With nearly 70 percent of audit fraud occurring at non-public companies, and multi-billion-dollar international scandals such as Parmalat and Satyam resulting in massive investor losses and lawsuits, a panel of experts at an accounting conference advised attendees on the red flags that CPA firms need to monitor, and new technologies that can help reduce audit risks and strengthen the confirmation process.

“Paper confirmation is one of the most inefficient processes auditors go through,” said Brian Fox, chief marketing officer and founder of Capital Confirmation, an online audit confirmation concern. “It’s a four- to six-week turnaround and difficult to track.”

“It’s tedious,” echoed Michael Saltzman, a senior accountant at Zinman & Co. and a former Big Four auditor, referring to the paper confirmation process. “It takes 10 to 15 minutes per account to process. If one client has 23 accounts at two banks, it could take up to five hours for confirmation.”

Fox and Saltzman were part of a panel in a session titled “How to Reduce the Risk of Fraud in the Audit Process,” at the American Institute of CPAs’ 2011 Practitioners Symposium and Tech + Conference in Las Vegas on Monday.

Fox cited real-life examples of common fraudulent strategies inherent in the audit confirmation process, such as false mailing addresses or phone numbers, unauthorized signatures, and false URLs for banks and financial institutions. He also detailed well-publicized audit frauds such as the $5 billion fraud at Parmalat, which was perpetuated for 10 years. Equity investors lost 96 percent of their holdings in one day when it was discovered. The auditors were sued for $10 billion.
India-based Satyam had a $1 billion inflated cash balance, and managers created more than 6,000 phony invoices. Both the senior auditor and the partner on the engagement have since been indicted.

“We need technology to make audit fraud detection more affordable by using computer assisted audit techniques, or CAATS,” said Milla Austin of CCH. She demonstrated CCH’s data mining and statistical sampling application, ProSystem fx Active Data. 

Fox said the confirmation process, SAS No. 67, was issued in 1991. At that time, fax machines mainly used thermal paper, and the ink would fade in about two years. “That was probably not good for audit records,” he quipped.

A proposed standard from the Public Company Accounting Oversight Board that would expand the requirement for confirmation procedures to receivables that arise from credit sales loans or other transactions is pending.

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