Illegal acts: What is the auditor's responsibility?;

              Illegal Acts: What is the Auditor's Responsibility?
Dan M. Guy Ray O. Whittington
American Institute of Certified Public Accountants
Donald L. Neebes
Ernst & Young
Society has always been concerned with violations of laws and regulations by all types of entities - business enterprises, nonprofit organizations, and governmental units. Highly publicized accounts of management improprieties reported over the last two decades have caused this concern to increase sig-nificantly. Several congressional committees, regulatory agencies, and oth-ers have suggested that auditors should assume more responsibility for detecting and disclosing violations of laws or regulations, commonly referred to as illegal acts.
Developing standards that articulate the auditor's responsibility for ille-gal acts has proven to be a very challenging task for several reasons. First, a large diversity of laws and regulations affects most entities, and identifying violations of many of those laws and regulations requires legal expertise. Sec-ond, even with this expertise, the complexity of some laws and regulations makes identifying a violation very difficult. Finally, even after an illegal act has been identified, evaluating management's assessment of its potential ef-fects on the entity's financial statements is also very difficult.
This article analyzes the auditing standards that describe the auditor's re-sponsibilities for detecting and reporting illegal acts. It also reviews the his-torical developments that have brought the profession to where it is today. Finally, we introduce some future issues and research needs in this area.
Historical Developments
The issue of the auditor's responsibility for illegal or questionable acts by clients is not new. It first made front-page news in the mid 1970's as a result of the Watergate scandal. Investigations led to initial disclosures of illegal po-litical contributions by many large corporations. These initial disclosures opened the door to a host of other revelations involving questionable payments by corporations to domestic and foreign government officials. As a result, the profession formally addressed the issue of the auditor's responsibility to de-tect and report illegal acts by clients. The issue was initially studied by the Commission on Auditors' Responsibilities (the Cohen Commission). Based
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