11 Sep Was it possible in 2001 to learn from pre
Write 4-5 pages in response to the items listed for each of the three case studies included in this assessment.
Was it possible in 2001 to learn from previous financial scandals so they would not happen again? The answer then was probably not. We need to look no further than "The Pros & the Cons," a speakers' bureau that employs experts and ex-convicts to help companies avoid and detect fraud. Perhaps you will remember Frank Abagnale, the subject of the movie Catch Me if You Can. The purpose of the Sarbanes-Oxley Act of 2002 (SOX) was to shelter investors from financial crimes and provide them with greater confidence in American corporations. SOX helps these investors rely on financial statement information as an accurate representation of the financial condition of the organizations in which they are shareholders.
We often associate tax fraud with tax evasion, a term familiar to many taxpaying Americans. Why do even the most scrupulous American taxpayers dabble in this risky game of hide-and-seek? Consider greed to satisfy a person's lust for money as well as the risk of trying to cheat the taxman at the local, state, and federal levels. More often than not, the biggest scammers don't get away with taking advantage of the system.
The Pros & the Cons. (2010). Retrieved from www.theprosandthecons.com
For this assessment, you must analyze the three case studies and respond to the items listed for each case study. Reviewing the resources for this assessment will give you a good start on preparing for the assessment.
Jacob Kent is the general manager of a large locally owned garden center in Columbus. The store has four departments, each with its own department manager.
Each department has its own sales counter, and two salespersons are assigned to each counter. The salesperson enters his or her own PIN for each transaction. At the end of the day, the manager in each department totals the department’s sales, retrieves the cash and checks from the register, and prepares a deposit slip for the general manager to review and sign. The general manager re-checks the cash count and then signs the deposit slips and accounting documents.
When the general manager receives the cash receipts from all departments, he prepares a sales report and sends it to the store’s controller. The controller counts the money and signs three copies of the sales report. One copy is for her, one copy goes to the store accountant, and the final copy goes to the store manager. The controller then puts all the cash into the safe until it is picked up for delivery to the bank.
The store accountant reconciles copies of sales reports with bank deposit slips and the bank statement.
Jacob has a long relationship with the bank. The bank just called to suggest that he checks into some customers' checks that had recently been returned for non-sufficient funds. According to the bank, some of the payers had written bad checks to other local businesses.
The bank suggested that the garden center may have an employee working against it. A police investigator told the bank that in similar cases an insider is involved.
- What possible check fraud schemes might the company be a victim of? What control processes could be implemented to detect and deter them?
- Given the store’s procedures for processing cash receipts, which store employees might be in a position to participate in a check fraud scheme?
Heather Lockard is the CFO of the Keel Company in Fort Lauderdale, Florida. The company is a privately-held manufacturer of custom recreational vehicles with about 175 workers (engineers, vehicle designers, mechanics, and so on), and nine employees in its main office. Heather’s primary responsibility is to prepare the financial statements. Two full-time accountants work for her. She follows GAAP in most cases, but she sometimes deviates from GAAP when she thinks it does not lead to what she considers to be the best financial results for the family members who own the company.
For many years, the company was owned by three cousins. All three cousins were on the board of directors. One of the three, Yvonne Keel, was the CEO during that period. The other two cousins were less involved with the company.
Three weeks ago, Yvonne’s cousins were killed in a car accident. Their wills specified that all of their shares in the Keel Company were to be transferred to a single trustee at a large regional bank. Each cousin had held her shares in a revocable living trust with the bank named as Successor Trustee.
Heather and Yvonne recently met with the trustee, Cathy Nelson. Cathy has many connections in the recreational vehicle business, and she wants to bring her experience to bear in managing the Keel Company. She feels that a custom recreational vehicle building business would be better off in Mexico where it is closer to the parts manufacturers. Heather and Yvonne are concerned that Cathy might take the company in a direction they don’t want it to go.
In recent years, Keel’s stock had been valued at about $15 per share and had paid $9 per share in dividends. Yvonne was paid a competitive salary, but she depended on the dividends to support a comfortable lifestyle. With this change in circumstances and with a new trustee in the mix, she felt she could no longer depend on her salary and dividends meeting her needs.
Now Heather was working on the current annual report, and the earnings had declined. Preliminary calculations showed earnings per share somewhere around $9. Earnings had declined because of defaulted contracts from the two large dealers who had gone bankrupt. Keel had completely financed the contracts for these dealers because of their previous excellent credit history. Now Keel was on the hook for a whole fleet of custom recreational vehicles without buyers.
Considering the issue of the drop in the earnings, Yvonne asked Heather to find a way to report stable earnings. She was concerned that Cathy might respond negatively to the decline in earnings and complicate the relationship. Heather considered various options:
- Increase the estimated percentage of completion on all custom recreational vehicles in work-in-process inventory by 15 percent. This would erase most of the loss. She could justify this because she always felt that work-in-process estimates had been conservative.
- Recognize revenue on the fleet of custom recreational vehicles in default. It would be difficult to sell them quickly at a good price, but she could argue that they could be sold. It would be best to find new buyers for them, but that could take well over a year.
- Switch to mark-to-market accounting for some of the recreational vehicles in progress so the company could recognize all of the profit when contracts with other clients are signed.
- Are any of the options that Heather is considering acceptable under generally accepted accounting principles? Why or why not?
- Do any of the options being considered by Heather constitute financial statements fraud?
- How would you handle the entire situation if you were in Heather’s position?
A small biomedical company has had great success in the last four years and is now generating $75 million per year in sales. The company has only three employees, all siblings. Their strategy for success has involved leveraging a few valuable patents and outsourcing almost all business functions. The siblings are planning to take their company public with the hope of generating capital for expansion. Launching an IPO, however, will require them to become SOX 404 compliant. At present, the siblings are the only members of the board of directors and are the only officers of the company.
- Analyze whether it is possible for a three-person company to become SOX 404 compliant?
- What general steps should the siblings take to do so?
- Written communication: Written communication should be free from errors that detract from the overall message.
- Length: 4–5 pages.
- Font and font size: New Times Roman, 12-point.
Submit your assessment for evaluation by clicking on the assessment title and uploading the assessment as a Word document.
By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:
- Competency 2: Assess the background, practice, and methods of conducting an audit.
- Analyze ways to evaluate open source shopping cart systems.
- Design a system to detect customer theft in a restaurant.
- Analyze the optimal role for detection in a restaurant setting.
- Evaluate steps taken in the investigation of an employee suspected of wrongdoing.
- Evaluate internal control processes related to credit approvals, bill payment, collections, and bank deposits for a small business.
- Competency 3: Examine various types of forensic and non-forensic audits.
- Evaluate how open source affects the security of shopping cart systems.
- Competency 5: Communicate in a manner that is professional and consistent with expectations for professionals in the field of accounting.
- Communicate in a manner that is professional and consistent with expectations for professionals in the field of accounting.
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