by Gary Zeune, CPA
Continued from Preventing Your Firm's 'Enron' - Part 1
Avoid Procedures That Can Lead to Your ‘Enron’
Now let’s explore some of the things that can lead to your "Enron":
1. Audit the business: Statement on Auditing Standards Number 82, "Considering Fraud in a Financial Statement Audit," is a positive affirmative DUTY to detect fraud. Most SAS 82 audit procedures are OUTSIDE the books. Yet many accountants still use the same audit program as they did before SAS 82 became effective Dec. 15, 1997.
How do you explain that a new standard went into effect five years ago, but your audit program hasn’t changed? Just one example of audit procedures “outside the books” that is critical. Does your client do background checks on employees with access to liquid assets? Why are background checks important? Because the easiest way to prevent someone from stealing the company blind is not to hire them in the first place. In addition to criminal checks, check credit history and driving records. Employees behind on their bills are more likely to steal. As are people who get many traffic tickets ... they are risk-takers.
While we’re on the topic, do you perform background checks on your firm’s employees, especially new hires? In a recent survey, 40 percent of 18- to 35-year-olds said they lived above and beyond their means. What makes you think CPA firm employees are immune? For example, south Florida Alexander Grant partner Jose Gomez spent 41/2 years in prison for his part in the $350 million ESM Government Securities fraud in the late 1980s. He lived above and beyond his means, and borrowed from ESM’s CFO. A year later ESM needed to hide a $350 million trading loss suffered by Home State Savings & Loan. Home State was owned by a relative and was ESM’s largest customer. So Mr. Gomez helped set up the unconsolidated affiliate to hide the loss.
2. False sign-off of audit work: False sign-off occurs when staff sign-off on work they didn’t do.
First: Why would firm personnel say they did work when they didn’t?
Answer: Budget pressure, and to get a promotion and pay raise by coming in under budget and keeping the client happy.
Second: How does staff know what to falsely sign-off and not be detected?
Answer: Look at last year’s workpapers.
Third: Why doesn’t workpaper review detect false sign-off?
Answer: Because we trust staff ... if they sign off the work is done; we assume they did it.
3. Peer review: Peer review is the profession’s primary quality control mechanism. Yet it doesn’t detect false sign-offs. Why not? Because reviewers don’t look at original audit support to determine if the work was actually done.
4. Stop asking the client: When a staff person has a question about an audit step, whom do they sometimes ask? The client, especially if the controller is a former auditor. Why? Because the staff person doesn’t want to look stupid. The staff person has lost her independence when she asks the client how to perform an audit step. Make a firm-wide rule: No one is allowed to ask client personnel how to perform an audit. Violation is grounds for dismissal.
5. Listen: When a client’s employee is embezzling/stealing/etc., someone in the company usually knows it. Train staff to listen to the grapevine. If top management is cooking the books, some lower-level employees nearly always try to alert the auditors (e.g., Enron VP Sherron Watkins and former AA employee warned the Andersen audit team the company might implode in an accounting scandal).
© 2002 by Gary D. Zeune, CPA, is the CEO of The Pros and The Cons, 3573 Woodstone Drive, Lewis Center, OH 43035. For questions, he can be reached at 614-761-8911 or via e-mail at [email protected].