Your cover article, “Preventing Fraudulent Financial Reporting” by Mark S. Beasley, Joseph V. Carcello, and Dana R. Hermanson (December 2000), based on the authors’ academic research connected with the report by the Committee of Sponsoring Organizations (COSO), is interesting and informative. Nevertheless, I have some serious misgivings—probably more with the COSO report than with the article per se.

First, I suggest that readers juxtapose that article with the disclosures detailed in various SEC filings and court dockets arising from the Cendant case. There they would find a textbook case study containing most, if not all, of the perversity alluded to in the December article. Furthermore, such a study would question the authors’ observation that “solid training in the assessment of personality, background, and behavior can reduce the likelihood that auditors will feel intimidated during face-to-face meetings with senior executives. Such training is particularly critical for auditors below the partner ranks.” My study of the documents informs me that auditors below the partner ranks noted the critical aberrations in the accounts of CUC (which, in 1997, merged with HFS to form Cendant). I maintain that the judgment calls made by the partner in charge were what permitted the fraud and the merger to go forward.

I developed a detailed analysis of the COSO report that served as the frame of reference for a presentation to the public interest section of the American Accounting Association in August 2000. My analysis, “Garbage In/Garbage Out—A Critique of Fraudulent Financial Reporting: 1987–1997 (the COSO Report),” can be found online at www.bus.baruch.cuny.edu/critical/ (click on Briloff & Accounting Horizons). The opening of that presentation went as follows: “According to traditional wisdom, the efficiency of a sanitation department should not be measured by the amount of garbage it picks up, but instead by what is left behind.”

This axiom—meant purely as a metaphor and not intended to be pejorative—came to mind regularly as I reviewed and reflected on the COSO report. The essential thrust of my analysis was that the profile of the 99 Accounting and Auditing Enforcement Releases that served as the basis for the COSO report did not fairly reflect the “periodic high-profile cases of fraudulent financial reporting [that] raise concerns about the credibility of the U.S. financial reporting process and [that] call into question the roles of auditors, regulators, and analysts in financial reporting”—cases like Cendant. Without reflecting these cases, the critical premise underlying the COSO project is substantially undermined.

Abraham J. Briloff
Emanuel Saxe Distinguished Professor, Emeritus
Baruch College, New York City

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