Waste Management Andersen 48。0 – 31。0 79。0 31。0 0。65

Source: U。S。 Office of Chief Accountant (2001)。

Cohen et al。 (2000) notes that auditors frequently fail to consider non-financial information during an audit。 Senior CPA personnel sometimes rely on the junior’s assessments of risk, when junior accountants often are too inexperienced to assess risk properly。 Senior CPA personnel may also face such strong pressure to generate professional fees that they ignore many indications of audit risk。

Houston (1999) found that audit seniors’ time budgets are less responsive to increased client risk in the presence of fee pressure。 Inadequate time budgets force many CPAs to improperly assess audit risk。 Moreover, time constraints and fee pressures can often override the firms’ review and supervision policies that maintain quality control。 Since firms view consulting as the only viable revenue growth area, high-level audit personnel often focus on selling more non-audit services and could miss key risk factors and other signals that suggest possible fraudulent financial activity。

2。Literature on fraudulent financial reporting

Romney et al。 (1980) warned of widespread concern for auditors’ ability to detect fraud。 Pincus (1989, p。 155) stated that, “Over the past decade in the United States, the accounting

profession, the users of financial statements and the government have expressed growing concern with the incidence of fraudulent financial reporting and the problems of detecting fraud。” Rather than addressing such warnings, the profession seemed to cede its ability to serve as the public watchdog, especially its key role to foster reliable financial information by detecting fraudulent financial accounting reporting practices。 Palmrose (1988) states that audit failure results when an auditor fails to correct or reveal financial misstatements or omissions。 Moreover, DeAngelo (1981) defines audit quality as the joint probability of the auditor detecting and reporting material financial statement errors。

Our review of the literature addressing accounting fraud suggests that it can be catego- rized into five broad areas: (1) red flags; (2) fraud assessment practices; (3) fraud recognition theories; (4) independence and consulting effects; and (5) auditor liability and responsibil- ity。 Descriptions and examples of these areas, along with linkage of the literature to the Enron/Andersen affair, appear below。

2。1。Red flags

Red flags are warning signals for fraud that indicate areas for increased auditor attention。 Hackenbrack (1993) found that auditors may find difficulty in ascertaining the effect of specific fraud risk factors on the overall risk of fraudulent financial reporting。 Hoffman and Patton (1997) found that holding in-charge auditors accountable to their superiors resulted in more conservative fraud risk assessments but did not affect their susceptibility to incorporate irrelevant information。 Pincus (1989) showed that while CPAs’ use of red flag questionnaires led to increased consideration of a more comprehensive and consistent set of potential fraud indicators, this use did not lead to more effective fraud risk assessment。 Newman et al。 (2001) similarly argue that due to the dynamic interaction between the auditor and auditee, procedures that help to assess audit risk may not reduce that risk or result in more efficient audits。