audit malpractice

The Fraud Blame Game: Accusing the Auditors

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magnifyprintWhen a company discovers an internal fraud, it’s not uncommon for owners and management to look for a party to blame. After all, someone should have known that a fraud was in-progress, right? Often, the blame is cast in the direction of the auditors.

The auditors are an easy target. Not only do they usually have professional liability insurance policies to fall back on, the auditors initially seem like the logical culprit.

Management often believes that the auditors worked very closely with the financial information; therefore, they should have discovered the fraud.

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Audit Malpractice Defense: Four Key Issues

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When a major fraud is discovered in a company, one of the key targets of litigation is usually the independent auditors. Two well-publicized cases in which management or shareholders suing the auditors after fraud was uncovered involve Koss Corp. (auditors Grant Thornton) and Navistar International Corp. (Deloitte & Touche).

Plaintiffs look to the auditors for potential recovery since the auditors typically have deep pockets and large insurance policies. Auditors (and their attorneys) need to know how to defend themselves in these suits.  Naturally, the auditors recognize that audits are supposed to provide reasonable assurance that the financial statements are fairly stated.

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Navistar v Deloitte: Blame the Auditors for Fraud Committed and Concealed By Employees

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In cases of corporate fraud, including embezzlement, financial statement fraud, earnings management, bribery, and the like, it’s easy to blame the auditors. After all, they have very deep pockets, often with large malpractice policies.

Even though the task of auditors is usually well-defined and agreed-to by shareholders, management, and the board of directors, it doesn’t seem to matter to them that the financial statement auditors aren’t responsible to find fraud during their audits. People quickly forget that the auditors disclaim responsibility for finding fraud multiple times before, during, and after the audits, and that management is ultimately responsible for preventing and detecting fraud in their own companies.

Last week Navistar sued their former auditors, Deloitte & Touche, for fraud, fraudulent concealment, breach of contract, and malpractice.  The lawyers say Deloitte lied about its competency in performing audits, and the company ultimately restated its financial statements for 2002 through 2005.  Whose fault is it that Navistar overstated its pre-tax income by $137 during those years? According to them, Deloitte.

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Sachdeva and Koss Corp.: The Indictment, the Clothes, and the Auditors

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handcuffsThe case of the alleged theft of at least $31 million by Sue Sachdeva from Koss Corp. (NASDAQ:KOSS) carries on. Last week, Sachdeva was charged with 6 counts of wire fraud. Experts are saying this indictment came much faster than usual, as the Feds usually spend much more time thoroughly investigating cases. They’re speculating that a guilty plea is going to come quickly, and the indictment was the first step toward that.

The indictment is interesting. Not only did she use company funds to pay her American Express bill as we had heard, she’s also been accused of getting cashier’s checks from a bank account belonging to Koss, writing Koss checks to Petty Cash and keeping the funds, and using Koss traveler’s checks for personal purposes.

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SEC brings charges against auditors

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69 auditors have been charged by the Securities and Exchange Commission with issuing audit reports on the financial statements of public companies without first registering with the Public Company Accounting Oversight Board.

The SEC has named 37 unregistered audit firms and 32 audit partners in this violation of the Sarbanes-Oxley Act of 2002. According to the SEC:

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