The gap between what the public expects from the auditor and what the auditor perceives his or her role to be has exacerbated crises within the accounting profession. Perceived audit failures, followed by historically large law suits, have resulted in the alteration of accounting firms’ behavior. Ironically, the response has done little to alleviate the crisis in public confidence and has led to other concerns related to the auditor‐client relationship. Discusses issues associated with the expectation gap and posits that the profession’s efforts to educate users as to the nature of the audit process is a necessary, but insufficient, response. A two‐part strategy is proposed to effect structural change of the auditor‐client environment. Part one of the strategy calls for greater involvement of regulators in selecting the external auditor and requiring auditor rotation. Part two of the strategy proposes market‐based instruments, audit failure permits and audit disaster futures, to deal with remaining audit risk.

The highly publicized accounting scandals of the recent past seriously damaged the credibility of the accounting profession. In an effort to restore public confidence in the capital markets, the US Congress passed the Sarbanes‐Oxley Act of 2002. A central theme of this new law is the attempted reduction of major audit failure by stricter governmental regulation of the accounting profession and the creation of the Public Company Accounting Oversight Board. This paper discusses the likely effectiveness of the Sarbanes‐Oxley Act in the reduction of major audit failures. Four root causes of audit failure are identified, and issues not addressed by the Sarbanes‐Oxley Act that may have audit failure implications are discussed. Recommendations for improvements that potentially further reduce the likelihood of audit failure are presented.

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A recent study reported that businesses normally lose 5% of their revenues to fraud each year—with the median loss for occupational fraud set at $140,000. But finding fraud is tough: 87% of the perpetrators have never been previously charged with a fraud‐related offense. And budgetary cutbacks are another obstacle for internal auditors, who are continuously being asked to do more with less. Computerized records offer greater accuracy and efficiency, but investigators can find themselves drowning in a sea of digital data. So fraud investigators need a practical way of finding the proverbial “needle in a haystack” clue that will lead them to the perpetrators. The author suggests one solution: association rules (AR), a data‐mining technique that can help auditors find fraud when they are not sure where to search. He explains how auditors can use AR to find patterns and relationships that would otherwise go unnoticed. © 2013 Wiley Periodicals, Inc.

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