Audit standards and detection of fraud under the Private Securities Litigation Reform Act of 1995

Even under the English law, an accountant was perceived as a watch-dog. An accountant was not bound to be a detective or a bloodhound and was not obligated to approach his work with a suspicion that something was wrong.(1) The accountant was entitled to assume that management was honest and reliable. Recent legislation amending the Securities Exchange Act of 1934 appears to have changed this perception dramatically and requires, in effect, that the accountant become a detective, as well as a bloodhound, to detect fraud and other illegal acts. There is no experience with this requirement, and its ramifications are uncertain. This article discusses the background and current considerations regarding the requirement.