How to handle fraud or illegal acts under SSARS 19 – part one

What should you do if something comes to your attention during a compilation or review that suggests that fraud or an illegal act may have taken place?

SSARS 19 starts this discussion with two intriguing phrases.  First is the comment saying if information comes to your attention.  Second is the comment that this information indicates a fraud or illegal act “may have occurred”. 

SSARS 19 does not create any new requirement that accountants have to do anything to look for fraud or illegal acts on a review.  Thus, the comment about information coming to your attention.  You don’t have to look for fraud or illegal acts, but don’t close your eyes.  If something jumps out at you, you need to deal with it.

The intriguing thing about that phrase of something may have occurred highlights that accountants are not judges and therefore cannot determine on a definitive basis whether something they are pondering is in fact a fraud or illegal act.  We can only take what we know about how things should be done based on our limited knowledge of the law and compare that to what we see while performing a compilation or review.  When we make that comparison, sometimes we realize the two don’t line up with each other and conclude that there could be a problem.

So, what to do if something jumps out at you that seems like it could be a likely violation of the law or fits the fraud profile?  Unstated in the SSARS is the obvious idea you probably ought to double-check yourself and coordinate with the rest of your team.  Better make sure you have your facts straight and you really understood the situation before you start talking to people.

After you make sure you really understood the situation correctly and coordinated it internally, you should bring it to the attention of the appropriate level of management.  You’ll have to figure out what the appropriate level is based on the nature of your client and their situation.  SSARS doesn’t have a lot to say on what you do after that, but I think you can figure it out.

Now if the possible fraud or illegal act involves a member of senior management, then you need to bring it to the attention of an even higher level of management.  This could be the owner in a small business setting or it could be the Board of Directors in a nonprofit or larger business.  It could also be the audit committee or some other group that constitutes those individuals charged with governance (the SSARS borrows some phrasing from the audit literature).  Again, the SSARS is silent on what to do after notifying the higher level of management, but like before, I think you can figure what to do next if anything else is needed.

Next post – can you take a report of the problem outside the organization?

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