Senate Debate Puts Audit Standards on Center Stage

The Senate is scheduled to resume discussion of the Sarbanes accounting reform bill on July 9, 2002, putting audit standards on center stage. A key issue is the extent to which audits can or should uncover major frauds.

Under current and proposed audit standards issued by the American Institute of CPAs (AICPA), auditors are not required to detect major types of frauds. But lawmakers are keenly aware that recent audits have disappointed investors by failing to detect alleged frauds. Rather than try to legislate a definitive statement of the auditor's specific duties for detecting fraud, the Sarbanes bill would shift responsibility for setting audit standards to an independent board that would also set other types of standards and discipline firms that fail to meet the standards.

According to an article published by the Wall Street Journal, there has been criticism of a proposed standard on fraud issued in February 2002 by the AICPA's Auditing Standards Board. This proposal was formulated largely in response to pressure from the Securities and Exchange Commission (SEC) that started about four years ago. ("Accounting-Overhaul Plans Draw Skepticism," July 8, 2002.) The Journal reports that critics say the current proposal falls short because:

  • It makes certain audit steps optional rather than mandatory. "A lot of it has loosey-goosey wording that doesn't say you have to do it," explains former SEC Chief Accountant Lynn Turner.

  • It provides too many loopholes that allow accounting firms' lawyers to argue that properly conducted audits can still miss fraud. Baruch College Professor Douglas Carmichael says the proposed standard "contains at least five or six paragraphs that don't do anything except explain why an audit done in accordance with accounting standards might not detect fraud."

Other professors have concluded that today's audit methodology focuses too heavily on computer programs and internal controls to catch fraud by top-level management. President Bush has indicated that he will urge Congress to pass tougher penalties for senior-level management. Even though Congress has very few weeks left in this session, the current expectation is that a bill will be passed and sent to the President for his signature by the end of the summer.

-Rosemary Schlank

You may like these other stories...

A new Wall Street Journal/NBC poll found that there is broad support among registered voters for Congress to enact legislation that would curb the practice of US companies shifting their headquarters overseas to cut their US...
All that was needed on Tuesday was a voice vote for the House of Representatives to pass a bill that would prevent state and local governments from taxing access to the Internet.Now the ball is in the Senate’s court....
The Republican-controlled House of Representatives passed a bill on Friday morning that would permanently extend the bonus depreciation tax break for businesses.The measure, HR 4718, which was crafted by Representative Pat...

Already a member? log in here.

Upcoming CPE Webinars

Sep 24
In this jam-packed presentation Excel expert David Ringstrom, CPA will give you a crash-course in creating spreadsheet-based dashboards. A dashboard condenses large amounts of data into a compact space, yet enables the end user to easily drill down into details when warranted.
Sep 30
This webcast will include discussions of important issues in SSARS No. 19 and the current status of proposed changes by the Accounting and Review Services Committee in these statements.
Oct 21
Kristen Rampe will share how to speak and write more effectively by understanding your own and your audience's communication style.
Oct 23
Amber Setter will show the value of leadership assessments as tools for individual and organizational leadership development initiatives.