New York (June 25, 2004) -- With the accounting profession wedged between the crosscurrents of changing standards and burnishing its reputation amidst the ongoing spate of corporate scandals, auditors will use those platforms as a springboard to usher in unbridled demand for their services, according to a noted expert on securities and financial fraud.
“I truly believe we are at the dawn of a new renaissance or a golden age in auditing,” said Michael Young, in a keynote before several hundred auditors at an anti-fraud conference, here. “We will soon be free from the shackles of auditing as a loss leader and commodity. There’s no doubt we are in a momentous period in the history of accounting. Audit fees will go up and they should go up.”
Young, a noted expert on securities fraud, is a litigation partner at the New York law firm of Willkie Farr & Gallagher and has served as a counsel to both the Financial Accounting Standards Board and the American Institute of CPAs.
“Most [public] companies are scared to death of losing their auditor. The auditor is already in a powerful position. But we need a change in the mindset,” he said. Young’s remarks came during a presentation at an anti-fraud conference sponsored by the Foundation for Accounting Education.
He outlined a series of examples of financial fraud at public companies where auditors adhered to accepted guidelines, but in the end came under fire and, in some cases, were prosecuted by regulators.
“You can follow generally accepted auditing standards, but as a practical matter in the current environment I can say this about fraud, ‘You either catch it or you’re toast,’” said Young. “What you have to remember is that the object of the SEC’s enforcement division is not fairness, it’s prosecution. They are all prosecutors.” He noted that the SEC receives roughly 20,000 “tips” per month through its fraud hotline.
“Nobody in a company sets out to commit fraud. Fraud is driven by factors such as pressure to perform and earnings targets which create rationalizations. And soon it gets out of control, because it’s mathematically impossible for a financial fraud to stay the same size. Perpetuating fraud is a lot of work,” he continued. Young noted that even peripheral groups such as “short sellers” and analysts now have an interest in exposing financial fraud at companies.
“A short seller wants to uncover fraud because that will drive the price of a company’s stock down,” he said. But he warned that no matter how “deep” the auditor takes the engagement to uncover fraud, “the perpetrators can always take it one level deeper.”
-- Bill Carlino
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