Whistle blowing on the rise in accounting, auditing

The PCAOB is fielding a rising number of accounting- and fraud-related tips

(09/13/2010)

 By Ken Rankin

Washington, D.C. - Audit firms that engage in shady accounting practices or financial fraud face a growing risk of being turned in - by their own staff accountants and by the internal auditors of their public company clients. 

With financial reporting chicanery on the rise due to the shaky economy, enforcement officials at the Public Company Accounting Oversight Board are finding accountants and other "insiders" increasingly willing to blow the whistle on public accounting firms that cut auditing corners, violate accounting standards, or help to cook corporate books.

Last year the board fielded 179 tips and complaints alleging wrongdoing by audit firms, their employees and others - a record number, according to PCAOB Enforcement and Investigations Division director Claudius Modesti, who noted that the number of such allegations has been increasing steadily for the past few years. 

Many, though not all, of those tips are coming from accountants employed by the CPA firms that are the subjects of the complaints. According to Modesti, his enforcement staff also receives complaints of auditor wrongdoing from internal accountants at corporations, outside consultants and individual investors. 

The flow of accusations is channeled through the PCAOB's online "Tip Center" - a reporting resource on the board's Web site where accountants and others with knowledge of audit firm missteps are invited to inform enforcement officials of the situation. Modesti, who established the online complaint process shortly after joining the PCAOB in 2004, said the Tip Center "was one of the first things I wanted to have up and running" to assist the board's enforcement efforts.

"We thought auditors and investors would like to have an avenue to report violations of accounting and auditing standards and financial fraud," he told Accounting Today.

The online Tip Center, which can be accessed directly from the home page of the board's Web site, http://pcaobus.org, urges accountants and others with information about auditor wrongdoing to "report suspicious or criminal activity of registered public accounting firms or people associated with them." 

Officials at the Enforcement Division promise to review any leads provided to the Tip Center promptly, noting, "Tips and other information from the public are important sources for the PCAOB." 

In addition to being asked to submit details of "potential violations of law or PCAOB rules," informants are invited to "provide information that may be relevant to a PCAOB inspection," as well as any other information that may be relevant to the board's oversight responsibilities. 

A RANGE OF COMPLAINTS 

According to Modesti, the tips received by the PCAOB run the gamut, from allegations of GAAP violations, to independence issues, suspected non-compliance with PCAOB audit standards, revenue recognition irregularities, and even billing disputes involving audit firms. 

The Tip Center specifically asks informants for information about problems relating to auditor independence, document destruction, accounting fraud, quality control concerns and auditor ethics. 

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