STATEMENT ON AUDITING STANDARDS NO. 99
CONSIDERATION OF FRAUD IN A FINANCIAL STATEMENT AUDIT


By: Gary A. Porter, CPA

In October 2002, the Auditing Standards Board of the American Institute of CPAs (AICPA) issued Statement on Auditing Standards No. 99 entitled Consideration of Fraud in a Financial Statement Audit.  As I read through the 84 paragraphs and some 43 pages (plus another 40 pages of appendix material) of this new standard, I was again faced with misgivings about the leadership of my chosen profession.  SAS No. 99 was issued by the AICPA to show that it was serious about addressing management fraud and avoiding audit failures as a result of management fraud.  This statement was issued in direct response to the accounting debacles known as ENRON, Waste Management, World Com, Adelphia, Xerox, and Tyco.  But as I read through this standard, there was really only one simple message that came through, and that simple message was that the auditor should be “skeptical”.

Somebody is seriously missing the point here.  What’s needed is not “skepticism”.  What’s needed is “Ethics”.  It was not a lack of skepticism that caused the auditors to look the other direction and overlook fraud in accounting transactions; it was an enormous lapse of ethics.  The AICPA apparently felt it had to do something to restore congressional and the public confidence.  That something was to issue a new standard on detecting fraud in a financial statement audit.  (They were really taking action in an attempt to stop the creation of a public audit oversight board, fraud had nothing to do with it.)  But I would think that the collective minds of the AICPA leadership should have come up with something better than this.  While those of us who practice public accounting and perform audits must comply with it, this new standard is nonsense.  It offers nothing new to the profession conceptually, and provides only minor procedural changes at best.  It causes me to wonder if any of the auditing standards executive committee members ever took a college course on auditing.  It also reminds me of one of the basic challenges of performing accounting and auditing research.  For instance, have you ever attempted to research the principle of conservatism in modern accounting and auditing literature, or perhaps the matching concept?  Skepticism is another one.  The fact is they don’t exist is professional literature.  Yet these principles are the basic building blocks of accounting and auditing.  They are as fundamental as debits and credits.  But if they don’t exist in professional literature, then where do they exist?

Well, for that you would have to look back at your basic college textbooks because that’s where those principles are set forth very clearly.  The most common textbook for auditing courses is “Montgomery’s Auditing,” first written some 65 years ago.  Montgomery wrote, “A higher risk should also cause the auditor a heightened degree of professional skepticism in conducting the audit.  The way an auditor meets the obligation to not assume unquestionably that management is honest, is by maintaining an attitude of professional skepticism throughout the audit, especially when gathering and evaluating the evidence, including management’s answer to audit inquiries.”  SAS No. 99 is simply 65 years too late.  It’s also unnecessary, because the principle of skepticism for auditors in evaluating audit evidence was already well established. 

The AICPA issuance of this standard is an insult to auditors, and if the public were aware of the standards that already existed, they would be insulted also.  SAS No. 99 will probably be the last such statement to be issued by the AICPA, as the new public company accounting oversight board created under the Sarbanes-Oxley Act is authorized to, and has announced that it will, take over responsibility for issuance of new auditing standards.  So, the last standard issued by the AICPA will probably forever stand as evidence of the AICPA’s inability to take a strong, meaningful stand to discipline its own members.  SAS No. 99 is too little, too late.  If the AICPA had not submitted to the demands of the “Big Eight” (now the “Final Four”) accounting firms during the last 30 years, but had stood firm for auditor independence and separation of the obvious conflicts of consulting services performed by the auditing firm, it likely that none of this would have happened.  The largest offender was the CPA firm of Arthur Anderson.  The marketplace has appropriately punished that firm for its ethical lapses.  The firm effectively no longer exists.  However, each of the “Final Four” firms has already had lawsuits against them for virtually identical audit failures.  The root cause of these audit failures is the same, a lapse of ethics, not a lack of technical skill.

When the auditors of Enron, Adelphia, World Com, and Tyco signed the unqualified audit reports for those companies, they were guilty of dereliction of duty, not only to their client and their shareholders, but also to the tens of thousands of honest CPAs with reputations that were damaged by their misdeeds.

Now if they can only figure out how to issue a new standard on ethics.  But, wait, we already have ethics standards too.

Unfortunately, we now apparently have to worry about the ethics of this new oversight board.  Their first act was to approve salaries for themselves of almost $500,000 per year.   Is this the act of someone who can be trusted to look after the public’s best interest?  Seems they’ve already placed self interest above public interest.  Hmmmm!

Gary Porter, CPA began his accounting career with the national CPA firm Touche Ross in 1971.  He is licensed by the California Board of Accountancy and the Nevada Board of Accountancy.  Mr. Porter has restricted his practice to work only with Common Interest Realty Associations (CIRAs), including homeowners associations, condominium associations, property owners associations, timeshare associations, fractional associations, condo-hotels, commercial associations, and other associations.

Gary Porter is the creator and coauthor of Practitioners Publishing Company (PPC) Guide to Homeowners Associations and other Common Interest Realty Associations, and Homeowners Association Tax Library.  Mr. Porter served as Editor of CAI’s Ledger Quarterly from 1989 through 2004 and is the author of more than 200 articles.  In addition, he has had articles published in The Practical Accountant, Common Ground and numerous CAI Chapter newsletters.  He has been quoted or published in The Wall Street Journal, Money Magazine, Kiplinger’s Personal Finance, and many major newspapers.

Mr. Porter is a member of Community Associations Institute (CAI), American Resort Development Associations (ARDA), and California Association of Community Managers (CACM).  Mr. Porter served as national president of CAI in 1998 – 1999.