Problems to Avoid When Brainstorming Fraud Risks

David A. Wood, PhD, and Jeffrey Pickerd

Nine years ago, in response to several accounting scandals, the AICPA passed Statement on Auditing Standards (SAS) 99, Consideration of Fraud. This standard requires auditors to conduct brainstorming sessions to increase their ability to identify potential sources of financial statement fraud. However, using brainstorming to effectively address this area of concern continues to be problematic for practitioners. In 2003, the SEC identified auditor judgment errors, including the failure to conduct adequate risk assessment, as one of the leading causes of audit failures. More recently, the Public Company Accounting Oversight Board (PCAOB) issued a report criticizing the profession for excessive variation in the quality of brainstorming sessions. Academic studies also echo the concern of the PCAOB and SEC that brainstorming is not being done correctly by practitioners. Clearly, auditors will benefit from a greater understanding of how to improve brainstorming sessions.