SAS Number 99 and the Corporate Audit

SAS Number 99 and the Corporate Audit This report attempts to explain how the new SAS No.99 will change the way accounting firms will be required to conduct corporate audits. News about the collapse of Enron continues to dominate the American media circuits and in the wake of the now infamous Enron accounting scandal, accounting firms will be required to pay more attention then ever.

Since the recent American Institute of Certified Public Accounts issue of SAS 99, the approach of auditors in the United States will for ever more be greatly enhanced. With SAS 99 for example, external auditors will be required to discuss and gather facts with internal auditors. As of SAS 99, corporate America will now be required to monitor and share the findings of internal auditors who may be privy to critical fraud-related data residing with their clients.

SAS 99 will therefore provide new opportunities for external and internal auditors to partner up and therefore improve external audit process. As can be expected, the Enron collapse in Texas and the WorldCom scandal in Mississippi have each dramatically demonstrated how critical it is that regulating bodies ensure that Corporate America provides high quality, trustworthy, and reliable financial reporting.

"The 40-year-old accountant is accused of creating and managing the complex web of partnerships that disguised the true state of affairs at the disgraced energy firm." (BBCi, Enron finance chief denies charges) Enron basically opened America's eyes into what may actually be going on in many organizations throughout our nation. The philosophy of everyone must be doing it was confirmed only a few short months later when the chief financial officer of the telecoms giant WorldCom was indicted because of another multi-billion dollar accounting fraud.

"The company's collapse followed exposure of an accounting fraud, now put at $7.68bn (£5bn), which made the company look profitable when it was not." (BBCi, "Ex-WorldCom finance boss indicted") America has been forced to demand that the boards of directors, internal and external audit committees and anyone else perpetrating financial reporting fraud should be held accountable. The American Institute of Certified Public Accounts concurs.

The consensus is that internal auditors should be able to discriminate between an organization's fraudulent financial reporting methodologies and external auditors should be aware that fraud is a very real possibility thus eliminating the rubber stamp audit. Therefore, Enron and WorldCom in a sense have ensured that both external and internal auditors will from this point forward work together to recognize attempted fraudulent reporting for financial information. There is no doubt that any audits conducted throughout 2003 were very different from those conducted prior to Enron and WorldCom.

There were numerous scenarios throughout 2002 and 2003 where organizations purposely manipulated their books to make themselves either look profitable or at least solvent. The accounting community is now on high alert. No firm wants to be the next Arthur Anderson. The American Institute of Certified Public Accounts issued the new audit standards that focus specifically on nabbing fraud offenders. The standards, SAS 99, went into effect on December 15, 2002. It is critical that an audit team, be it internal or external, recognize when fraud related conditions are caught.

The main objective of the American Institute of Certified Public Accounts SAS 99 focuses on the three fundamental areas usually present in a fraudulent financial reporting system: Often there are very obvious incentives or internal and external pressure to perpetrate fraud There is usually an opportunity to carry out the fraud The apparent attitude or rationalization is to simply justify any fraudulent action These three fundamental conditions demonstrate a number of warning signs related to fraud.

With the American Institute of Certified Public Accounts SAS 99, external and internal auditors will be ale to create effective partnerships with the sole intention of detecting and also preventing fraudulent reporting. The American Institute of Certified Public Accounts has demonstrated that they feel strongly about these obvious fraud attempts and have therefore convinced its members to adopt the SAS 99 standard as soon as possible. The American Institute of Certified Public Accounts main objective is to prevent future misstatements with no exception for those caused by fraud or error.

Some of the key provisions of the new American Institute of Certified Public Accounts SAS 99 standards are: 1.) All auditors will now be required to gather data that helps identify all risks that could result in a misstatements or fraud. Those experts in General ledger can be asked for any relevant back-up information with a focus on all manual journal entries.

Have readily accessible full documentation of those entries; 2) all auditors will now be required to evaluate their clients programs or controls; 3) all auditors will now also be expected to focus on any issues where management can override controls; 4) all auditors will now be required to examine journal entries and/or other adjustments for possible misstatement or fraud; 5) all auditors will now be required to review any accounting estimates for legitimate biases that could lead to misstatement or fraud; 6) all auditors will now be required to evaluate business rationale for significant or unusual transactions.

These new requirements will add plenty of additional pressure on whoever is responsible for a company's general ledger. Whenever management has veto or overwrite controls available to them, bells and whistles.