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Business Risk Auditing: Cardillo Travel System, Inc.

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Question 1: Explanation of the Securities and Exchange Commission’s decision to charge the executives at Cardillo for the listed violations

· False representation to external auditors

The SEC had every right to charge the executives at Cardillo considering that they falsified the accounting transactions. Under section 13(a) and 15(d), of the SEC rules on management internal financial control strategies, the management is required to provide accurate financial reports that give reasonable assurance for the external users of the information. For example, it was wrong for the executives to suggest of a ‘secret arrangement’ with Rognelien and United Airline Chairman, where it emerged that there was a consensus that the United Airline was never to be repaid the $203,210 (Hanim et al., 2013).

· The failure to maintain accurate financial records

It is justified for SEC to sue Cardillo for its inability to sustain accurate financial record as it amounts to ethical and integrity breaches on financial reporting (Curtis & Turley, 2014). For example, the firm was allegedly maintaining its stock equity above the required threshold, which went against the provision of SEC 13(b). Also, Lawrence and Rognlien recorded $203,000 as the firm’s commission revenue for the second quarter when it should have never been recorded following other pending obligation with the United Airlines (Hanim et al., 2013).

· The failure to file timely financial reports with SEC

Cardillo executives were again liable for the failure to provide prompt reports to the SEC. For instance, the firm failed to provide their form 8-K in time for filing for its $685K financial penalties. Apparently, they acted in violation of section 10(b) of SEC provision that required all Companies to disclose actual organization material events on a timely basis for filing by SEC. Therefore, the executives were liable under section (13) a, for administrative proceedings for the late filing and were risking its registration status (Hanim et al., 2013).

· The violation of the insider trading provisions of the federal securities regulations

The executives at Cardillo as well violated the insider trading rules while investing in the organization through its corporate action of selling stock to conceal its losses during some of its civil suits. The Company sold 100K of its shares to the open market acting in contravention with the SEC provision under section 10b-5 on federal security laws amounting to breach of a duty of trust (Hanim et al., 2013).

Question 2: Determining the entity that was in contradiction/ non-compliance with the AICPA’s Code of Professional Conduct in the case provided, and the analysis of the primary reasons for their non-compliance.

Cardillo’s is presumably in violation of the AICPA’s code of professional conduct. Nevertheless, the first three culprits to be joined in the lawsuit will include the Cardillo’s Board Chairman and CEO Walter Rognlien, as well as the in-house attorney Raymond Riley, and the Chief Operating Officer Esther Lawrence. The primary reason for their non-compliance to AICPA’s Code of Professional Conduct is because they allegedly tried to conceal the ethical obligations with the United Airlines as instituted in Section 102 of AICPA regulation, as well as concealment of its actual report to the independent auditors (Curtis & Turley, 2014). Besides, the management was responsible for overriding the decision of the controller of the budget to go ahead and endorse a misrepresented statement regarding the firm’s equity further attracting civil litigations.

Likewise, the American Institute of Certified Public Accountant code of professional conduct emphasizes on the professional recognition of its duties to all the stakeholders. The doctrine requires that professionals demonstrate their basic tenets of professional and ethical behavior as the principle (Brown et al., 2014). Professionals are expected to conduct themselves honorably and transparently when exercising their jurisprudence/ judgment. However, Rognlien, Riley, and Lawrence failure to honor such professionalism in their conduct implicates their position to instill public confidence in self-governance. Besides, the three also breached the integrity principle, as well as failing to observe due diligence in their conduct. It is also arguable to claim that Rognlein’s confidante and even the wife was liable for the endorsement of the false affidavit by the executives. Also, Roger Shlonsky of the KMG auditing firm was liable under rule 203 of AICPA code of ethical conduct since he acted independently in rationalizing the suspicious transactions of the company under question. As an auditor, his action to vindicate immaterial misstatement rendered him unfit for the profession (Curtis & Turley, 2014).

Question 3: The analysis and evaluation of the action by Cardillo’s outside auditors, and the level of efficiency in audit risk management for the case

The external auditors’ partner, i.e., Helen Shepherd and Roger Shlonky did a better job in the assessment of the material risk of the management misstatement and effort to conceal the suspicious organization transactions with the United Airline. Shepherd made efforts to reach out to the United Airlines to validate the nature of the transaction and whether the amount by the United Airlines was refundable. Her understanding of the risky area of Cardillo’s business gave her insights to uncover the misstatement and ‘secrete agreement’ by the executives of the Company. Again Shlonky was not convinced by ‘secret agreement’ as purported by the executives (Curtis & Turley, 2014).

Therefore, the duo demonstrated high standards of audit risk management by requesting and analyzing files to come up with substantial proof against misstatement of financial reports by Cardillo’s (Curtis & Turley, 2014). The established professional standards require that reliability must be attained on the source of the evidence to ascertain the appropriateness of audit evidence. Some of the evidence that the two were able to uncover included that which declared that oral client representation would be used in contracting. The two were also able to present evidence that disputed the exactness of the adjusted entries in the Company form 8-K to better the result and other documents that were used by the two parties while entering the agreement.

Question 4: Whether or not the five components of control were adhered to by parties in the case

Bestowing from Hanim and his colleagues (2013), the internal control auditors and the accountants play several roles in any organization and will require some standards of moral resolve while executing their professional mandate to the enterprise. This five components of control include risk assessment, environmental control, internal activities control, along with monitoring controls, as well as information and communication control (Hanim et al., 2013). Such responsibilities should be harmonized to help the enterprise achieve its financial aims and desist from the material misstatement of financial reports, as well as safeguarding the Company assets and adhering to the policies in place. For example in the case provided, Smith showed his determination to adhere to these five components despite his best effort being thwarted by the executives who were determined to commit fraud. Also, the vice president at Cardillo was determined to monitor the process despite failure to rectify the action.

Question 5: An argument supporting or refuting whether the auditors have any responsibilities in the assessment of the judgment of the decision by Cardillo’s executives

In the case provided for the thesis, the auditors, i.e., Shlonsky and Shepherd owed a responsibility to the public interest in Cardillo’s. Therefore, as professionals they had to ensure the financial information provided to the public, i.e., investors/ stockholders and creditors were beyond doubt. Also, the executives at Cardillo’s had a responsibility to reinforce the enterprise commitment through ensuring the integrity of information reported, that the report was timely and that internal monitoring of finances was efficiently done to avoid bankruptcy and litigations (Curtis & Turley, 2014).

References

Brown, P. A., Stocks, M. H., & Wilder, W. M. (2014). Ethical exemplification and the AICPA Code of Professional Conduct: An empirical investigation of auditor and public perceptions. Journal of Business Ethics, 71(1), 39-71.

Curtis, E., & Turley, S. (2014). The business risk audit–A longitudinal case study of an audit engagement. Accounting, Organizations and Society, 32(4), 439-461.

Hanim Fadzil, F., Haron, H., & Jantan, M. (2013). Internal auditing practices and internal control system. Managerial Auditing Journal, 20(8), 844-866.

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