Spotting Fraud: Going beyond your legal obligation

On March 7, 2012 Japanese prosecutors filed charges against Olympus Corp. and executives allegedly involved in the company's $1.5 billion accounting scandal. Olympus Corp. is a Japanese company that specializes in making cameras and medical-imaging equipment. The company admitted to hiding investment losses for more than a decade in one of Japan's biggest corporate scandals.
On March 29, 2012 Ernst and Young ShinNihon was cleared of legal responsibility for its involvement in the Olympus Scandal. Ernst and Young ShinNihon commissioned an independent panel to investigate the matter, and they were cleared of any legal responsibility in its audit of Olympus Corp. The panel found that while no significant flaws were found that would that would cause a legal violation of duty, the scandal shows that accounting firms need to go beyond their legal responsibilities when looking for potential fraud.
The Olympus scandal is one of the many scandals in recent years where corporate executives and upper level management hid investment losses and misstated their company’s financial statements. In all of these scandals in recent years of large public companies, an accounting firm was involved that gave these companies a clean bill of health. In the current financial crisis accounting firms are being scrutinized more and more for not spotting inaccuracies and fraud in publically traded companies. Accounting firms and their auditors need to go beyond the legal obligations of an audit, and dig deeper when trying to determine potential fraud areas. By doing this, and spotting frauds earlier and more often, auditors and their respective accounting firms will gain a better reputation in the industry. Accounting firms will also start to gain back the trust of investors and the public, by spotting fraud earlier and more often. It would be much better for accounting firms to be in the news for recognizing frauds, and not for being a part of them.