AICPA Readies Proposed Standard on Fraud Detection

In Congressional testimony on February 14, 2002, James G. Castellano, the chairman of the American Institute of CPAs (AICPA) said the Institute plans to release a draft of a new standard by the end of February. The objective of the new standard is to help auditors detect new types of management fraud.

AICPA views the standard as mission-critical to the financial reporting world of the future -- a world in which companies make real-time disclosures over the Internet, and auditors provide contemporaneous assurance the information is reliable. Mr. Castellano said this scenario will not be possible without changes in both the reporting model and the focus of auditing.

The changing focus of auditing

In future assurance services, as AICPA envisions them, auditors will report on information systems and provide assurance that these systems are operating effectively. To help prepare auditors for this role, the new standard will provide guidance on how to assess the risk of management overriding the systems and preparing fraudulent and untruthful disclosures. The guidance will focus on two types of audit procedures:

  • Explicit procedures to address the risk of management override of controls.
  • Required procedures to evaluate the business rationale for significant unusual transactions.

The tentative timetable calls for issuance of a final standard by the end of the year.

Other reforms advocated by AICPA

In addition to the new audit standard, the AICPA advocates a list of near-term reforms. Specifically, AICPA wants the FASB to address non-financial performance indicators, unrecorded intangible assets, forward-looking information, off-balance sheet disclosures, reporting on the effectiveness of internal controls, and stock options. It wants the SEC to address insider trading and other disclosures, as well as auditor assurances on the Management Discussion and Analysis (MD&A) sections of SEC filings.

Download the full testimony from AICPA’s web site. Access additional coverage related to the Enron crisis, or read Mr. Castellano’s article in USA Today that outlines positions taken by the AICPA.

-Rosemary Schlank

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