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| October 1, 2005 | The
Newspaper of the NYSSCPA |
Vol.
8, No.17 |
CPAs Teach Journalists About ‘Sherlock Holmes’ Accounting
By Lois Whitehead, Public Relations Manager
BusinessWeek magazine recently sent 26 of its reporters to learn about how CPAs unearth fraud shenanigans, at one of the Society’s custom-designed educational sessions for journalists.
Debbie Cutler, CPA, CPE, a partner with Kramer, Love & Cutler LLP, prepared and presented the two-hour event, which included a presentation on financial report restatements by Michael Young, a partner with Willkie Farr & Gallagher LLP. The seminar also touched on topics ranging from the history of forensic accounting to how the Sarbanes-Oxley Act has empowered audit committees.
Cutler kicked off the seminar by describing forensic accountants as “Sherlock Holmes types that are skeptical, have a questioning mind and an understanding of the legal process.” In her presentation, Cutler equipped the reporters with the knowledge necessary to help identify red flags in investigating financial statement fraud in their stories and specifically discussed the more common methods of fraud that appear in financial statements.
Cutler stressed that all parts of the fraud triangle—opportunity, pressure or incentive, and rationalization or attitude—generally exist in financial statement fraud cases. By eliminating one of these three characteristics, the risk of material misstatement due to fraud decreases.
“A prime example of pressures experienced by corporate executives commences in the quarterly earnings call in a conference call when analysts question results,” Cutler told seminar attendees. “When those results are lower than expected, the cascading effect could lead to the devaluation of the company’s stock price ... and in an extreme case ultimately may lead to bankruptcy or delisting (of the company’s stock) on an exchange.”
“Where senior management is involved in alleged fraudulent financial reporting, it is not uncommon for there to be a power struggle between management versus the audit committee,” Young said during his presentation. “Sarbanes-Oxley opened the door for the audit committee to unilaterally finance an investigation into the numbers and, if necessary, get the SEC involved.”
The seminar also outlined new SEC laws to combat fraud.
“SAS 99 requires the auditor to design audit procedures to identify fraud risk factors by incorporating forensic procedures in the audit process,” explained Cutler, although she did point out that, “Only a court of law can determine whether a fraud has or has not occurred, because an accountant cannot determine the intent of an alleged fraudster. A CPA can opine on indicia of fraud.” She used the WorldCom scandal as an instance of where journal entries were the vehicle used to disguise the fraud.
Young offered common examples of the rationalizations used by those committing fraud: “I’m saving the company;” “The competitors are doing it;” “I earned it.” Young cited an interview he did with a troubled company where an employee broke down and cried in relief after finally being able to speak openly about what was happening within the company.
“There is nothing like going inside the company and meeting the people involved and observing the nonverbal clues during an interview,” Cutler explained.
While Cutler applauded the provisions under Sarbanes-Oxley as a step in the right direction toward curtailing fraudulent financial reporting, she admitted that this was a culture swing that would take time to effect change within the accounting profession. She pointed to leading corporations as being the number-one factor in fostering future change.
The Society regularly offers free journalist-education sessions on understanding financial statements; the next is scheduled for January 2006. Hundreds of journalists have participated in these financial media training sessions.
“These sessions provide training for reporters, many of whom have degrees in journalism but less background in business and financial issues,” said Joanne S. Barry, the Society’s Director of Communications. “The level of financial journalism is enhanced, and as an added benefit, journalists come to know the Society and its members as an objective resource for quotes or background as they write their articles.”
For additional information on these sessions, contact Lois Whitehead, NYSSCPA Media Relations Manager, at 212-719-8405 or lwhitehead@nysscpa.org.
