If I were Dr. Mitchell, first thing that I would recommend to the caller is suggest him go back to his office, and to search and collect all the appropriate and related evidences on the transactions which are in question. The searching can help the caller in the best knowledge to confirm that, there is a clearly inadequately to the inclusion of those transactions in the first quarter of financial statements. The caller could gather all the actual accounting entries documentation which have related to the transactions that recorded in the accounting system. In order to make sure that the caller's views about the inadequately accounting treatment are valid, the additional searching to the possible evidences is very important. The caller also should have to maintain all the copies of that related evidences in a protected file in order to protect him from the future false allegations and any assignment of blame to those transactions.
Furthermore, I might also advise the caller to have a meeting with the company senior executives in one more time as to re-emphasize the concerns to the inappropriate inclusion of the sales and receivable transactions in the first quarter financial transactions. The specific GAAP criteria required in revenue recognition should be highlighted by the caller. Besides, the consequences of issuing intentionally financial misstatement information to the bank should be emphasized by the caller because it could be extremely severe for both the company and those individuals who submitted the financial misstatement information. If the fraud is continually revealed, litigation and possible jail time might be the results. Hence, the senior executives involved have the responsibility to aware of the serious consequences.
Finally, I would like to advise the caller to have to immediately to seek the advice from a sound legal counselor. The third parties rely on the information to make the business decisions would have to bears serious legal consequences if the false and misleading financial reporting has been issued.
What are the risks of continuing to work with the company?
Regardless the reaction of the senior executives to the concerns of the caller, Dr. Mitchell could encourage the caller try to have to seriously consider in resigning from the current position. Even if the company recalls the financial statements to eliminate the consequences of the transactions, the caller now has the strong evidence showing that there is a weak in the integrity of senior executives. The professional reputation of the caller would be spoilt if continued affiliation with the company and senior executive team. Although there may a significant personal costs is introduced if discontinuing employment, there is a likely to be greater costs of being associated with the company and management team that owns little professional integrity.
What are the risks of resigning immediately?
It is encouraged for the caller to resign himself immediately from the position. The caller should first to emphasize the importance of the sufficient copies of the available evidences have been gathered which is related to the transactions. The sufficient evidences are extremely important and helpful if the senior executives team intent to falsely place blame on the caller because of the inadequately accounting. Gathering such copies of evidences would be the first priority to the caller.
Could the state board of accountancy be a source of advice?
The state board of accountancy may be a source of advice to the caller. The state code can be the guidelines to deal with the conditions such the case of the caller. Accessible resources provided for the caller as to meet with someone to discuss any problem on an anonymous basis.
Question 2
What responsibility, if any, does the caller have to report this situation directly to the bank involved? Before you respond, think about the risks present if the caller does inform the bank and it later turns out that the caller's assessment of the situation was inaccurate, i.e., there was no fraud.
If there is a probability that the bank is inadequately to fund the line of credit according to the overstated sales and accounts receivable balances issues in the first quarter financial statements, Dr. Mitchell has to point out that there have the risks to the caller if he contacting with the bank immediately. During the meeting with the bank representative on Friday, there is a responsible for the senior executives as to submit the financial statements to the bank. They as the representative of the senior management, they actually have the primary responsibility to notify to the bank on the misstated financial misstatements. If the caller decide to inform to the bank about the misstated financial misstatements but it later turns out that the caller's assessment of the situation was inaccurate, the caller would confront the result of overstepping his superiors and disclosing the false information about his company to the third parties. Finally, he may confront the consequences in losing job and a potential recourse from his company.
Therefore, before informing to the bank, the caller should have the confident that his conclusion of financial misstatements is accurate. At the same time, the caller should refuse to sign the bank commitment letter for the financial statements in the first quarter and also serve it as a "red flag" to the bank. However, if the caller is persuaded that the financial statements are really misstated, it is appropriately to contact directly with the bank representatives. However, it is very important to the caller that to search a legal counsel for advice about the available actions that can be taken before contacting to the bank.
Question 7
Which financial statements assertion related to sales transactions did management violate when it issued the falsified financial statements?
The fraud described by the caller represent that the revenue and the related accounts receivable have been recorded by the management but there is no customers place an order to the goods or before the shipments of the goods to the customers. Those entries recorded have violated the "occurrence" financial statement assertion for sales transactions. The occurrence assertion for classes of transaction addresses that whether the transactions and events recorded have been occurred. Since there was no orders placed by the customers or the goods have not yet been shipped to the customers, there was no type of formal entries and no exchange of goods for cash. As a consequence, the activity violates the occurrence assertion for sales transactions.
What types of audit procedures could an external auditor perform that might help the auditor detect this fraudulent activity?
There are many types possible audit procedures could be an external auditor performed that might help the auditor detect the fraudulent activity. First, the auditor can mail the confirmations letter to those customers who have associated with the recorded transactions. It may determine the misstatements in the accounts receivable balances recorded for the revenue transactions which have been prematurely recorded. Most probably, the customers would show the differences in the accounts receivable recorded due to the overstated revenue transactions. The auditor must be sure that the customers selected for confirmation are from the recorded accounts receivable balances.
Moreover, the auditor might select the transactions from the sales journal and carry out the examination to the related documentation from those transactions, such as the purchase order from customers and the shipping documentation. Other than that, the auditor might also carry out well-designed analytical procedures to highlight the potential misstatement, if the amounts are not recorded consistent with the pre-determined expectations from the auditor according to the prior year trends. Finally, make inquiry with the key personnel who are involving in the accounting, shipping and sales might also have the probability to disclose any unusual activities.
Case 3.4
Question 1
At the time Cynthia Cooper discovered the accounting fraud, WorldCom did not have a whistleblower hotline process in place. Instead, Cynthia took on significant risks when she stepped over Scott Sullivan's head and notified the audit committee chairman of her findings. Conduct an Internet search to locate a copy of the Sarbanes−Oxley Act of 2002. Summarize the requirements of Section 301.4 of the Act.
Section 301.4 of the Sarbanes-Oxley Act of 2002 requires that the public company audit committee should have to carry out the procedures for the receipt, retention, and treatment of complaint obtained by the company regarding the accounting, internal controls or auditing matters. The audit committee has the responsibility to carry out the procedures for those complaints and treat it confidentially. They also must to establish the procedures for the submission process so that it is to be anonymous for the employees who are submitting the complaints about the accounting and auditing matters. The procedures are always referred to as "whistleblower" procedures.
Question 2
Use the Internet to conduct research related to whistleblower processes. Prepare a report summarizing key characteristics for the operation of an effective corporate whistleblower hotline. Be sure to highlight potential pitfalls that should be avoided.
The effective whistleblower programs should be overlooked by the audit committee of board of directors. It notices that the audit committee can give assistance to encourage developing a culture that the employees always look whistleblower as a worthy contribution to an attractive workplace of integrity. Effective whistleblower programs must be performed confidentially so that the potential whistleblowers are making sure that their concerns have been adequately considered. The audit committee must supply a strong leadership to develop and maintain the whistleblower programs in order to ensure that level of confidentiality and trust.
According to the AICPA, an effective whistleblower program must safeguard that the complaints submitted which related to the accounting, internal controls and auditing matters are submitted to the audit committee automatically and directly. Management and other parties could not have the chance to filter such complaints before it is submitted to the audit committee.
There is a discovering that many organizations are engaging with the third party vendors to control the whistleblower program. The vendors supply and staff the telephone or Internet-based hotline to report the complaints and also provide periodic reports to the audit committee within the organization about the tips they are receiving. The internal audit also serves as an effective administration of the whistleblower program.
Pitfalls occur whenever there is a breach in the perception of confidentially or anonymity. Once the staffs lose the trust to the process, they will no longer feel comfortable in submitting the potential concerns. Besides, the staffs should think that the follow-up actions will be carried out whenever submission of complaints. Several prior cases of fraud disclose that the staffs supplied complaints, but no actions have been carried out by the audit committee. Finally, if there is ability for the management to screen the complaints obtained before the complaints are submitted to the independent parties like the audit committee or internal audit, there is a risk that the complaints about the management fraud will not be disclosed to the key oversight groups.
Question 3
As Vice President of Internal Audit, Cynthia Cooper reported directly to WorldCom's CFO, Scott Sullivan, and not to the CEO or audit committee. Research professional standards of the Institute of Internal Auditors to identify recommendations for the organizational reporting lines of authority appropriate for an effective internal audit function within an organization.
International Standards for the Professional Practice of Internal Auditing issued by The Institute of Internal Auditors notice that the chief audit executive should report to a level within the company that permits the activity of internal audit has performing its responsibilities. The activity of internal audit should be free from any interference during they identify the scope of internal auditing, perform audit work and communicate the results.
It is most recommended that the internal auditor report should be directly to the audit committee of the board of directors because they are independence from the top management. The audit committee can effectively make sure that the scope of internal audit is not limited by the top management and their findings are addressed adequately by the top management. Internal audit reports effectively to the audit committee on matters that involved the audit scope and findings, it is always administratively to the CEO.
