Corporate governance can mitigate financial statement fraud through the process of greater supervision of the
organization. This process is also called oversight. Oversight is so important that it is included in the title of the
organization that replaced the American Institute of Certified Public Accountants regarding the development of auditing
standards. This organization is the Public Company Accounting Oversight Board (PCAOB).
The Sarbanes Oxley Act was the legislation that mandated the establishment of the Public Company
Accounting Oversight Board. Some of the standards promulgated by the Public Company Accounting Oversight Board
include the following: Every five years, the primary or reviewing audit partner must be changed for each client. Working
papers must be maintained for a minimum of seven years. This is partially due to documents being shredded relative
to a number of famous fraud cases. A few of these famous fraud cases will be briefly presented later in this lesson.
The internal control system of an audited organization must be evaluated and any material weaknesses
Formal and official ethics standards must be adopted by each auditing organization. Major components of
these ethics standards must include clarity about the organization’s independence from the audited organization
along with how the audit process is accepted and planned and supervised.
Other oversight groups that do not actively operate the organization include the organization’s Board of
Directors, Audit Committee and external auditors. Increased oversight is expected by the organization’s internal
auditors as supervised by top managers such as the Chief Executive Officer and the Chief Financial Officer. It is
hoped and believed that if an organization has a strong audit committee and excellent external audit process that
fraud will be deterred. However the responsibility and blame for fraud rests exclusively at the feet of management
and not at the feet of the audit committee or the external auditors.