Identifying built-in hazard and control hazard factors
Mark S. Beasley
Frank A. Buckless
Steven M. Glover
Douglas F. Prawitt
It was 9:30 A. M. on a monday forenoon when the call came through. “hi dr Mitchell. make you hold a minute?
A am on of your former pupils. but if you don’t mind. I would prefer to stay anymous. I think it is best for both us if i non uncover my name or my company to you. i am concerned that the senior executives of the company where I serve as accountant merely provided our local bank fraudulently misstated fiscal statements. although they acted like they appreciated my desires for flawlessness and exactitude. they made me experience like it was my deficiency of experience in tehreal universe that kept me from holding a more practical position to a common concern pattern. i need some fast advice about what to make. presently. may i briefly describe what’s traveling on adn acquire some input from you? ” she asked.
“go in front. allow me see if there some manner I can assist. ” responded dr Mitchell
I am the accountant of a privately-held. little. get down up company that I joined three and one-half months ago. on Friday of last hebdomad. the company’s chief executive officer met with representatives of the bank thaht financess the company’s line of recognition. the company is sing a terrible hard currency deficit. and the bank late halted funding the line of recognition until we could show our most recent operating consequences. fortuitously. the pupil clerk is presently taking your scrutinizing class. where fiscal statement fraud is a subject. and he was uncomfortable with what had transpired. it was at that meeting. merely three yearss ago. that our senior executive squad wittingly submitted fiscal statements to the bank that overstated gross revenues and receivable histories.
Earlier on Friday. anterior to the bank meeting. I vehemently refused to subscribe the commitment missive required by the bank because of my concerns about the inclusion of gross revenues minutess to clients on history that one knew did non run into gross acknowledgment standards specified by GAAP. that commitment missive related to funding the loan right at near of the last financial twelvemonth. so. my signature is on file at the bank related to anterior twelvemonth. I explained to the chief executive officer and chief financial officer that i believed including those minutess in the quarterly consequences would. they continued to take a firm stand that the fiscal statements needed to reflect the minutess. because without them. the bank would non go on funding constitute fraud the line of recognition. one of the intents of the meeting was to supply our most recent quarterly fiscal misstatements. unfortunaltey. none of the senior executive have accounting-related backgrounds. I am the top degree accounting individual at the company.
Over the weekend I had clip to believe about the state of affairs. and now i am even more positive that this is clearly fraud. my cea and chief financial officer have been arm-twisting the accounting staff to book gross revenues minutess before gross revenues occur. as best I can state. these unusual activites began merely late given our hapless consequence in the first one-fourth of this twelvemonth. he instantly updated me on the twenty-four hours i returned about what had happened. the chief executive officer and chief financial officer noted that booking these sorts of recognition gross revenues minutess is a common concern pattern. even if it isn’t technically compliant with GAAP given that the minutess represent gross revenues expected in the really close hereafter. possibly even following hebdomad.
As it turns out. the chief executive officer even instructed the histories collectible clerk. while I was out of the office for a couple yearss. to enter entries that ceo had handwrittern on a piece of paper. one of my accounting clerk resigned last hebdomad due to similiar concerns. our frailty presideng of human resources discussed the surrender with me after go forthing about the clerk’s concern during a concluding issue interview. They accused me of life in an “ivory tower” and emphasized that sorts of minutess clip. i am on my cell phone and necessitate aid measuring my following measure before one caput to my office this forenoon. the chief executive officer told the clerk. who works portion clip while completing his accounting grade at your university. non to advert the entries to him. unless one specially asked. in that event. the clerk was supposed to state me that the clerk related to new gross revenues generated by the chief executive officer and that all was under control. as a affair of fact. the clients in inquiry haven’t placed any sort of orders with our company and no goods have been shipped to them. because we aren non company. our external hearer has non performed any sort of interim reappraisal of the interim fiscal statements. ”
“do you think this is limited to merely one one-fourth? ” dr Mitchell asked
“i think so” the company replied
“as I mentioned. I joined the company three and a half months ago. one of my first undertakings involved shuting out the anterior financial twelvemonth and helping the external hearers with the year-end audit. they were non resiling them. but they were non funding the line of recognition until the first one-fourth consequences were presented on friday following hebdomad. our company is a start up endeavor that has been runing at a net income for a piece. merely now. the bank stopped uncluttering cheques drawn off the company history. interestingly. the bank instantly started funding the line late Friday and. I understand based on phone calls with my clerk this forenoon. the bank is go oning to fund the line this forenoon. these bizaree entries make up about half of our first quarter’s gross revenues. of class. given that these are quarterly fiscal statements. they are audited. the histories receivales clerk has ne’er worked with gross revenues and receiveables. unluckily. I had to subscribe a bank committedness missive merely two hebdomads after fall ining the company. i truly think the earning misstatements foremost occured this one-fourth and that the anterior twelvemonth audited fiscal statements are non misstated. but. given the current events. I refused to subscribe the paperss delivered to the bank on Friday. I might add. nevertheless. that the HR frailty president is the married woman of the ceo”
“anyway. i’m merely non certain what responsibilities I have unwrap the earning misstatements to outside parties. I am sing all kind of options and idea I would see what advice you could offer. what do you believe Is should make. dr Mitchell? ”