AN ANALYSIS OF SMALL COMPANY FRAUDS AND IMPLICATONS FOR AUDITORS IN DETECTING FRAUDS

ABSTACT: While much has been written about large company corporate frauds such as Enron, WorldCom, Computer Associates, and most recently REFCO, the risk of financial statement fraud and other frauds is not any less prevalent at small public companies. The researcher sets out to determine how these frauds compare to those committed by large companies. The researcher examined SEC Enforcement Releases and other data to determine if small company frauds are as common an occurrence as in large public companies and how they may be similar or different. Common types of frauds and their implications on small firm’s auditors are suggested along with prevention and detection techniques. A risk approach as to how a small company might identify areas of vulnerability is applied. Special auditor attention is given to high-risk areas and audit procedures are suggested that could help identify possible misstatements caused by fraud. An audit risk approach suggested by professional standards and techniques from other fraud literature is used to refine findings. Cost/benefit analysis is recommended for small companies to consider when fighting fraud. Certain elements of Sarbanes-Oxley laws could also apply to these companies and help integrity of management. Particular application of ethics and codes of conduct might provide for internal prevention of some frauds. The guidance of corporate codes of conduct from large companies could be applied to smaller companies. Conclusions are drawn and recommendations for further research are made