The introduction to this chapter contained the following quotes from an IMA paper:

The requirement to report on internal control resulted from one particular type of internal control breakdown: senior management of some major public companies overrode their control systems and issued misleading financial statements. History has shown that senior management cooking the books has been most costly of control failures. It has caused billions in investor losses, undermined confidence in reporting affecting the liquidity and cost of capital for many companies, and triggered significant new regulations and requirements, including reporting on controls. Other forms of fraudulent financial reporting, such as misleading reporting by lower-level employees, have not had the same impact.

The same IMA piece also stated:

Based on our inquiries, we have not identified any external audit firms that maintain five-year historical records of all errors and irregularities they have identified during their audits. This data would allow pattern analysis, helping with the identification of trends and patterns that would disclose systemic control weaknesses, including the frequency that management has not provided full and frank disclosure. As noted earlier, in order for full transparency and understanding of systemic root cause errors to be a reality, appropriate safe harbors for issuers and public audit firms need to be seriously considered.

Required

a. The Jonas comment included in the chapter introduction material implies that auditors can (should) identify control environment problems leading to "cooking the books." In your group, discuss the following: (1) Do you think, as future auditors, you can or should be responsible for identifying control environment problems that lead to "cooking the books"? and (2) What might some of those control environment problems be?

b. Do you think that firms should develop a "pattern analysis" database as suggested in the last part of the article? If yes, what are (a) The potential difficulties in developing such a database and (b) The potential problems in using such a database? What obstacles might a firm have to overcome to use such a database?