If clients knew that audits required fraud detection, they would also know that they could not shop around for compliant auditors. .
Auditors must go beyond the recently proposed Statement of Auditing Standards ("SAS-) 99, which creates an affirmative duty to perform only "minimum- procedures to detect material fraud, including making inquiries of management. Beyond this limited duty, auditors need to ask probing questions, expand their inquiries beyond the most senior personnel, and develop and implement a variety of approaches to detecting fraud.
Fraud detection will require the improvement of many different aspects of the financial reporting process within individual companies. For example, the internal audit staff must be encouraged to act independently and trained to look into the areas of the company's operations that are most fraught with potential for wrongdoing. Audit committees must ensure that the reporting system requires the chief internal auditor to report directly to the audit committee of the Board of Directors. .
Under current standards, an auditor must obtain sufficient competent evidence through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit. Yet, particularly auditor violations resulted largely from auditors' failing to gain sufficient evidence to support the issuer's accounting, we must re-examine the auditing requirements for confirmation of completed sales to ensure that auditors can ferret out these and other abuses.
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When auditors evaluate a client's valuations for corporate transactions, they should carefully examine companies' valuation practice in previous similar transactions. Sometimes the reason that accountants accepted a particular practice in the past was that the amount involved was immaterial to the company's overall financial picture. Yet continuing the practice when the amounts increase in size can cause material misstatements, so evaluations of these practices must be revisited.
