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AICPA Addresses Fraud in Audit Committee Guidance

AICPA Addresses Fraud in Audit Committee Guidance

by Rick Turoczy on January 25, 2005

As part of its ongoing fraud-prevention program, the American Institute of Certified Public Accountants today issued guidance to help U.S. audit committees understand one of the most significant of fraud risks: management override of internal controls.

The guidance, Management Override of Internal Controls: The Achilles’ Heel of Fraud Prevention — The Audit Committee and Oversight of Financial Reporting, is available free of charge and may be found on the Audit Committee Effectiveness Center page of the AICPA website.

“Our guidance outlines specific steps audit committees can take to address the risk of management overriding established internal safeguards,” said John Morrow, AICPA Vice President — The New Finance. “Had audit committees taken these steps, many financial frauds may have been prevented.

“Proper guidance for audit committees is particularly important in the wake of such widely reported financial-reporting frauds as WorldCom and Enron,” Morrow added.

One of the most common examples of management override is the posting of fictitious journal entries to overstate revenues or understate expenses. In this scenario, the Chief Financial Officer and Controller generally are the architects of the fraud, with lower-level accounting employees serving — usually through fear of losing their jobs or naivete — as accomplices.

In most instances, the fraud is intended to be a temporary solution to a missed earnings target. One false financial report, however, invariably leads to another, resulting in a domino effect that culminates in the collapse of the company. According to the Association of Certified Fraud Examiners’ 2002 Report to the Nation on Occupational Fraud and Abuse, the average length of time from inception of a financial-statement fraud to its detection is 25 months.

AICPA Addresses Fraud in Audit Committee Guidance

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