Public reporting on those controls would be new, however. The more registrants and their external auditors think about, talk about, and work on improving internal control systems the better those systems probably will become. Aside from the POB's statement and the position of the General Accounting Office that led to the requirements for management and auditor reports on internal control as part of the Federal Deposit Insurance Corporation Improvement Act of 1991, I have not heard any recent argument that public reporting by public companies and their independent auditors will improve financial reporting in general. I question whether the financial reporting by honest managements, who run the vast majority of public company registrants, is going to be improved significantly by public reporting on internal controls. I will, however, reserve judgment on that reason for public reporting on controls until I see or hear more evidence or argument.
Fraud justifiably engenders public outrage.
While few business failures involve fraud, their corrosive effect on public confidence is widespread. The public looks to the independent auditor to detect fraud, and it is the auditor's responsibility to do so. The POB agrees. After considerable informal discussions with practitioners, preparers of financial statements, and other regulators, and a year and a half of reviewing accounting and auditing enforcement cases as they wind their way to the Commission, I question whether public reporting on internal controls over financial reporting by registrants and their independent auditors would reduce so-called fraudulent financial reporting and litigation against external auditors. I agree fraudulent financial reports arise principally when management of an enterprise deliberately has falsified the facts by misstating assets, liabilities, equity, or income.