Guidance issued on management override of internal controls.
As part of its ongoing fraud-prevention program, the AICPA has issued guidance to help audit committees understand one of the most significant of fraud risks: management override of internal controls. The guidance, Management Override of Internal Controls: The Achilles 'Heel of Fraud Prevention--The Audit Committee and oversight of Financial Reporting, is available flee of charge through the Audit Committee Effectiveness Center at www.aicpa.org/audcommctr (go to "Spotlight Area").One of the most common examples of management override is the posting of fictitious journal entries to overstate revenues or understate expenses. In this scenario, the chief financial officer and controller generally are the architects of the fraud, with lower-level accounting employees serving-usually through fear of losing their jobs or naivete--as accomplices.
In most instances, the fraud is intended to be a temporary solution to a missed earnings target. One false financial report, however, invariably leads to another, resulting in a domino effect that culminates in the collapse of the company. According to the Association of Certified Fraud Examiners' "2002 Report to the Nation on Occupational Fraud and Abuse," the average length of time from inception of a financial-statement fraud to its detection is 25 months.
Management Override of Internal Controls identifies six key actions the audit committee should consider: maintaining skepticism; strengthening committee under standing of the business; brainstorming to identify' fraud risks; using the code of conduct to assess financial reporting culture; ensuring the entity cultivates a vigorous whistleblower program; and developing a broad information and feedback network.
The AICPA has produced separate whistleblower guidance, titled Anonymous Submission of Suspected Wrongdoing (Whistleblowers)--Issues for Audit Committees to Consider. It also is available from www.aicpa.org/audcommctr.
Management Override of Internal Controls and the whistleblower guidance are the latest in the AICPA's portfolio of resources for audit committees. In 2004, the Institute issued an Audit Committee Toolkit that provides a set of best practices for audit committee members. The AICPA also sponsors the Audit Committee Matching System to help organizations find CPAs with relevant knowledge and experience to serve on their audit committees.
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| Publication: | CPA Letter |
|---|---|
| Date: | Mar 1, 2005 |
| Words: | 345 |
| Previous Article: | Understanding SAS No. 112; audit risk alert developed to help members. |
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