Accounting fraud is a serious crime that can be directly linked back to management decisions. It usually starts small, as a company tries to meet earnings and revenue projections, so managers may fudge the numbers hoping the next quarter will let them make up for questionable entries in the books. What begins with cutting a few corners takes on a life of its own as the next quarter is never quite enough to correct the imbalance. When stock prices are reaching their peak, the need to achieve revenue or cost projections can become too compelling for managers of questionable character.
Since the drafting of SAS 82, SAS 99, and more recently broad regulatory laws like Dodd-Frank, the accounting industry, as a whole, has recognized the heightened role it must play in identifying potential risk factors of fraud. As the corporate scandals of Enron, MCI, and other entities have demonstrated, there is increased need for accounting firms to “know their client.” With the complex nature of the financial industry and the business dealings that take place, it’s often times challenging for firms and their clients to maintain the required arm’s length approach necessary. It’s a valid argument for independence even for an accounting firm’s own oversight in an increasingly regulated and legally risky environment.
FRM can assist accounting firms to mitigate their risk when accepting new audit engagements, deciding when to continue an audit engagement, and for high risk engagements such as business valuations. FRM’s reports identify possible risk factors of fraud associated with management including historical cases of fraud that management may have been involved in, prior instances where financial statements were restated as a result of aggressive reporting mechanisms, undisclosed contingent liabilities, self-dealing, and less than arm’s length transactions.
FRM accomplishes this by working with the auditor in performing a thorough review of publicly available information on management including criminal records, bankruptcies, lawsuits, judgments, tax liens, UCC-1 filings, news articles, regulatory sanctions, and verifications of management’s curriculum vitae and prior work history before accepting a new audit client on board. Upon reaching the comfort level with management to accept the new audit client, FRM provides services on the entity as part of the annual audit process to make sure undisclosed contingent liabilities are properly foot noted as part of the audit engagement.
FRM also assists by developing best standard pre-employment screening programs for accounting firms, especially as it relates to promotions to partners and other senior roles.