Financial Accounting Blog

Thursday, March 25, 2004

Auditing. Behind wave of corporate fraud: A change in how auditors work. Auditors have to reassess how they perform audits. How deep do they look for errors or crooks. They asses this by how honest they think management is in that particular year. This is what got them in trouble at WorldCom, Health South and Tyco. Some hid the dishonesty in many little low dollar entries while others just made big last minute additions to the books. The bottom line is how to catch dishonest people without spending a fortune on the audit process.
"just because an accounting firm says it has audited a companies numbers doesn't mean it actually has checked them."

"The sole documentation for one $239,000,000 journal entry, recorded after the close of the 1999 fourth quarter, was a sticky note bearing the number"$239,000,000" according to the WorldCom audit committee's report. Sometimes the "top side" adjustments boosted earnings by reversing liabilities. Other times they reclassified ordinary expenses as assets, which delayed recognition of costs. Other unsupported journal entries included one for precisely $334 million in July 2000, three weeks after the quarters books were closed. Another was for exactly $560 million in July 2001.