Detecting and Preventing Financial Statement Fraud: The Roles of the Reporting Company and the Independent Auditor

Abstract

The bankruptcies or near failures of such organizations as Penn Square Bank, E.S.M. Government Securities, and Continental Illinois Bank have renewed interest in the problem of financial statement fraud-the deliberate issuance of misleading financial reports. During 1985 and 1986, the House Energy and Commerce Subcommittee on Oversight and Investigations conducted 16 hearings in an attempt to uncover the reasons behind this recent wave of so called audit failures. These hearings have prompted heated debate about the proper roles of the reporting entity and the independent auditor in detecting and preventing financial statement fraud.