Discussant's response no. 2 to "Illegal acts: What is the auditor's responsibility?";

              Discussant's Response No. 2 to
"Illegal Acts: What is The Auditor's Responsibility?"
Frances M. McNair
Mississippi State University
When I agreed to discuss the paper by Dan Guy, Ray Whittington, and Don Neebes, I did not realize the task would be so difficult. Commenting on a paper about SAS No. 54, written by drafters of the statement, is difficult enough, but then to follow discussions by three of the brightest accounting students at the University of Kansas is really a chore.
Even with the enactment of SAS No. 54, the question of what the auditor is responsible for is still difficult to answer. Does this standard answer the question or does it raise the question, "What is the Auditor Responsible For?" The standard increases the auditor's responsibility for detection of a client's illegal acts and it may be difficult to determine where the responsi-bility stops.
Some of the work that I have done recently has been in the area of the accountant's liability and responsibility. Consequently, some of my com-ments concern the potential effect that this new SAS No. 54 could have on the auditor in terms of additional duties and liabilities. I would like to address four areas of concern: (1) the classification of illegal acts as direct or indirect; (2) potential increased liability; (3) interaction with other SASs; and (4) dis-closure.
Direct vs. Indirect Illegal Acts
As discussed in the paper by the authors, illegal acts are divided into two categories. The auditor is prescribed different degrees of responsibility based upon the category in which the illegal act falls. The prescribed degree of care is much higher for the first category of acts - those illegal acts that have a direct and material effect on the financial statement amounts. Since this category of illegal acts would affect the financial statement amounts, the auditor should assess the risk that an illegal act may cause the financial state-ments to contain a material misstatement. Consequently, the auditor must design audit procedures to provide reasonable assurance of detecting the il-legal act.
Much recent litigation has been based on the auditor's negligence when there was a failure to discover and report management's errors and irregu-larities, i.e., management fraud. This same standard of care required for dis-covery of management's errors and irregularities is now required for the discovery of the client's direct effect illegal acts. This means the auditor will have to understand the legal environment in which the client is operating in order to design procedures that would detect such offenses. This will have
162