Discussant's response to management behavior -- An auditing horizon;

              Discussant's Response to
Management Behavior—An Auditing Horizon
Robert L. Grinaker
University of Houston
Although I am pleased to comment on Donald Georgen's paper, I also have something of a problem because, to a large extent, I agree with most of the things he has to say. It's a little difficult to discuss a paper that I wish I had written myself. Hence, I would like my remarks to be considered complementary to, rather than critical of, those presented in the paper. My discussion will be directed to the following specific topics:
A. Under the broad area of auditor's responsibility, I shall make a few comments on management fraud and illegal payments.
B. I shall address the following three additional topics:
1. Evaluation of traditional auditing procedures.
2. Understanding the client's business.
3. Scientific research design—a prototype for auditing procedures.
Auditor's Responsibility for Management Fraud
Let me first comment that Don Georgen makes a very useful distinction be­tween
employee and management fraud. Furthermore, I agree with him that most instances of management fraud are "performance" based rather than involved in the direct theft of assets. However, certain classical cases—notably McKesson-Robbins—did involve massive thefts of company assets.
I further agree that the profession is becoming increasingly aware that it has significant responsibility for the discovery of management fraud. I also am con­vinced
that this awareness stems principally from public expectations which are reflected in actions of regulatory agencies and the courts. The processes appear to be by-passing the auditor, thus posing some significant dangers. To me, the danger is that the auditor's responsibility for fraud losses may be completely dis­associated
from financial statements and their fair presentation. In my judgment, the only perspective that makes sense in defining the auditor's responsibility for fraud is its relationship to the fair presentation of the financial statements. In this regard, our professional literature, characterized in the paper as ambiguous, has been something less than helpful. Consider the following from AudSEC's Statement on Auditing Standards No. 1:
In making the ordinary examination, the independent auditor is aware of the possibility that fraud may exist. Financial statements may be misstated as the result of defalcations and similar irregularities, or deliberate mis­representations
by management, or both. The auditor recognizes that
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