Information gathered can confirm if transactions are fraudulent - Free Essay Example

Another advice that Dr. Mitchell can give to the caller is to arrange another meeting with senior executives of the firm. She should tell them about her concerns about improper transactions included in financial statements. She should emphasize the GAAP sections which deal with revenue recognition. She should also tell them about the repercussions of reporting fraudulent transactions. The consequences would be extremely harsh and all the senior executives could face heavy fines, even possible jail time, and the company can go bankrupt. The company may face litigation from various creditors and due to no financing sources available, may even go bankrupt. The last advice that Dr Mitchell can give to the caller is to immediately consult with a lawyer. Since producing and submitting fraudulent transactions has serious legal implications, the advice of a law professional can be helpful since they have experience in dealing with these matters. The lawyer can also provide guidance on how to immunize her from litigation. (b) Even if the senior executives repent and correct their mistake, Dr Mitchell should advise the caller to ultimately resign from her position at the company. This is because the caller has evidence incriminating senior management and even if that information is published at a later date, it could seriously taint the managements integrity in accounting matters. If she continues to work at the company, and if these matters are raised at a future date, association with these executives could tarnish her professional reputation. Even if she faces hardships by resigning her positions, the long-term effects are surely beneficial since she will not be working with a management which has flexible views on ethics. (c) The risk of resigning immediately would be that she would not have access to the evidence about these fraudulent transactions. Obtaining that evidence is important especially if the company decides to sue her for fraudulent financial reporting at a future date. Her first task when reaching the office would be to obtain evidence of these transactions. (d) The state board of accountancy may prove to be an important help to the caller. Probably the board h as guidelines on how to deal with such situations from prior experience. Also, the caller may be able to discuss her situation with an accountancy ethics expert and obtain more advice on the situation. Question 2: Even though the caller is sure that the company is obtaining financing from the bank through fraudulent ways, Dr Mitchell may suggest to her that going to the bank immediately poses other kinds of risk. Since the senior executives are responsible for giving the bank their financial statement, it is their duty to ensure that there are no material misstatements in the financial records. The caller is aware that these records may contain inflated balances from the period. The risk is that if the transactions actually turn out to be valid, and if the caller informs the bank that they are not, the caller would be responsible for giving misleading information that harms the company. This would result in her being fired from the company, and possibly the company suing her for defamation. So it is very important that the caller be convinced in every way possible that the financial statements are materially misstated. She should be confident of these transactions before reporting to any outside entity. When she is confident about the misstatements, she can contact the bank, although it would be advisable for her to consult legal counsel before any such actions. On part of the bank, her not signing the financial statements should be detected in the internal control. Since a controller not signing financial statements is likely a big issue, the bank should investigate the companys accounts and should also start interviewing management about reasons why the statements are not properly authorized. Question 3: (a) The caller should likely consult with the state board of accountancy on whether there is a legal requirement for her to notify any third parties of what has happened. She should then follow their advice on whom to contact. However, if there is no such requirement, the caller does not face any legal repercussions for not contacting anyone else with information about these transactions. However, it is always better to also consult an independent lawyer in addition to the state accountancy board to completely ensure her immunity. (b) The external auditor should only be notified after the caller has consulted a lawyer. The eternal auditors can help to convince the company that they are deliberately misstating the companys financial statements. Also, the external auditor may recheck if the previous years accounts contain any material misstatements. This investigation will lead to auditors higher skepticism when dealing with the company next time. They may even go through the enti re backlog of previous audits to ensure that there were no material misstatements. However, it may even lead to the auditor to resign since they do not want a client with such high Audit risk. Question 4: (a) Even though the media in this decade has been full of headlines of accounting malpractice, it is really difficult to put an exact number on the prevalence of accounting malpractice. Some famous cases include Enron and Arthur Anderson, WorldCom, Tyco, etc. In 1999, a COSO study was released highlighting fraudulent reporting in the previous decade. This report was called Fraudulent Financial Reporting 1987-1997: An Analysis of US Public Companies. To the surprise of many people, the report stated that there were only about 300 cases of fraud in the corresponding decade. This number is quite low when one considers the amount of publicly traded companies in the US. However this is limited to public limited companies only and also because the Securities and Exchange Commission (SEC) has very limited resources. Almost 50% of fraudulent companies involved a situation like the one above where revenue recognition criteria were not followed. So this is quite a common method of committing fraud. Because of this, the AU requires that external auditors assume a risk of fraud causing material misstatement when evaluating financial statements. (b) Senior executives who face undue pressure to meet the expectations of different stakeholder may try to projects these pressures upon employees to help meet those targets expected by the stakeholders. Senior executives may even commit fraud to continue meeting expectations of stakeholders. The status of senior management can be used to pressure lower level employees to commit fraud. Threats usually employees are job loss or denial of promotions to employees unless they accept to be a part of managements fraudulent schemes. Also, the experience of senior employees may cause lower level employees to think that they are safe from prosecution as these techniques have already been tried. Also, if junior employees may not know the full picture, they can be easily lured into committing illegal frauds by management. (c) The best method junior employees can use is to stick with the IAS or GAAP as the basis for any activity or reporting. The same with this case where the caller was concerned that her employers were not meeting GAP criteria. Thus, the employee cannot be blamed for not doing transactions which do not abide by IAS or GAAP criteria. This also gives senior employees no justification to carry out recording which goes against established standards. Question 5: The senior executives of the company where the caller worked faced many incentives which made them give out materially misstated financial statements. Because it is a start-up company, executives face intense pressure to get the business to become a profit making enterprise and establish itself as a serious competitor in the marketplace. This company had been operating at a loss for a while and facing a huge cash shortage. Also, the bank had halted all credit until the quarterly reports could be produced. So there were a large number of pressures the management was facing and it gave the, the incentive to commit fraud. When they had so many incentives, they took advantage of some of the opportunities to commit fraud. Because these are interim and not period end reports, they were not audited by an external auditor. This gave management a huge opportunity to engage in fraud for the first quarter since there was no external investigation or audit. Also, because the company is smal l, the management could influence the clerks to commit fraud. Also, the fraud could have been easily perpetuated due to a lack of sophisticated control systems. And since the caller was gone for some days, it prevented management with a rare opportunity to get fraudulent accounting entries in to the system. Attitude was another condition that the management displayed when perpetuating fraud. They also showed a complete and utter disregard towards the importance of fairly presented financial statements. They used rationalization that everybody does it and accused the controller of being too high-minded and an idealist. They also commented on the controller lack of practical experience tried to rationalize it to the controller. But their overall main rationalization was that most companies do commit accounting fraud, and they shouldnt be the exception. Question 6: To record a transaction, SAB 101 states that the following criteria are required for GAAP: Evidence of an arrangement to exchange goods or services Earnings process should be complete. This means that the company has provided the product and a credit or cash payment has been made The money to be received can be measured reliably Collection is reasonably assured. The caller had said that none of these criteria were there to record the transactions. There was no arrangement to exchange goods and services, no goods were provided or cash or credit received. Consequently there was no way to measure revenue. And there was no possible assurance of collection since no transaction was agreed upon by any two parties. Question 7: (a) In this case, management had recorded revenue and debited accounts receivable when no purchase order was placed for those goods and no goods were shipped out. There were no actual customers. Thus, if recorded, these posting would not confirm to the occurrence assertion in the financial records for sales transaction. If we reference AU 326, the occurrence assertions tests whether the transactions recorded actually happened and whether they are done by the company. So there would be no occurrence assertion for these transactions. As there were no orders placed by customers to the company in the case, there obviously had been no shipping to these customers by the company. And since there was no shipping of these goods, there was no arrangement of any kind between customers and the company for exchange of cash and goods. (b) There are many audit procedures which can detect this kind of fraudulent records. The easiest and most straightforward way would be to send confirmation to these customers to verify that these transactions had indeed occurred. Customers would have probably exposed the proper amounts they owe to the company as accounts receivables. Also, they should show if these transactions were prematurely recorded or not. Another audit procedure would be to analyze the supporting documents of these recorded transactions. For example, select a sample of transaction from the Sales Journals, and check if there are supporting documents verifying the amounts. These can be, but are not limited to, the customers purchase orders, shipping documentations and acknowledgment of receipt of goods. There are also analytical procedures that can be used to check the occurrence of these transactions. This can be done by comparing this quarters data to previous quarters and measuring the discrepancies between quarters. Other comparisons can also be used; but some might only have a limited affect in ensuring occurrence of these transactions.