WEEK 55 QUESTION

1. Distinguish between an auditor’s responsibilities to detect and report errors, illegal acts, and fraud. What role does materiality have in determining the proper reporting and disclosure of such events? What ethical concerns might an auditor face when doing his or her job?

Incorporate concepts from this week’s lecture in your post. Your main post should be at least 250 words in length.

2. What are the auditor’s responsibilities to communicate information to the audit committee under AICPA and PCAOB standards? If the auditor discovers that the audit committee routinely ignores such communications, especially when they are critical of management’s use of GAAP in the financial statements, what step(s) might the auditor take at this point?

Incorporate concepts from this week’s lecture in your post. Your main post should be at least 250 words in length.

WEEK LECTURE FOR QUESTIONS 1 AND 2

Ethical Concerns of Auditor - Distinguish between an auditor’s responsibilities to detect and report errors, illegal acts, and fraud. What role does materiality have in determining the proper reporting and disclosure of such events?  What ethical concerns might an auditor face when doing his or her job?

In collusion, multiple parties are involved, and each person involved helps to foster the transaction.  A typical example is that a person establishes a relationship with several people in the real estate industry, like a title company, appraiser, etc., and makes it beneficial to them to help facilitate the transaction.  Brokers would then qualify consumers that wouldn’t normally qualify; this can be done by another method of fraud like falsifying income.  An appraiser would then have to inflate the value of the home. Once this has been done, the lender gets the paperwork and funds the loan.  The home is now underwater due to the inflated home value and there is a bigger lien on the home than what it is actually valued at. Not to mention that the consumer may have had to falsify income.  These transactions created the higher delinquencies that lead to foreclosures, and the housing crisis of 2008 started.

To combat collusion, Fannie Mae, Freddie Mac, FHA, and VA have recommended that lenders employ a third party to examine their controls and provide a risk assessment solution.  The company I work for provides a service than can help lenders detect collusion by cross checking the lender’s portfolio to see if the same people are involved in multiple transactions, properties, etc.  These transactions must maintain an “arms length” to be free of fraud.

Employees need to know that you are employing a standard of ethics within the company that distinguishes between right and wrong.  SOX requires a code of ethics to be adopted and in place.  With the stronger accounting practices, and stiffer penalties for misrepresentations, hopefully the examples of companies like Enron and WorldCom have set the example of what will happen if you commit fraud.

Our second discussion this week is as follows:

AICPA and PCAOB Standards - What are the auditor’s responsibilities to communicate information to the audit committee under AICPA and PCAOB standards? If the auditor discovers that the audit committee routinely ignores such communications, especially when they are critical of management’s use of GAAP in the financial statements, what step(s) might the auditor take at this point?

The week 5 writing assignment will be on the case study of Groupon from chapter 5 of the text. Remember to include at least one resource.  There are three questions to answer for this assignment and the length requirement is two to three pages.

Let's discuss audit committees and their role in more detail.  It is a group of at least 3 individuals responsible for overseeing all internal and external audit functions of a company. In addition, at least one member must be a financial expert or have significant financial expertise. Audit committees are responsible for selecting and appraising independent and external CPA firms to provide audit functions. They also oversee the financial reporting process including (but not limited to) supervising internal auditors, monitoring internal controls, and ensuring adequate compliance with SEC and GAAP standards. Because staff on audit committees report to the board of directors of a company, they cannot belong to the company's management team or be in a position where their independence can be questioned (What is Audit Committee? Definition and Meaning, 2012).

Additionally, an audit committee:

· Oversees the financial reporting process monitoring the choice of accounting policies and principles

· Monitor internal control process

· Ensure open communication among management, internal auditors, external auditors, and the audit committee

· Oversee hiring and performance of the external auditors

· Ensure proper composition. (Keinath & Walo, 2009)

References

Keinath, A. K. & Walo, J. C. (2009). Audit committee responsibilities. Retrieved from http://www.nysscpa.org/cpajournal/2004/1104/essentials/p22.htm.

Marasco, J. (2008). Theft by collusion: Five times more loss. Fraud Matters. Retrieved from  http://www.stonebridgebp.com/fraud-forensics/library/theft-collusion-five-times-more-loss

What is audit committee? Definition and meaning. (2012). In InvestorWords online dictionary. Retrieved from  http://investorwords.com/7478/audit_committee.html#ixzz28hiSoJvt

3. Watch Deal Killers for Small Companies and Financial Firms.

The video discusses the Sarbanes-Oxley Act (SOX) and the Dodd-Frank Act. Summarize three key learnings you obtained from the video.  Based on your own independent research, why were these two acts passed in the first place?  Do you agree with the speaker that the acts have put an undue burden on US businesses?  Why or why not?  Do you agree with the speaker that SOX discourages companies from going public?  Why or why not?

Incorporate concepts from this week’s lecture in your post. Your main post should be at least 250 words in length.

4. Some auditors claim that increased exposure under Section 404 of the SOX creates a litigation environment that is unfairly risky for auditors. Do you think that the inability of auditors to detect a financial statement misstatement due to internal control fraud in a timely manner should expose auditors to litigation? Why or why not?  What can auditors do to ensure they do not violate any ethical guidelines and conduct audits in a professional manner?

Incorporate concepts from this week’s lecture in your post. Your main post should be at least 250 words in length.

WEEK LECTURE FOR QUESTION 3 AND 4

Forbes Video - Deal Killers for Small Companies and Financial Firms

View the following Forbes video:  https://www.youtube.com/watch?v=3e7T4aGQC5w   The video discusses the Sarbanes-Oxley Act (SOX) and the Dodd-Frank Act. Summarize three key learnings you obtained from the video.  Based on your own independent research, why were these two acts passed in the first place?  Do you agree with the speaker that the acts have put an undue burden on US businesses?  Why or why not?  Do you agree with the speaker that SOX discourages companies from going public?  Why or why not?

Here is a scenario to think about: a large company with offices in several countries.  The Chief Procurement Officer sets up fake companies from which he would create fake invoices that the company would have to pay.  Due to his senior level position, he was responsible for approving and negotiating contracts with suppliers/vendors.  He colluded with the accounts payable clerk and committed fraud by essentially paying himself and giving a small portion to the clerk who could process the payments.  This was discovered because many of the invoices were being paid to the same P.O Box address.  This was obviously a very careless mistake by the executive.  Things quickly unraveled and he was fired on the spot and sued by the company for damages.  

Companies need to proactively mitigate internal control risks.  Prevention is the best defensive tool against accounting fraud.  It is important to have appropriate “tone at the top" of the organization from executives.  This can create a corporate culture that values ethics and integrity in all internal and external business interactions.

Our final discussion question will be:

Sarbanes-Oxley - Some auditors claim that increased exposure under Section 404 of the SOX creates a litigation environment that is unfairly risky for auditors. Do you think that the inability of auditors to detect a financial statement misstatement due to internal control fraud in a timely manner should expose auditors to litigation? Why or why not?  What can auditors do to ensure they do not violate any ethical guidelines and conduct audits in a professional manner?

According to the article, "Internal Control Checklist: 5 Anti-Fraud Strategies to Deter, Prevent, and Detect Fraud," the audit committee should be "knowledgeable of the company’s fraud risk exposure and aware of the steps management is taking to monitor and mitigate those risks. Truly independent audit committees may also maintain healthy levels of skepticism to promote continuous evaluations of the company’s anti-fraud programs and controls." In my experience, many big companies have "audit committees."  Please feel free to research this topic further.  Consider the following during your readings: the role of an audit committee, why they are so important, and who should sit on this committee.  Here is an article of interest: Internal control checklist: 5 anti-fraud strategies to deter, prevent, and detect fraud .

The final paper will be a case study on MicroStrategy.  The paper needs to be at least six pages in length and include a minimum of two resources. 

Thank all of you for your hard work and dedication to this class.  We wish you the best in achieving your educational goals.

References

Bell, E. (2009, February 16). Internal control checklist: 5 anti-fraud strategies to deter, prevent, and detect fraud. Retrieved from http://citationmachine.net/index2.php?reqstyleid=2&mode=form&rsid=5&reqsrcid=APAWebPage&more=yes&nameCnt=1nd Detect Fraud