SAS No. 99 and Its Impact on Corporate Audit Standards
This paper examines how Statement on Auditing Standards No. 99 (SAS 99), issued by the American Institute of Certified Public Accountants (AICPA) and effective December 15, 2002, fundamentally changed the way accounting firms conduct corporate audits. In the wake of high-profile accounting scandals at Enron and WorldCom, the paper outlines the three core fraud conditions SAS 99 targets — incentive, opportunity, and rationalization — and details the standard's key provisions requiring auditors to evaluate journal entries, assess management overrides, and review accounting estimates. The paper also emphasizes the new collaborative mandate between internal and external auditors as a central mechanism for fraud detection and prevention.
- Introduction: SAS 99 and the Post-Enron Audit Environment: Overview of SAS 99's role in reshaping corporate auditing
- The Enron and WorldCom Scandals as Catalysts for Reform: Scandals that exposed widespread corporate accounting fraud
- The AICPA's Response and the Purpose of SAS 99: AICPA mandate to end rubber-stamp audits and enforce accountability
- The Three Fraud Conditions Targeted by SAS 99: Incentive, opportunity, and rationalization as fraud indicators
- Key Provisions of SAS 99: Six auditor requirements for detecting misstatement and fraud
- Implications for Auditors and Corporate Accountability: New pressure on auditors to verify books with due diligence
- Conclusion: SAS 99 enables auditor collaboration to prevent future fraud
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What makes this paper effective
- Uses real-world corporate scandals (Enron and WorldCom) as concrete anchors to explain the regulatory motivation behind SAS 99, making the abstract standard tangible for readers.
- Integrates direct quotations from news sources to substantiate claims about the severity of the scandals, lending journalistic credibility to the analysis.
- Presents the six key provisions of SAS 99 in a clearly enumerated format, making complex regulatory content accessible and easy to follow.
Key academic technique demonstrated
The paper employs a cause-and-effect argumentative structure: it establishes the scandals as the cause, traces the AICPA's response, and then analyzes the practical effects on auditor behavior. This technique is effective for policy or regulatory analysis because it grounds the rule in its real-world rationale before dissecting its provisions.
Structure breakdown
The paper opens by introducing SAS 99 and its context, then moves into the Enron and WorldCom scandals to establish urgency. It explains the AICPA's motivations, outlines the three fraud conditions the standard targets, enumerates its six key provisions, and closes with a discussion of auditor accountability. The conclusion restates the core thesis without introducing new material.
Introduction: SAS 99 and the Post-Enron Audit Environment
This report examines how SAS No. 99, issued by the American Institute of Certified Public Accountants (AICPA), will change the way accounting firms are required to conduct corporate audits. News about the collapse of Enron continues to dominate American media, and in the wake of that now-infamous accounting scandal, accounting firms are required to pay closer attention than ever before. Since the AICPA issued SAS 99, the approach of auditors in the United States has been fundamentally and permanently enhanced.
With SAS 99, for example, external auditors are required to discuss findings and gather information alongside internal auditors. Corporate America is now required to monitor and share the findings of internal auditors who may have access to critical fraud-related data residing within their clients' organizations. SAS 99 therefore provides new opportunities for external and internal auditors to partner together and improve the external audit process.
The Enron and WorldCom Scandals as Catalysts for Reform
The Enron collapse in Texas and the WorldCom scandal in Mississippi each dramatically demonstrated how critical it is that regulatory bodies ensure corporate America provides high-quality, trustworthy, and reliable financial reporting. As one report noted, "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 opened America's eyes to what may actually be occurring in many organizations throughout the nation.
The sense that such practices were widespread was confirmed only a few months later when the chief financial officer of the telecommunications giant WorldCom was indicted in connection with 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"). The WorldCom scandal reinforced that Enron was not an isolated incident but part of a broader crisis in corporate financial integrity.
The AICPA's Response and the Purpose of SAS 99
America was forced to demand that boards of directors, internal and external audit committees, and anyone else involved in perpetrating financial reporting fraud be held accountable. The AICPA concurred. The consensus was that internal auditors should be able to distinguish between an organization's fraudulent financial reporting practices, and that external auditors should recognize that fraud is a very real possibility — thereby eliminating the rubber-stamp audit.
In this sense, Enron and WorldCom ensured that both external and internal auditors would, from that point forward, work together to identify attempted fraudulent financial reporting. Audits conducted throughout 2003 were markedly different from those conducted prior to these scandals. During 2002 and 2003, numerous organizations purposely manipulated their financial records to appear either profitable or at least solvent. The accounting community was placed on high alert — no firm wanted to become the next Arthur Andersen. The AICPA issued new audit standards focused specifically on detecting fraud. Those standards, SAS 99, went into effect on December 15, 2002.
The Three Fraud Conditions Targeted by SAS 99
It is critical that an audit team — whether internal or external — recognize when fraud-related conditions are present. The main objective of the AICPA's SAS 99 focuses on three fundamental conditions typically present in a fraudulent financial reporting environment:
Incentive or pressure: There are often very obvious incentives or internal and external pressures to perpetrate fraud.
Opportunity: There is usually an opportunity to carry out the fraud.
Rationalization: There is an apparent attitude or rationalization that simply justifies the fraudulent action.
These three fundamental conditions serve as warning signs related to fraud. Under SAS 99, external and internal auditors are able to create effective partnerships with the sole intention of detecting and preventing fraudulent reporting. The AICPA has made clear that it takes these fraud risks seriously, and has urged its members to adopt the SAS 99 standard as quickly as possible.
Key Provisions of SAS 99
The AICPA's primary objective is to prevent future financial misstatements, whether caused by fraud or error. The key provisions of SAS 99 establish the following requirements for all auditors:
1. All auditors are required to gather data that helps identify all risks that could result in misstatements or fraud. Experts in general ledger management may be asked for relevant supporting information, with a particular focus on manual journal entries. Full documentation of those entries must be readily accessible.
2. All auditors are required to evaluate their clients' programs and internal controls.
3. All auditors are expected to focus on areas where management can override controls.
4. All auditors are required to examine journal entries and other adjustments for possible misstatement or fraud.
5. All auditors are required to review accounting estimates for potential biases that could lead to misstatement or fraud.
6. All auditors are required to evaluate the business rationale behind significant or unusual transactions.
Conclusion
In conclusion, this report has explained how SAS No. 99 will change the way accounting firms are required to conduct corporate audits. As the collapses of Enron and WorldCom continue to shape the American regulatory landscape, the AICPA has issued standards designed to eliminate similar failures in the future. SAS 99 provides an opportunity for both external and internal auditors to collaborate, share information, and work together to eliminate the possibility of fraudulent financial reporting.
Works Cited
BBCi. "Enron Finance Chief Denies Charges." BBC International. 6 November 2002.
BBCi. "Ex-WorldCom Finance Boss Indicted." BBC International. 28 August 2002.
SAS 99. Ed. AICPA. AICPA.
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