A Fresh Look at Fraud Risk

Guidance for Auditors

Howard B. Levy, CPA

One needs only to peruse an early edition of Montgomery's Auditing to learn that more than 100 years ago, modern auditing began with a clear emphasis on finding employee defalcations; however, following the U.S. Securities Act of 1933 and Securities Exchange Act of 1934, that emphasis shifted to the fair presentation of financial statements, where it remains today. In 1938, McKesson & Robbins—perhaps the most notorious financial fraud of the 20th century—led to the development of the first formal auditing standards and a new focus on intentionally overstated assets in financial statements, particularly inventory and receivables. According to a February 1939 editorial in the AICPA's Journal of Accountancy, “the wave of publicity raised by the McKesson & Robbins case has shocked the accountancy profession into breathlessness.”