A former external auditor for a heating oil company has been sentenced to serve jail time after pleading guilty to conspiracy to commit bank fraud and aiding and assisting the filing of a false federal tax return, according to an article published in the New Haven Register. Court testimony revealed that the company's president instructed the external auditor to certify the accuracy of false information beginning with the company's financial statements for the fiscal year ending in March 2006. Testimony also showed that the external auditor was aware that company money had been used for nondeductible personal expenses. The company unexpectedly went out of business in 2008.
This case highlights the fact that fraud knows no boundaries regarding who will commit fraudulent acts — including an external auditor. Both internal and external auditors have a professional responsibility to recommend and undertake risk assessments as a part of their overall planning and audit engagement activities. This is of particular importance when an organization is facing significant financial or operational challenges.
Disregard for an appropriate segregation of management versus financial duties was at play between the heating oil company's CEO and owner, but the unethical and criminal behavior of the external auditor was even more egregious. The role of a qualified auditor is to demand appropriate documentation and sign-off of accurate financial records as well as to challenge the actions of the CEO.
It is unclear whether the company had an internal audit function in place. Perhaps this points to a need for strengthening these aspects of the regulatory regime for heating oil companies or the broader energy services industry. The banking industry could take the opportunity presented by this case to review its oversight, financial monitoring, and audit processes and practices.