Auditing Scandals: Corporate abuse of the auditing system in America

The reputation of the external audit profession is in tatters. Standards and practices of the profession have been found severely wanting in recent times, their contribution to the decline in corporate morality and the erosion of investor confidence is a worldwide talking point.

As an example, while Enron is the highest profile, current example of this accusation, the statistics in the accompanying graphic bear out that Arthur Anderson's actions were not inconsistent with an industry norm. The review period for these statistics coincides with Enron, but excludes Enron's outcome, as outcomes have not yet been reached in Enron cases. “The rapid failure and bankruptcy of Enron has prompted severe criticism of the nation's financial reporting and auditing systems, which are fundamental to maintaining investor confidence in U.S” (Protecting the public interest, 2002)The relationship between business and audit firms appears from available statistics to be an insidious one. It seems the only protection for the investor or employee is a sound corporate governance model.

It stands to reason that if the way people are to be governed in the corporate sphere and the rationalization of the governance model components are unclear to the majority of employees, then the model itself is doomed to failure. But the corporate governance model describes due diligence relating to fraud and ethic abuse prevention to include: the organization taking steps to communicate effectively its standards and procedures to all employees and agents, by requiring participation in training programs or by disseminating publications that explain in a practical manner what is required.

As a result, most companies see this as merely sending another auditor on another training program. Internationally this inclusion in the governance model is aimed at shifting perceptions of employees as a tool to reduce threats as much as it is aimed at skills training to combat threats. The hallmark of an effective program to prevent and detect violations of law is that the organization exercised due diligence in seeking to prevent and detect criminal conduct by its employees and others. Therefore, companies that do not have a program are not compliant as they cannot say they have exercised due diligence when adopting their governance model. Management needs to approach the problem by focusing on the reasons people commit fraud and mitigating this rationale. There are myriad reasons: situational pressures might include drug dependence, divorce, extramarital affairs, alcohol abuse, greed, debt and so on. And fraud need not be for personal gain. Fraud committed with altruistic motives includes a manager hiding damaging company indiscretions or losses for the greater good of the whole.

Management needs to get to the root of the problem by focusing their efforts on the issue of people's perception, and recognizing the reality and identity of situational pressures. It is also important to remember that all fraud perpetrators have some or other explanation or rationalization for their behavior.

Democratic leaders Dick Gephardt and Tom Daschle thought that public outrage over the Enron scandal would ...