Fraudulent Financial Reporting: 1998-2007, Term Paper Example

Summary of the recommendations of Cohen Commission

The recommendations of the commission of Cohen is based on the independent audit, its review functions, fraud and illegal acts, reducing uncertainties in financial statements and developing suitable measures for auditors. The Federal Government when announced the Commission of Cohen, they said that they would figure out the reasons relating to issues in independent audit and will fix this issue. According to the Cohen Commission, ‘The Canadian Government will take every feasible step to figure out the reasons leading to the challenges face by auditors and develop suitable measures for auditors.’ (Cohen Commission, 2010)  This commission was led by Justice Bruce Cohen as he was selected as the commission head. He was tasked with the transformation of the government practices, policies and procedures and to give recommendations. The cost of the Commission was estimated to be 26$ million. Around 75 recommendations were generated in this commission in which 11 of them were linked with the issues of independent audit and its functions (Beasley et al., 2010).

The Role of Independent Auditors in Society (Section 1)

The financial statement users expect that in order to penetrate into the affairs of the company the auditors need to have management surveillance and they must play an active role in enhancing the financial disclosure quality (Cohen Commission, 2010). The auditor must be expected by the users to be concerned with the issues of illegal and fraud management behavior. According to this commission, the auditor must be made an important part for the accounting information audit. An audit which is independent is crucial because of the potential inherent conflict between the financial information users and management of the firm. Since the employees and the management know that the statement of financials will be audited, the audit’s anticipation which lead them to a more acceptable conduct and minimize fraud.

Opinion formed on the financial presentations (Section 2)

In order to analyze the phrase of the report of auditor ‘report fairly’ many attempts have been made. This reporting fairly means that the Cohen Commission recommends fairly reporting to be in conformity with the GAAP principles (Cohen Commission, 2010). If the opinion formation of the auditor’s responsibility are done based on the actions and judgment then the phrase ‘present fairly’ is not required in the report of the auditor.

Reporting on important financial presentations certainties (Section 3)

It is the responsibility of the auditor to add information that is specific on the uncertainties and are inconsistent with his report. So, he must express his opinion in these financial statements aspects (Cohen Commission, 2010).

Fraud Detection and Clarification of Responsibilities (Section 4)

Most of the contribution of the work of audit is based on the ranking of the fraud detection. This is one of the most significant objective of audit. The AICPA have taken steps that are positive to strengthen and clarify the standards of audit and actions in relation to the auditor’s responsibility of detecting fraud. According to the Cohen Commission (2010), ‘An audit must be designed in such a way that gives an assurance that is reasonable that the statement of financials are not impacted with the fraud that is material. It must also give an assurance that is reasonable for the management accountability for the corporate assets material amounts.’

Corporate Law and Accountability (Section 5)

The Cohen Commission recommends that the auditor who is independent should be expected to identify those questionable and illegal acts. The auditor must determine the weaknesses of material measures and the corporate law and indicate his conclusion in his report.’ In this commission the gap which exists should be considered according to the expectations of the public or needs and what the auditors need to do to accomplish and reduce this gap. If there exists such kind of gap, the commission needs to explore this and identify ways in resolving this disparity (Cohen Commission, 2010).

The Auditor’s role Boundaries and their Extension (Section 6)

The services of audit according to this Commission is subjected to substantial regulation of the government. They consulted and met with different parties who were interested and considered the issues that ranges from the function of independent audit. The review of recommendation must be an integral part of audit.

Audit and users Communication (Section 7)

The Commission members interpreted the mandate and change to study all the factors if the audit independent function and to give the recommendations that benefits all the groups that have interest in this function. These users comprises of the managers, financial statement users, auditors and the regulatory bodies. According to the Cohen Commission, ‘they need the directors, corporate managers and independent auditors to act in a united way to enhance financial reporting’ (Beasley et al., 2010).

Summary of the recommendations of Tread way Commission

The Sponsoring Organization Committee of the Commission of Tread Way (COSO) is the initiative that is joint with the five private sector organizations. This commission was established in the United States and is dedicated to provide thought leadership to the management executives and the entities of the government (Graham, 2010).They provide this leadership though on the critical issues of the organization governance, internal control, and ethics of business, risk of enterprise, fraud and reporting of financial statements (Beasley et al., 2010).

Recommendations for Independent Accountant of Public

All of the SEC’s cases are related to financial fraud and these are against the public account accountants as they are unable to act in conformity with GAAP. The Tread way commission analyzed the impact on the breakdown in the statement of financials and the system of reporting so, they give the recommendation that analysis of the SEC cases are crucial in identifying the financial reporting problem. The debt and equity of the company that is public can be a financial reporting fraud victim (Moeller, 2011).  But they don’t suffer harm only (Moeller, 2011).  The shareholders, banks, customers, suppliers, analysts, underwriters, attorneys etc. all the one are impacted by this fraud. So, In order to safeguard the independent accountant of public companies, Tread way commission recommends that the sophistication and increasing power of computer based IS and computers may contribute to limit the fraudulent financial reporting.

According to this commission, the advanced in the Information systems can greatly reduce the ways of fraud and also helps in preventing fraudulent reporting of financials. The securities of federal law wants the companies that are public to disclose accurate and complete financial information on a daily basis. The Public company has the final and initial responsibility for its statement of financials (Moeller, 2011).

Recommendations to the Public Corporation

In order to reduce fraudulent activities in the corporations that are public, the recommendation of the commission is two address two level of issues; one is the establishment of an overall environment that is controlled and other is to establish financial tone in which the reporting of financial statements occur (Moeller, 2011). Second is that they need to increase the        functions and effectiveness of the company statements that are critical for the financial reporting integrity. In order to limit the fraudulent activities and enhance the intern control systems, it is crucial that the companies set up a tone for their top management (Moeller, 2011). They must inculcate an environment of corporate culture within which the reporting of financial occurs and this is the most crucial factor that leads to the reporting of financial process integrity.

Recommendations for SEC and other regulatory bodies

The Financial Executives International (FEI) and the Institute of Internal Auditors (IIA) (Moeller, 2011). Tread way commission recommends that internal control and audit, SEC and regulatory bodies have broad impacts on the financial society. This commission is already being called as the study of landmark because of its Integrated Framework and internal control. This establishes for the first time, a standard that aims for evaluating the effectives of the systems of internal control (Moeller, 2011). The framework set by the tread way commission recommends three steps. One is the under sting and identification of factors that leads to the fraud activities in reporting of financials. The Second is to assess the financial reporting fraud risk that are created within the corporation. The last is to implement and design internal controls which gives reasonable assurance in the prevention of

This commission recommends the merging of the five sponsoring organizations (SEC and Regulatory bodies) to come together to integrate the different concepts of internal control and the provision of the general point of reference. The commission recommends the creation of a conceptual framework but also establishing a standard in which the organizations could assess their system of internal control and to figure out their effectiveness. In other terms, it can be said that this commission recommends to give both the understanding the common language and a realistic way for the organization to enhance and assess their systems of internal control (Moeller, 2011).

Identification and discussion of the auditing standards of the two commissions

In order to find out the auditing standards of the Cohen Commission and Tread Way Commission, we need to look below. There are 11 ISAs in the Commission and the similarities and differences of the recommendations of the Cohen Commission and the Tread Way Commission will be described in the light of those 11 ISAs;

The Role of Independent Auditors in Society (Section 1)

In both the commissions, an appropriate consideration must be made by the auditor in relations to the issues of every questionable act or any illegal activity. This includes three factors which are that the auditor must identity the extent as to what item impacts the financial statement the most. Other is that this act must be compared with the corporate standards and code of conduct in which the auditor has to carry on his examination (Cohen Commission, 2010).   Lybrand & Coopers were commissioned to conduct and prepare the report under the guidance of COSO and the advisory council.

Opinion formed on the financial presentations (Section 2)

The auditors and the lawyers of corporation must work with the board of directors, internal auditors and the management to stipulate and explore the appropriate code of conducts in many instance as possible. They must prepare the ready consultation procedure which will be with the counsel of corporation presumable (Cohen Commission, 2010).   They must be made and be provided to the auditor with a comprehensive and additional support. They provide this leadership though on the critical issues of the organization governance, internal control, and ethics of business, risk of enterprise, fraud and reporting of financial statements (Beasley et al., 2010).

Reporting on important financial presentations certainties (Section 3)

All the companies that are public are required by the rule of SEC to add their reports of stockholder annually and it must be signed by the Chief Officer of Accounting and the Chief Financial officer (CFO). The Commission of Tread way is commonly a study of the recommendation of an outgrowth of the National Commission on the Financial Reporting Fraudulent activities.

Fraud Detection and Clarification of Responsibilities (Section 4)

The disclosure of the public information to the extent must be considered a questionable or illegal act. This comes in the attention of the auditor and must be brought to the concerned authority of individuals as specified by the Cohen Commission policy statement (Cohen Commission, 2010).   In order to limit the fraudulent activities and enhance the internal control systems, it is crucial that the companies set up a tone for their top management (Moeller, 2011).

Corporate Law and Accountability (Section 5)

If a corporate conduct code is adopted by the corporation then the management annual report must comprise that a code of conduct exists and the procedures have been monitored and implemented according to audit compliance (Cohen Commission, 2010). Talking about the recommendations of the Tread Way Commission, this involves the study of COSO, the council advisories and of Coopers & Lybrand.

The Auditor’s role Boundaries and their Extension (Section 6)

In both of the Commissions, the auditor has an ability that is limited to evaluate the completeness and the quality of the legal matters disclosure. The legal advisors and the management must provide the assurances whenever requested for such kind of matters. This information given by the management must be assured and sustained by the counsel to the auditor. This must be directly presented to the financial information users.

Audit and users Communication (Section 7)

In both the Commission, the responsibility of the auditor in this case would be to review the representations of the management and the information of the counsel to identify that the information provided on the financial statements is reflected properly (Cohen Commission, 2010).   This also involves other who have played an active role in the study of this report (Beasley, 2010).

Training, Education and Development of the Auditors (Section 8)     

Training and developing an ethical and technical standard for the Auditors that serves both the objectives performance and the means of departure measurement. Both of the Commissions recommends establishing the basic concepts that allows the management to differentiate its system of internal control against the standard for the mission of protecting and strengthening the system (Moeller, 2011).

Maintaining Audit Independence (Section 9)

The statement of policy may identity the board of directors, management or a board committed to address these specific matters. If the appropriate disposition of violation is not obtained by the auditor at the level of stipulated authority as specified then the auditor must to a higher level.

Audit Standards Establishment (Section 10)

The management report should also comprise of the statement which shows that the management believes that all the uncertainties of the material have been accounted appropriately and disclosed for and has been consulted with the legal matters counsel. This must be done in accordance with the legal matters consultation and in the nature of accounting. 

Regulation and maintenance of Audit Practice (Section 11)

In regards to the quality of audit practice, the regulation profession states in Section 11 of the Cohen Commission that there are four elements involved in the profession of public accounting. These are maintaining a high skill standard and competence for entering or continuing the right to practice of the profession.

References

Beasley, M. S. (2010). Fraudulent Financial Reporting: 1998-2007: An Analysis of US Public Companies. COSO, Committee of Sponsoring Organizations of the Treadway Commission.

Beasley, M. S., Carcello, J. V., Hermanson, D. R., & Center, C. G. (2010). Fraudulent Financial Reporting.

Beasley, M., Carcello, J. V., Hermanson, D. R., & Neal, T. (2010). Fraudulent financial reporting 1998-2007: An analysis of US public companies. Committee of Sponsoring Organizations of the Treadway Commission.

Bhutta, Z. A., Chen, L., Cohen, J., Crisp, N., Evans, T., Fineberg, H., … & Zurayk, H. (2010). Education of health professionals for the 21st century: a global independent Commission. The Lancet, 375(9721), 1137-1138.

Cohen Commission. (2010). Commission of inquiry into the decline of Sockeye salmon in the Fraser River.

Cohen, K. M., Finney, S., & Gibbard, P. L. (2012). International Chronostratigraphic Chart: International Commission on Stratigraphy.

Graham, L. (2010). The COSO Internal Control Framework. Complying with Sarbanes-Oxley Section 404: A Guide for Small Publicly Held Companies, 25-96.

Janvrin, D. J., Payne, E. A., Byrnes, P., Schneider, G. P., & Curtis, M. B. (2012). The updated COSO Internal Control-Integrated Framework: Recommendations and opportunities for future research. Journal of Information Systems, 26(2), 189-213.

Moeller, R. R. (2011). COSO ERM Framework. COSO Enterprise Risk Management: Establishing Effective Governance, Risk, and Compliance Processes, Second Edition, 51-87.

Young, M. R. From Treadway to Sarbanes?Oxley. Financial Fraud Prevention and Detection: Governance and Effective Practices, 39-58.