanes-Oxley Act (7-30-2002) • Most significant change since 1934 Securities Exchange Act • New five-member Public Company Accounting Oversight Board (PCAOB) • Authority to set and enforce auditing, attestation, quality control and ethics (including independencies) standards for auditors of public companies. • Empowered to inspect the auditing operations of public accounting firms that audit public companies as well as impose disciplinary and remedial sanctions for violations of the board’s rules, securities laws and professional auditing and accounting standards. • Rotation of lead audit partner every five years. • For now no requirement to rotate auditing firm

  48. Sarbanes-Oxley Act (7-30-2002) • Eight types of services outlawed: • Bookkeeping. • Information systems design and implementation • Appraisals or valuation services, fairness opinions, or contribution-in-kind-reports. • Actuarial services • Internal audit outsourcing • Management and human resources services • Broker/dealer, investment adviser, and investment banking services • Legal or expert services related to audit services • Applies to foreign accounting firms filing with SEC. • http://www.pcaob.us, to get free subscription to PCAOB Update.

  49. Sarbanes-Oxley Act of 2002 • If you are going to be an auditor, you have to be an auditor, not an auditor and a consultant [Senator Jack Reed]. • In order to be independent, an accounting firm should not • Audit ones own work. • Function as part of management or an employee. • Act as an advocate. • No limitations are placed upon accounting firms in providing non-audit services to public companies they do not audit or any private companies. • Audit services and non-audit services (e.g., tax) must be pre-approved by the audit committee, if not prohibited by the Act (before the non-audit service commences). • Auditor must report to the audit committee on a timely basis. • Cooling off period of one year for hiring an auditor if CEO and other senior officers worked for the auditor. • There is no requirement to rotate the auditors. • There is discussion of requiring a forensic audit irregularly. Harvey Pitt suggested this proposal.

  50. Sarbanes-Oxley (contd.) • Many of the Sarbanes-Oxley’s provisions became effective July 30, 2002. • www.tnwinc.com The Network • Thus, SEC will control the accounting standards, not the AICPA. • Auditors to report to audit committee, and audit committee must approve all services. • Crime to corruptly alter, destroy, mutilate, or conceal any document with the intent to impair the object’s integrity or availability (up to 20 years). • Statute of limitations for the discovery of fraud is now two years from the date of discovery and 5 years after the act. • Maximum penalty for mail and wire fraud is increased from 5 to 10 years. • Financial statement filed with SEC: certified by CEO and CFO. Maximum penalties for willful and knowingly violation: fined not more than $5 million and/or imprisonment of up to 20 years. • Sense of Congress: CEO should sign the Federal income tax return.

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