Auditor Liability Declines with Enhanced Auditor Skepticism, Says New White Paper from Epstein + Nach LLC

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"Auditor Liability and Professional Skepticism: A Look at Lehman Brothers and MF Global," is the title of a new white paper published by accounting expert Dr. Barry Jay Epstein, CPA, of Epstein + Nach LLC in Chicago, Illinois.

Auditor failure to maintain an attitude of healthy skepticism increasingly underlies failure to detect financial reporting fraud perpetrated by public and private companies, notes accounting expert Dr. Barry Jay Epstein, CPA.

One key to effective auditing is for auditors to maintain a high level of professional skepticism, according to accounting expert and Epstein + Nach LLC ( principal Barry Jay Epstein, Ph.D., CPA, CFF. A new white paper titled, “Auditor Liability and Professional Skepticism: A Look at Lehman Brothers and MF Global,” is the latest in a series of articles and white papers by Dr. Epstein that explore the realm of auditor liability and accountant malpractice.

“Auditors should adopt a ‘trust but verify’ approach when asked by management to accept questionable financial reporting that favorably influences the apparent profitability, liquidity, or solvency of the reporting entity,” cautions Dr. Epstein.

The white paper considers the case of Lehman Brothers, where financial statements reported repurchase arrangements as sales rather than secured loans. MF Global is another example also cited for its improper accounting for repurchase agreements, in this case to partially conceal losses resulting from unsuccessful bets on European sovereign debt issuances.

“Diagnostic tools are available to evaluate the extent to which engagement performance and documentation are compliant with the latest audit standards,” adds Epstein + Nach LLC principal Ralph Nach, CPA. “Accountants and auditors can learn how to design substantive analytical procedures with an appropriate level of precision to test significant management assertions.”

The white paper explains the role assigned to auditors in our society. Basically, auditors act as examiners of the financial statements prepared by company management, followed by the expression of opinions as to whether those financial statements have been fairly presented in accordance with a stated basis of accounting, such as U.S. GAAP or IFRS. Auditors plan and then gather evidence to support that managements’ financial statement assertions are accurate within the bounds of materiality. In order to be able to express such an opinion, auditors must examine enough evidence to conclude that each material financial statement assertion is supported. It is skepticism that drives auditors’ judgments regarding what, and how much, evidence will be needed to achieve this.

Click on the link to access a complimentary copy of the white paper titled, “Auditor Liability and Professional Skepticism: A Look at Lehman Brothers and MF Global.”

Other recent white papers by Dr. Epstein, all available on the Publications page at, include:

-- Revenue Recognition: Fraud and Financial Reporting Risk
-- Accounting for Leases: Significant Financial Reporting Changes for Lessees and Lessors
-- Non-GAAP Measures of Performance and SEC Regulation G


Epstein + Nach LLC is an international financial reporting consulting firm concentrating in forensic accounting, litigation consulting and expert testimony, technical consultations, engagement quality control review (EQCR), internal inspections, and training for accountants and auditors.

Dr. Barry Jay Epstein, CPA, CFF, is a widely-published international accounting and auditing expert in U.S. Generally Accepted Accounting Principles, International Financial Reporting Standards, and Generally Accepted Auditing Standards. He authored the 3,000 page reference, The Handbook of Accounting and Auditing, now published by Thomson Reuters, from 1988 through 2013. Dr. Epstein also served as the lead author of 26 annual editions of Wiley GAAP (1985-2010), and 14 annual editions of Wiley IFRS (1997-2010), both published by John Wiley & Sons.

Mr. Ralph Nach, CPA, is the author, instructional designer, and facilitator of the popular annual Accounting and Auditing Clinic™ continuing professional education program. He has served as author, co-author, contributing author, or technical editor of a number of widely-utilized technical reference works, including PPC’s Interactive Disclosure Library, PPC/Thomson Reuters, 2011; PPC’s Guide to Preparing Financial Statements, PPC/Thomson Reuters, 2010; Wiley GAAP (2001–2010), John Wiley & Sons; and The Handbook of Accounting and Auditing, Warren, Gorham & Lamont, 1999.

The firm is based in Chicago, Ill. Details are available at or 312-464-3520.

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