The U.S. auditor watchdog on Wednesday issued an alert to corporate accounting firms, reminding them to watch for fraud or misstatements if they detect significant unusual transactions when doing their work.
The audit practice alert from the Public Company Accounting Oversight Board comes in the wake of scandals at firms like Lehman Brothers Holdings Inc
Significant unusual transactions, especially those close to period end that pose difficult 'substance over form' questions can provide opportunities for companies to engage in fraudulent financial reporting, the PCAOB said in the alert.
The PCAOB, which was created in 2002 after accounting scandals at Enron and Worldcom, has the power to oversee, inspect and cite auditors of public companies in the United States.
The PCAOB has recently launched an investigation into Lehman's audit after the firm's bankruptcy examiner claimed the investment bank hid some $50 billion in assets by using an accounting technique called Repo 105, according to a person familiar with the matter.
The audit practice alert on Wednesday is the second major communication the PCAOB has sent out to auditors in recent weeks that would address concerns cited by the Lehman examiner about the role of its auditors, Ernst & Young , in the investment bank's collapse. Ernst & Young has denied it did anything wrong.
Last month the PCAOB proposed rules aimed at improving communication between board members on a company's audit committee and the company's audit firm.
The board also said earlier this week that it is seeking to hire a director for a new Financial Reporting Fraud Resource Center that would maintain and publish information on risks and financial reporting fraud.
(Reporting by Emily Chasan; Additional reporting by Rachelle Younglai; Editing by Richard Chang)