July 2000


Principal Author and Editor: Michael R. Young, Esq.,
Introduction by
Mario M. Cuomo

Harcourt Professional Publishing, $99

Reviewed by Vincent J. Love, CPA, Chair, NYSSCPA
Auditing Standards and Procedures Committee

This excellent book is a must-have for the professional or businessperson interested in learning more about financial fraud and how to prevent and respond to it. The book often reads more like a well-crafted novel than the professionally competent treatise that it is.

The book addresses the circumstances surrounding and leading up to the perpetration of a material financial fraud, the apportionment of blame after the fraud is discovered, the issuance of new financial statements, the investigation of the fraud, and relationships with insurers and regulators. The chapters written by Michael Young of Willkie Farr & Gallagher and Harvey Kelley of PricewaterhouseCoopers are particularly noteworthy for their readability, but all of the chapters are full of good advice and informative material.

Chapter 1, "The Origin of Financial Fraud," is a powerful analysis of--and fascinating look at--the genesis of a financial fraud. Young isolates the elements leading to the fraud and suggests that most material financial fraud does not start with dishonesty, but with pressure. Fraud starts out small, in the "hazy" (judgmental) areas of financial reporting; grows over time; and, finally, has no way out once begun. Young also warns of the danger of managing earnings.

In Chapter 3, "The Immediate Aftermath," the authors discuss the intricacies of the preliminary investigation, the initial board meeting, insurance coverage issues, developing an action plan, restoring credibility, and the initial press release.

Chapter 4, "Getting New Audited Financial Statements," addresses the difficult decision of whether to continue to retain the current auditors and lists the pros and cons of selecting new auditors. It also addresses the requirement for restated financial statements, the auditor's difficulty with accepting management representations, and how lawsuits affect the auditor's independence.

Chapter 8, "Dealing with the D&O Insurer," and Chapter 9, "Dealing with the Regulators," give management guidance and advice on how to act in these very delicate situations.

Chapter 11, "What's an Audit Committee to Do?" includes the fundamental responsibilities of the audit committee, the best ways to prevent fraud, and how to react to a fraud after one is discovered. The chapter gives competent, understandable advice on how an audit committee can meet its obligations to the full board and the shareholders and deals with the committee's responsibility for financial reporting, including references to authoritative literature. Young pointedly discloses the audit committee's biggest challenge: lack of access to reliable information. He also addresses the audit committee's need to deal with potential managerial bias in the application of GAAP: "Is management overly aggressive? Overly conservative? Is it trying to get it right?"

Six appendices on the subject of SEC initiatives against accounting irregularities and managed earnings include the full text of three recent rulings relating to corporate governance and audit committees and three staff accounting bulletins (SABs) relating to materiality, restructuring, impairment charges, and revenue recognition.

Last but not least, the book includes a CD-ROM with full-text copies of documents referred to in the book and all of the exhibits. Other documents on the CD-ROM include the Treadway Report, relevant speeches and letters by SEC Chair Arthur Levitt, topical AICPA authoritative literature, legal decisions relating to the auditor's responsibility when fraud is discovered, major exchanges' listing requirements, the Cendant Corporation investigative report, and more. The CD-ROM itself is worth the price of the book.

Accounting Irregularities and Financial Fraud is the best of the many books I have read on the subject. Its writing style, clarity, breadth of coverage, and authenticity are unmatched. I highly recommend this book to all CPAs, managers, and boards of directors. *

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