ACCOUNTING COLLUSION

Accounting Collusion

Accounting Collusion

Synopsis

From the theoretical standpoint, the purpose of this study is to explain the important concepts related to Accounting Collusion. This topic would probe deeper into the criminological theory, including not only the components of incentives/pressures, opportunity, and attitudes/rationalizations, but also the component of collusion. The focus would also be made on a case of mortgage fraud, a primary antecedent of the “toxic assets” that flowed into the financial markets. It is important to recognize some important facts. Fraud is a criminal act; therefore, to be effective, auditor guidance on the evaluation of fraud must be based in the criminological literature. This first attempt at auditor guidance described examples of typical fraud schemes auditors might encounter that could result in misstated financial statements or misappropriation of assets. The results of this study will enable auditors to identify critical fraud risk factors that may indicate a conspiratorial fraud scheme. Therefore, this is the synopsis of the study.

Introduction In 1997 the American Institute of Certified Public Accountants (AICPA) issued Statement on Auditing Standards (SAS) No. 82, Consideration of Fraud in a Financial Statement Audit. Its purpose was to strengthen and clarify the auditor's responsibility to assess fraud risk. While the prevention and detection of fraud was a responsibility of company management, SAS No. 82 required auditors to make an assessment of the likelihood of fraud in the financial statements. SAS No. 82 provided auditors with a list of fraud risk factors grouped into three general categories concerning fraudulent financial reporting. These categories concerned management characteristics and influence, industry conditions, and the company's operating and financial characteristics. Most of the auditing industry did not question the origin of these risk factors and took them as a given. Researchers focused instead on topics such as audit planning and and/or perception of the risk factors. In spite of this, less than 5 years later, although a massive amount of corporate frauds were exposed, the auditors did not initially discover the fraud, and several were found to be involved in the fraud scheme. These occurrences even led to the demise of Arthur Anderson, one of the largest public accounting firms in the United States (Apostolou, Hassell & Webber, 2001).

Congress acted quickly and passed the Sarbanes-Oxley Act (the Act) in January 2002. The Act (2002) not only increased an auditor's responsibility to search for fraud, it also created an organization, the Public Company Accounting Oversight Board (PCAOB), to oversee audits of public companies. Thus, the auditing profession was no longer internally regulated by the AICPA. In part, because of the assault on CPAs' reputations, the AICPA issued SAS No. 99, which was essentially a revision of SAS No. 82. The fraud risk factors in SAS No. 99 were organized differently from those in SAS No. 82, under the categories of incentives/pressures, opportunities, and attitudes/rationalizations. Subsequently, the FBI reported an 80% increase in corporate fraud cases from 2003 to 2008, citing financial fraud, health care fraud, and mortgage fraud as the most ...