New fraud audit standard will help auditors uncover fraud; cornerstone of comprehensive anti-fraud program.

A new fraud audit standard recently approved by the Auditing Standard Board officially launches the AICPA's anti-fraud program designed to rebuild investor confidence in our capital markets and re-establish audited financial statements as a clear picture window into corporate America. From providing CPAs with clarified and focused auditing guidance to establishing a new institute on fraud studies, the AICPA is determined to help reduce the incidents of financial statement fraud.

Statement on Auditing Standards No. 99, Consideration of Fraud in a Financial Statement Audit, carries the same title as its predecessor but is clearly more far-reaching than SAS No. 82. The new provisions of SAS No. 99 include sections dealing with: brainstorming the risks of fraud while emphasizing increased professional skepticism; discussions with management and others as to whether they are aware of fraud; the use of unpredictable audit tests; and responding to management override of controls by requiting on every audit certain procedures responsive to detecting management override. The new auditing standard is effective for audits of financial statements for periods beginning on or after Dec. 15, 2002; however, the AICPA is encouraging firms to implement the new auditing standard early.

More specific information on the new fraud audit standard as it relates to members in public practice, or members in business and industry or internal audit is provided in the respective member-segment supplements produced with this issue of The CPA Letter. Information for the other segments will be covered in upcoming issues.

AICPA President and CEO Barry C. Melancon announced anti-fraud initiatives in his Sept. 4 speech at the Yale Club in New York (The CPA Letter, Sept., pages 5-8). Taken together, the initiatives establish a culture that preventing and detecting fraud is everybody's business--the auditing community, corporate America and the financial reporting community (including analysts and the stock exchanges).

In changing the accounting profession's attitude toward fraud, two things need to occur. On the one hand, we must raise awareness within corporate America, as the first line of defense against fraud is preventing it in the first place. A second line of defense is corporate employees who identify and report fraud. On the other hand, auditors need enhanced auditing skills--especially interviewing skills--coupled with greater professional skepticism. Auditors must ask the right questions and question the answers, and obtain audit evidence that supports the answers. Moreover, auditors who identify fraud risks must know how to change audit procedures to handle the situation.

Besides the new fraud audit standard, specific AICPA anti-fraud initiatives include:

* Establishing an Institute for Fraud Studies, in conjunction with the University of Texas at Austin and the Association of Certified Fraud Examiners, to explore the origin of and circumstances surrounding fraud so that its frequency and effects can be minimized.

* Designing anti-fraud criteria and controls for public entities.

* Urging stock exchanges to mandate effective anti-fraud training for management, boards of directors and audit committees and making available training to directors and other corporate officials free of charge.

* Calling on CPAs to dedicate 10% of their CPE to fraud.

* Recommending the Auditing Standards Board enhance existing attestation standards for CPAs to test and report on client anti-fraud controls and criteria.

* Hosting a fraud summit to identify ways to reduce fraud.

* Working to ensure college textbook authors incorporate anti-fraud education in programs and text materials.

Over the next few weeks and months, the AICPA will be releasing various programs and materials to help members fully understand and comply with the new standard. From continuing education courses and conferences, to practice aids and a fraud competency model for auditors and chief financial officers (www.cpa2biz.com/CPEConferences/CAT.htm), a host of resources are in the offing. See the sidebar for some of what's available.

Continue to watch The CPA Letter and visit www.aicpa.org as developments unfold regarding fraud initiatives.