Auditors Miss Basic Steps in Corporate Fraud Cases:  Study

By Dena Aubin
May 9, 2013

NEW YORK (Reuters) - Auditors sanctioned in U.S. corporate fraud cases are making simple mistakes, like overlooking suspicious documents, according to a study released on Thursday that sheds light on why auditors sometimes miss blatant accounting scams.

The long-term analysis of frauds from 1998 through 2010 found that auditors sometimes did not question documents that appeared to be fabricated or that they overlooked discrepancies between real inventory and amounts on the books.

In at least one case, an auditor trusted managements' word that no fraud had occurred, the study found.

"It's not that auditors failed to execute some esoteric procedures, or didn't understand complex accounting rules," said Joseph Carcello, one of the study's four co-authors and a University of Tennessee accounting professor. "It's really pretty basic in these cases."

The study looked at 87 sanctions against auditors brought by the U.S. Securities and Exchange Commission in fraud cases involving public companies.

The most common auditor failings were lack of competence and diligence, lack of professional skepticism, and failure to assess and respond to fraud risks.

Auditors could be missing basic steps because of time or budget constraints, or fear of alienating clients by pushing too hard, Carcello speculated.

The study also showed auditor sanctions declined sharply after enactment of 2002's Sarbanes-Oxley Act, designed to curb accounting abuses after the Enron and WorldCom frauds.

Of the 87 sanctions studied, 76 occurred in 1998-2002; only 11 occurred in 2003-2010, although some investigations from those years may still be pending, the study noted.

Large national firms accounted for 35 of the 87 sanctions. Nine were brought against Arthur Andersen, which went out of business in 2002 after being convicted for its role in Enron Corp's fraud, a verdict that was later overturned.

(Reporting by Dena Aubin; Editing by Kevin Drawbaugh and Kenneth Barry)