SAS 99

06/28/08

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SAS No. 99, Consideration of Fraud in a Financial Statement Audit, is a significant new auditing standard issued that is contributing to the accounting professionís efforts to help restore confidence in the capital markets. It requires new heighten professional skepticism that presume fraud is possible and that consideration is blended in the audit process throughout the entire engagement. It requires the identification and assessment of fraud risks and auditor response to such risks. The standard includes an expanded fraud risk model from social sciences which considers 1)Incentives/pressure, 2) opportunities and 3)rationalizations related to fraud.

Background

The 1970s

During the mid 70s Congress held hearings on the accounting profession know as the Moss and Metcaff hearings.  In 1973, the FASB was established as an independent standards setting body but it was not enough to provide oversight over the accounting profession.  Potential regulation of the accounting profession was a key issue. The primary legislations from the 70s impacting the accounting profession was the Foreign Corrupt Practices Act of 1977. The profession responded.

The AICPA established a peer review program in 1977 for SEC practice section firms (SECPS) and private firms.

The Public Oversight Board (POB) was created in 1977 as an independent private sector body charged with overseeing and reporting on the programs of the SEC Practice Section (SECPS). The SECPS role included establishing quality control requirements for member firms. The POB's role would expand in 2001 to oversee the Auditing Standards Board and the Independence Standards Board.

In 1978, the AICPA Independent Commission on Auditors Responsibilities (Cohen Commission) issued a 195 page report recommending changes in auditors responsibilities. The AICPA responded by establishing the Auditing Standards Board to replace the Auditing Executive Committee .

In 1979 the AICPA established a Quality Control Inquiry Committee (QCIC) to promptly investigate alleged audit deficiencies of a firmís quality control systems and to provide reasonable assurance that firms are complying with professional standards by identifying corrective actions when appropriate.

The profession continued to be self regulated but then Congress would be back again.

The 1980s

During the mid 80s congress was holding hearing on recent cases of business failures and the role of auditors. Congress proposed the Financial Fraud Protection Act of 1986. This included an expanded role of external auditors and management to make reasonable efforts to detect and report on fraud. External auditors would be required to report such activities to the audit committee. In addition, if management did not take adequate steps to uncover fraud abuses, the auditors would be required to report such abuses to outside authorities. Management would be required to issue a report on the adequacy of internal controls and the external auditors would be required to give an opinion on management's statement. Concurrently with these congressional hearings, the AICPA, IIA and other organizations formed an independent National Commission on Fraudulent Financial Reporting, chaired by James C. Treadway, Jr. a former SEC commissioner. I worked closely with this commission and sponsoring organizations as the Manager of Standards for the IIA. In 1987, the Treadway Commission issued its final report. Their report included recommendations for the various participants in the financial reporting process. In terms of the auditors role, they did recommend that external auditors assess the likelihood of fraud and design tests that would provide reasonable assurance of detection. They also recommended an increased in professional skepticism of management instead of assuming unilateral management integrity.  The ASB issued SAS No. 53 "The Auditors Responsibility To Detect and Report Errors and Irregularities". The Fraud Protection Act of 1986 was not passed. That was the end of it for awhile.

The 1990s

The Public Oversight Board (POB), the predecessor of the Public Company Accounting Oversight Board (PCAPOB) and congress put the pressure on the profession to increase the bar for auditor oversight of fraud.

The POB recommended in its 1993 In the Public Interest report that auditors exercise more professional skepticism. Congress issued The Private Securities Litigation Reform Act of 1995 that included a requirement that auditors report fraud to the management and to the audit committee. In addition, the auditors are required to report to the full board and to the SEC if management and the board did not take immediate action. The ASB responded by issuing SAS No. 82. "Consideration of Fraud in a Financial Statement Audit" which replaced SAS No. 53.

The 2000s

The previous pattern of responding to propose legislation to maintain self regulation has run it course. Congress has responded with the Sarbanes Oxley Act of 2002 which effectively changes the accounting profession to a regulated industry, at least to the extent related to the audit of publicly held companies. The more recent scandals and numerous SEC enforcement cases push the AICPA to response quickly with SAS No. 99 which replaced SAS No. 82. It reaches far beyond anything that was proposed to date. Whereas the previous standards where primarily focuses on heighten awareness and the need to investigate it, the new standard presumes possible fraud. This standards is the cornerstone of the AICPA's anti-fraud program and corporate responsibility program. There are numerous implementation guides and training programs to help auditors with this new standard.  You will find some excellent resources below.

 

 

 

SAS No. 99 Resources:

AICPA SAS No. 99 summary

AICPA SAS 99 Power Point Presenetation

Client presentations

Educate your clients about SAS No. 99 by modifying this PowerPoint presentation for your needs and add your company logo. PPC-Thompson Publishing. [Now only available through purchase of CPE course]

Staff Training Seminar presentation with discussion leaders notes

This is the PowerPoint presentation found in the Staff Training section of PPC's Guide to Fraud Risk Assessment. PPC-Thompson Publishing.[Now only available through purchase of CPE course]

Staff Training Seminar presentation without discussion leader notes

This is the PowerPoint presentation found in the Staff Training section of PPC's Guide to Fraud Risk Assessment. PPC-Thompson Publishing. [Now only available through purchase of CPE course]

 

 

 


 

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This site was last updated 06/28/08