Accounting - Auditors and the Reporting of Illegality and...

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Auditors and the Reporting of Illegality and Financial Fraud Roman Tomasic Professor of Law University of Canberra Auditors' responsibilities have become the subject of renewed Australian and international interest in the light of the spate of the corporate collapses of recent years. Whilst this has continued to be the subject of debate over the last decade or more, the clarification of the rules in this area has become a matter of particular concern recently. This is especially so in relation to the reporting of financial fraud or illegality. This issue has become the subject of debate in a number of countries apart from Australia. In the United Kingdom, for example, the enactment of the Banking Act 1987 in England authorised auditors of banks to communicate fraud and other financial concerns confidentially to the Bank of England. Also, s. 109(1) of the Financial Services Act 1986 overrides any duty that an auditor may have to a client not to communicate information, which the auditor has become aware of as an auditor, where the auditor in good faith communicates that information to the Securities Investment Board. In other words, s. 109 'creates a right and a power for the auditor to disclose appropriate information to the appropriate regulator' (Sweeney-Baird 1990, pp. 30-1). The recent decision of the House of Lords in Caparo Industries plc v. Dickman and Ors (1989) 1 ACSR 636 has also examined the implications of auditors' reports for potential investors in the company. The House of Lords found that there was a duty of care owed by an auditor to an individual shareholder but not generally to potential investors. This decision has received considerable discussion elsewhere and I will not traverse the same ground here. Suffice it to say that it has clarified the potential obligations of auditors for negligent action. However, it does not greatly assist us in discussing the issue of the responsibility of auditors for detecting financial fraud and illegality. The United States has seen the publication in 1987 of the report of the Treadway Commission, the National Commission on Fraudulent Financial Reporting ( see further Goldstein and Dixon 1989, pp. 439-74; Corporate Crime Reporter 1987 , pp. 1-3). The Commission had been set up by the American Institute of Certified Public Accountants (AICPA) and several other American private accounting organisations. In addition to recommending that corporate management design and implement internal control systems adequate to prevent and detect fraudulent financial reporting, the Treadway Commission concluded that '[a]uditors can and should do a better job of communicating their role and responsibilities [as well as their findings] to those who rely on their work' (quoted in Goldstein and Dixon
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1989, p. 471). There has also been an ongoing Congressional debate concerning the responsibilities of auditors to the investing public as reflected in 1990 United States House of Representatives hearings (Wyden sub-committee of the Energy
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This note was uploaded on 03/20/2012 for the course ACCOUNTING 20111:010: taught by Professor Marjorieyuschak during the Spring '10 term at Rutgers.

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Accounting - Auditors and the Reporting of Illegality and...

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