KEEPING THE WOLVES FROM YOUR GATE

CPA Journal accounting and auditing editor Douglas R. Carmichael led a panel discussion recently on risk management practices for practicing accountants. The Pittsburgh-based law firm Cohen & Grigsby sponsored the discussion. The panelists were Richard Nelson, senior partner of Cohen and Grigsby and Ernest Ten Eyck, managing director of Ten Eyck Associates, both of whom have had considerable experience with accountants' liability and litigation.

The discussion focused on the whistle-blowing requirements of the Securities Litigation Reform Act of 1995, the risk management aspects of the new auditing standard on fraud, SAS No. 82, and good risk management practices in today's litigious environment.

A case study was used to help focus the discussion. The case centered on a new client opportunity in a high-risk entity with time and fee pressures, major transactions occurring near the year-end, and ultimately a president that flew the coup with $3,500,000. Not your typical client, but illustrative of the pressures and trouble CPAs have been known to experience.

Nelson stressed the importance of consultation by the engagement partner with other partners and outside counsel when encountering what might be considered an illegal act during an audit of a public company. "Auditors should err on the side of consultation given the newness of the Securities Reform Act and the liabilities for noncompliance," said Nelson.

Ten Eyck gave a warning not to rely too heavily on management representations where factors alert the auditor of the risk of fraud. "Believe it or not," said Ten Eyck, "management is sometimes crooked; management sometimes lies."

Risk management is a matter of following the guidance in professional standards, seriously and completely--among them effective client acceptance procedures, use of engagement letters, and a good quality control system.

As summarized by moderator Carmichael, the auditor has to have the fortitude and courage to face up to the danger signs that begin to appear. The consequences of incorrectly accepting management's representations are far too severe. *