Internal Controls

A company suddenly goes bankrupt.  Employees, creditors and others are left unpaid, while the management team has suddenly disappeared. A note on the front door of headquarters says that the company is now out of business, and that further calls should be made to the company’s attorney office. The law firm dropped the client several months ago for nonpayment of fees.

The company had a certified audit by Brokem, Cheatum and Worse, CPAs, for the last five years.  The CPA firm rendered an unqualified opinion on the company. Mr. Brokem, who is a managing partner of the firm, has been indicted for tax evasion. The State Accounting Board, however, will not act on a revocation or suspension of his license, until his trial is over. As a result, he is allowed (and is practicing), as a CPA.  The law firm for the CPA firm has stated that the firm should not cooperate with any state investigators unless required to do so.

You have been called to work for the state as a financial investigator. Since corporations are incorporated under state law, in this case, state law prevails.

In a preliminary review of the records and controls of the company, you have found substantial deficiencies.

In a detail response, what violations of internal controls (using documentation), and accounting regulations, could have been violated? Please response as if the CPA firm may have been in violation of AICPA rules or other related organizations.  Also, assume the company is a private corporation. Please detail your answer (500 word minimum).