Preventing Your Firm's 'Enron' - Part 2 of 4

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).

Continue >>

© 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 gzfraud@bigfoot.com.

You may like these other stories...

From May 20-23, the Association for Accounting Marketing (AAM) held its annual conference. Frequent contributor Sally Glick picked up some ideas that she will be sharing with us in the coming days, as she has done in...
Success, for a practitioner in a busy CPA firm, requires the ability to handle multiple tasks effectively. To get everything done, CPAs typically track their agenda with a "to do" list or other open-item systems to...
Everyone loses clients. You've seen the statistics. Clients and heirs often change accountants, attorneys, and advisors after a death or divorce. That's understandable. What about ongoing relationships when the...

Upcoming CPE Webinars

Jul 23
We can’t deny a great divide exists between the expectations and workplace needs of Baby Boomers and Millennials. To create thriving organizational performance, we need to shift the way in which we groom future leaders.
Jul 24
In this presentation Excel expert David Ringstrom, CPA revisits the Excel feature you should be using, but probably aren't. The Table feature offers the ability to both boost the integrity of your spreadsheets, but reduce maintenance as well.
Jul 31
In this session Excel expert David Ringstrom helps beginners get up to speed in Microsoft Excel. However, even experienced Excel users will learn some new tricks, particularly when David discusses under-utilized aspects of Excel.
Aug 5
This webcast will focus on accounting and disclosure policies for various types of consolidations and business combinations.