“ The Padding That Hurts ” ( JofA , Feb.03, page 67) was an excellent discussion of the reactions of various parties to fraud. However, I believe an independent auditor should resign from the audit of any company such as the one described. The external auditor knew a major officer was dishonest but not to what extent. He knew the CEO was not alarmed at the executive’s dishonesty and had even threatened to replace the auditor for bringing a fraud to his attention. The auditor also knew most of the members of the audit committee “were chagrined that they had to involve themselves in what they saw as such an insignificant matter.”
In my opinion the article should have discussed the possibility of the external auditor’s resigning and also mentioned that any audit committee members who react as did those described in the article need to be better informed of their responsibilities.
John A. Jeter, CPA