Auditor Crazy Eddie Question: What specific mistakes (apart from failure to notice “red flags”) did the auditor make? For each mistake, describe what the auditor should have done. If you were the Managing Partner for the CPA firm and had full knowledge of all the facts and events in this case, what changes in policy or procedures would you implement to make sure this audit failure does not occur in the future? The Crazy Eddie's financial statements had many fraudulent over and understatements done in many ways that the auditors should have caught. They created fictitious revenues by a number of means.
He began falsifying the books to give the impression that WorldCom was doing well. This resulted in Ebbers also pressuring other employees to commit account fraud. Without a these loans and a direct tie to company performance, Ebbers may have been under less pressure to ensure the company continued to perform well may not have had the incentive to commit this kind of accounting fraud. When stock prices declined and Ebbers received margin calls, instead of Ebbers selling his stocks which would have further crashed the price of WorldCom stocks, the compensation committee approved Ebbers loans and guarantees that exceeded $400 million. Even when the Board learned about the loans to Ebbers, because the loans needed to be disclosed in the company’s third quarter 10-Q report, the Board ratified and approved the compensation committee‘s actions.
Idea of cartels. T Boone Pickens constructed his argumentation on the fact that he wanted to access the board but he couldn’t not because of the fact that he is a former greenmailer but that the company is actually hiding lots of things that are consequences to the Keiretsu system. Different view of Keiretsu in the jap system: * for some it is from the jap culture * for others effective for LT and joint projects FYI 1 dollar = 100 Y Something to know: Koito had a very good growth, which was actually very high, and that lead the financial authorities to investigate on a possible fraud. For Koito, that was because of the greenmailer that sold the shares to Boones. The US vertical integration in this domain was replaced in Japan with the Keiretsu system.
Case Study 1: And the Fraud Continues Discuss the internal control weaknesses that existed at MCI that contributed to the commission of this fraud. Walt Pavlo would not have been able to commit fraud if MCI had better internal controls. Because of the weaknesses in MCI internal control he was able to defraud the company out of approximately 6 million dollars. Because Pavlo helped to create the accounts receivable system he knew its strengths and weaknesses and was therefore was able to manipulate it. There seem to be little segregation of duties and independent verification.
Their business included some long term investment and no short term returns to the company. Enron’s auditor was also accused of conducting business in an unethical manner in his attempt to retain the loyalty of Enron executives. At that time laws and SEC regulations allowed firms like Arthur Andersen to provide consulting services to a company and then turn around and provide the audited report about the financial results of these consulting activities, therefore making an “independent audit” by Arthur Andersen independent in name only. The Accounting Scandal It was revealed that it’s reported financial condition was sustained substantially by institutionalized, systematic, and creatively planned accounting fraud, known as the "Enron scandal". The accounting techniques used to influence Enron’s financial statements were a combination of many different complex tactics.
1. Discuss the Internal control weaknesses that existed at MCI that contributed to the commission of this fraud The big Internal control weaknesses existed at MCI was that Pavlo can manipulate the Account Receivable system which he had helped to create and develop. When the same employee is able to receive payments, update or manipulate accounts receivable records, or even reconcile the company's bank account, he may be able to embezzle money from the company (http://smallbusiness.chron.com/strengths-weaknesses-accounts-receivable-35111.html) that was exactly what happen to MCI with Pavlo, through the following tricks: a) Identifying Account receivables that were going to be written off and converted them into notes receivable, this way expenses are not touched and an Asset is created in the balance sheet. b) Unapplied cash was used to mask the bad debt and slow payments, the allocations of amounts over certain sums of money to delinquent or bad receivables, made the expenses related to the write off of the receivables would not hit the income statement. c) “Placeholder credits” was used.
In addition the interest on the debt alone was £9 million per year. All of this made it clear to Pitt that something had to happen to try to escape from the mess the government was in. In the 18th century there was a serious problem with people smuggling goods such as tea and tobacco into the country. This was to avoid the duty tax on products, which gave them a huge profit margin. This profit margin made the risk worth taking for many, resulting in the government losing money due to be not paying duty tax.
Without the implementation of Eaton’s strategy Chrysler’s credit rating would be poor. And they would not have enough cash to run operations smoothly also they would probably be bankrupt or taken over. However due to other external factors not related to Eaton’s $7.6 Billion strategy Chrysler suffered. Even though the strategy looks negative it worked. The auto industry can suffer a lot from positive and negative changes in the economy and interest rates hence auto companies should set aside cash for bad times.
Answer to questions: The ethical issues involved in the Madoff case was his misconduct and deceitful activity. He lied to investors, cheated out his financial interests, and stole from thousands of people around the world. He took money from new clients and paid it out to existing clients. I don't believe that Madoff worked alone. Even if nobody helped him deceive investors, people knew about it, and the act of knowing and not reporting a white-color crime is guilty by association.
The fraud begun when Phar-Mor manipulated their financial statements, so that, no losses are reported in their statement. The company did so in order to preserve their reputation and their success and hide their losses. Based on this fault records and fault financial statements, big companies and banks began to invest in Phar-Mor. They invest approximately $1.14 billion in Phar-Mor thinking that it is a good investment because the fraud was not yet discovered. The fraud was altering records to understate cost of goods sold and overstate inventory.