Johnson et al。 (1993) contend that the more popular strategies of using cues (red flags) and inpiduals who develop specialization or expertise in fraud detection are inadequate since few auditors actually experience fraud, and types of frauds vary greatly in both form and content。 Thus, auditors should seek to understand a potential deceiver’s methods and goals when interpreting cues, even when management’s attempts to create fraud seem in- significant。 Hooks et al。 (1994) integrated the whistle-blowing literature with professional guidance dealing with internal control and fraud deterrence。 Finding that whistle-blowing can play an essential role as a preventive and detective control and be an important tool to generate substantive evidence on the competence and integrity of key management person- nel, they suggest that public policy should support whistle blowing。

Erickson et al。 (2000) used publicly available court documents to carefully study the audit procedures and decisions from the infamous Lincoln Savings and Loan (S&Ls)   scandal。

They concluded that the most significant shortcoming of Lincoln’s auditors was that they inadequately understood the client’s business and the economic forces that influenced the S&L industry。 Bayou and Reinstein (2001) argue that the traditional reductionist, holistic and historical-event approach to assess audit risk and fraud are inadequate, claiming that a fraud event occurs within a system of causative and probabilistic interactions。

Sherron Watkins’ (2001) warning letter reported to CEO Kenneth Lay that she believed the numbers did not “add-up,” and that she was “incredibly nervous that we will implode in a wave of accounting scandals。” Less than 2 weeks later, Margaret Ceconi (an employee who negotiated deals for Enron Energy Services) also sent messages to Lay and Enron’s board of directors saying, “the board has only scratched the surface of the impending problems that plague Enron at the moment” (McRoberts, 2002b)。 These warnings were not acted upon quickly as Enron’s financial executives ignored their own corporate Code of Ethics, apparently with the Board’s acquiescence and its attorneys’ concurrence。 Revsine (2002) stresses that Enron’s board should have asked Andersen to discuss the set of accounting principles that Enron’s management selected—and to discuss whether Andersen agreed with the choices that management made。 Enron’s “very qualified” audit committee also failed to fulfill its fiduciary responsibilities in overseeing the audit process (Benston and Hartgraves, 2002, p。 121)。 If proper follow-up procedures for whistle blowing had been in place, Enron would have likely acted on these warnings before the information that led to its financial demise was finally made public。

2。4。Independence and consulting effects

Many stakeholders have expressed concern about the apparent deterioration of the ac- counting profession’s attitude toward independence, believing that consulting creates a conflict of interest that negatively affects auditors’ responsibility to protect the public from fraudulent financial reporting。 In response to these concerns, the SEC issued in 2001 Rule 2-01: “Revision of the Commission’s Auditor Independence Requirements。” Briloff (1990, 1993, 1997) has repeatedly chastised the profession’s “scandalous” behavior for repeatedly violating its contract with society。 Pleading that the profession must revive its moral order to assure true and fair financial and economic representations, he claims that even accounting academics have lost their independence to critically evaluate the profession。

Macintosh and Shearer (2002) address recent critiques of the accounting profession, questioning whether it still can claim the auditing monopoly that government statutes ceded to them。 They claim that the accounting profession has ignored the corruption of such basic accounting signs as net and operating income, off-balance sheet liabilities and option accounting。 Thus, without objective, transparent measures, auditors have subordinated their positions to their clients’ demands, rather than disclose the underlying real substance of such transactions。 Macintosh and Shearer accuse the profession of moving from a vocation dedicated to society to a marketer and advisor of all kinds of financial services, and chastise the profession for ceding its independence to enter into a symbiotic relationship with its clients。 CPAs, they believe, have clearly shifted their loyalty from a contract with society to one with their clients。