（2008）A Strategy for Dealing with Financial Reporting Fraud：Fewer Mandates, More Auditing.pdfVIP

A Strategy for Dealing with Financial Reporting Fraud: Fewer Mandates, More Auditing* STEVEN E. SALTERIO, Queen’s University The modern audit in North America is generally traced back to the British audit of the 19th century that arose from the mandating of the annual audit of the accounts of limited liabil- ity companies (whether public or private) in the United Kingdom in the 1850s (Brown, 1962). As part of an implicit social contract, business people and investors obtained the benefits of limited liability (i.e., they risked only the assets invested in the business and not their personal assets held outside the business) in return for various restrictions, including the requirement that an independent audit of their company accounts be undertaken each year. This starting place for auditing provides a very different starting place for the analy- sis of the role of auditing and the regulation of auditing than provided in Jamal (2008), who starts with the U.S. Securities Acts. In the British sense, the audit is seen as a public good that is part of a contract entered into among business people, potential third-party investors, and other third parties that provides rights to a new legal entity, a corporation, in return for certain obligations to society, including an annual audit of the accounts. Jamal (2008) and I do agree on several important points: • the current system of financial statement auditing in North America is broadly speaking “in crisis”; • the system of regulating financial statement auditors through regulatory mandates is also broadly speaking “in crisis”; • the management of professional services firms (formerly public accounting firms) is almost completely divorced from audit practice and the partners they allegedly manage; • the accounting “profession” i