Michael G. Alles
Rutgers, The State University of New Jersey
Alexander Kogan
Rutgers, The State University of New Jersey
Miklos A. Vasarhelyi
Rutgers, The State University of New Jersey
Abstract: The continuing series of business scandals from Enron to WorldCom have severely undermined the credibility of audits and auditors. In response, the SEC and the AICPA have advocated greater reliance on Continuous Assurance (CA), which utilizes online information technology to produce audit results simultaneously with, or a short period of time after, the occurrence of relevant events. In comparison with the traditional financial statements audit, continuous assurance aims to be timelier, more comprehensive, more accurate and more supportive of the management process. However, while CA is certainly useful if the problem behind firm failure is lack of information and analysis, it is no more effective than standard auditing in a setting in which managers and auditors collude to deliberately mislead investors. Indeed, we argue that its reliance on automated analytics based on auditor and manager determined benchmarks makes CA particularly vulnerable in the event of fraud. To overcome this Achilles Heel of CA we propose the creation of a Black Box Log File that is a read-only, third party controlled record of the actions of auditors, especially in regard to their interactions with management and choice of audit metric and models. Accompanied by sophisticated search and analytic algorithms, the log files will serve as an audit trail of an audit thus greatly enhancing the current peer review system. While the content and form of the log needs to be debated, we argue that tertiary monitoring is essential to enhance the credibility and usefulness of CA, and auditing in general.
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