...Financial Reporting Problems at Molex, Inc. (A) : . I n mid-November 2004, Molex's Board of Directors met to decide the future of Joe King and Diane Bullock, the company's CEO and CFO respectively. Molex's external auditors, Deloitte &c Touche, had accused both of failing to disclose an $8 million pre-tax inventory valuation error in a recent letter of representation to the auditors. In response, King and Bullock argued that at the time of their letter they had determined that the financial impact of the error was immaterial. Despite an inquiry by the Audit Committee, which concluded that management had not deliberately withheld information from the auditors, Deloitte & Touche was not satisfied. The audit firm insisted that it could no longer rely on Bullock's and King's representa-tions, and would be unable to complete its review of the first quarter results until representations were received from a new CFO and in all likelihood a new CEO. MOLEX BACKGROUND AND MANAGEMENT Founded in Lisle, Illinois in 1938 by Frederick Krehbiel, Molex Inc. designed, man-ufactured and distributed electronic connectors that were used by a wide range of industries.1 For example, in the computer industry its connectors were used to pro-duce computers, servers and printers; in the telecommunications industry they were used to produce mobile phones and networking equipment; the consumer products industry used Molex connectors to manufacture CD and DVD players, cameras, plasma...
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...household name for electric appliances and camping equipment. It will also be notable for more than a decade of mismanagement and dubious experiment.s in ruthless cost-cutting and wholesale firings. For years to come, the name "Sunbeam" will bring to mind a company that relied on questionable accounting gimmicks and outright fraLid in sacrificing the company's reputation on the altar of enhanced earnings and a jacked-up stock price. It happened under the direction of disgraced CEO Albert Dunlap — the notorious, take-no-prisoners West Point graduate and veteran corporate downsizer unaffectionateiy known as "Chainsaw Al" — who put company managers under orders to get the stock price up at any cost. One way to do that, as it turned out, was to report robust .sales of electric blankets in the summer and barbecue grills in late autumn. Eventually, earnings woes and Dunlap's bluster prompted his ouster by an aroused board of directors in June 1998. That was followed shortly by the replacement of accounting firm Arthur Andersen and a series of investigations and shareholders lawsuits, most of which are still pending. Sunbeam joins an ignominious cluster of companies — Rite Aid, c u e International (now part of Cendant Corp.), Livent, Oxford Health Plans, Phar-Mor, Miniscribe and, most recently. MicroStrategies — in business's hall of shame. All of these companies have one depressing feature in common: top managers who, whether out of desperation or greed, apparently turned to accounting...
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...Scenario: Apex Printing, Inc. Apex Printing, Inc. is a private, domestic United States printer of periodicals, newspaper inserts, and advertising materials that accompany distributions of Sunday and weekday circulations of large metropolitan newspapers. The company, headed by CEO John Matthews, generates $450 million in revenues from three product lines (periodicals, inserts, and advertising) and has long-term contracts with several large U.S. retailers to produce weekly sales flyer inserts as well as metropolitan newspapers to produce Sunday magazine inserts and coupons. Its printing presses are characterized by offset print technology and capable of high-capacity output; in addition, the company recently migrated to water-soluble inks, which reduce manufacturing emissions considerably. The company’s executive team, employees, and above all, its Vice President (VP) of Production, Luke Stewart, are committed to environmentally sustainable manufacturing practices. Presently, the only substrate Apex uses is paper, specifically newsprint of various weights. Trim and waste are recycled in accordance with the company’s sustainability commitment. Manufacturing divisions are geographically aligned with customers’ locations to minimize logistics cost and response time to customer requirements; however, a centralized corporate entity administers functions such as human resources, information technology, and financial reporting. The VP of Sales and Administration, James Simeon, oversees...
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...In this case, Cynthia Cooper, VP of Internal Audit blew the whistle on fraud she and her team found. Cynthia brought up concern over the accounting treatment of a $400M entry to re-class a reserve to income. She was dismissed by the CFO and by the external auditors, Arthur Andersen. Luckily she was not deterred and had her team continue to review the accounts. That’s how the largest part of the fraud was found. The CFO and CEO were involved in capitalizing network lease expenses as assets in WorldCom’s financials. So instead of reporting a $662M loss, they reported a $2.4B profit. She took her concerns to the audit committee and soon after the fraud was exposed. Before long, the company was bankrupt, the CEO and CFO and Controller were indicted and went to jail and Cynthia was seen as a pariah to most. Though in the end she did the right thing, this was before there were protections in place to protect whistleblowers from backlash. One of the biggest issues in this case were the lack of internal controls. The CEO, Bernie Ebbers, didn’t even want those words spoken in his presence. While internal controls may seem intrusive, they serve a very key purpose. Internal controls, as defined by COSO.org, are “processes, effected by an entity's board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: 1. Effectiveness and efficiency of operations. 2. Reliability of financial reporting...
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...Scenario: Apex Printing, Inc. Apex Printing, Inc. is a private, domestic United States printer of periodicals, newspaper inserts, and advertising materials that accompany distributions of Sunday and weekday circulations of large metropolitan newspapers. The company, headed by CEO John Matthews, generates $450 million in revenues from three product lines (periodicals, inserts, and advertising) and has long-term contracts with several large U.S. retailers to produce weekly sales flyer inserts as well as metropolitan newspapers to produce Sunday magazine inserts and coupons. Its printing presses are characterized by offset print technology and capable of high-capacity output; in addition, the company recently migrated to water-soluble inks, which reduce manufacturing emissions considerably. The company’s executive team, employees, and above all, its Vice President (VP) of Production, Luke Stewart, are committed to environmentally sustainable manufacturing practices. Presently, the only substrate Apex uses is paper, specifically newsprint of various weights. Trim and waste are recycled in accordance with the company’s sustainability commitment. Manufacturing divisions are geographically aligned with customers’ locations to minimize logistics cost and response time to customer requirements; however, a centralized corporate entity administers functions such as human resources, information technology, and financial reporting. The VP of Sales and Administration, James Simeon, oversees...
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...Earnings Management Eli Mudrick Professor David Heier, CPA, MBA 11 June 2014 Earning Management This paper looks at the speech entitles “The ‘Numbers Game’” that SEC chairman Arthur Levitt delivered at the NYU Center for Law and Business regarding earnings management in 1998. While companies use many techniques and illusions to improve their numbers, this paper will only look at three: “Cookie-Jar” Reserves, “Big Bath” Charges, and Revenue Recognition. After discussing and using real world examples of these techniques, this paper will examine ethical questions related to the selection of audit committee members such as qualifications and independence. Cookie Jar Reserves Cookie Jar reserves refers to the practice of intentionally recording unreasonable estimates or one time transactions during good economic times in order to smooth out activity in bad economic times (Levitt). These transactions directly violate, not only simple human honesty, but also Conservatism, one of the main accounting principles. A real world example of the use of cookie jar reserves is the computer company Dell. In 2010, they paid a penalty to the SEC of $100 million dollars due to their using of cookie jar reserves. To establish their reserves, Dell did not disclose payments from Intel which were paid in order to maintain exclusive use of their microprocessors. When times were tough, Dell drew on these reserves. At one point, these reserves made up more than 70% of their quarterly earnings...
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...Tutorial 8 Question 9 How do you ensure the independence and effectiveness of the audit committee? * Have a position description and assess the performance of the audit committee * The position description for the audit committee should include best practices and regulatory requirement. * Considering the position description and the competencies and skills of the audit committee, provides feedback and take timely, corrective action required to the audit committee. * Audit committee members understand the rationale for management’s choices and the implications for financial manipulation * Audit members must understand how such transactions require the judgement and choices management make, including the selection and application of critical accounting policies, judgements and estimates, and the potential for manipulation of financial statements. * Ensure that audit committee independence is real as well as perceived * Audit committee must have independence of thought, judgement and action to voice their own opinions and not allow their trust in relation with management. * Have agenda ‘mapping’ and effective committee documentation and reporting from the audit committee to the board * There should exist sufficient time between the audit committee meeting and board meetings to allow any issue arising to be carried out prior to reporting to the board. (Eg, reviewing minutes, developing matters for information, recommendation...
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...Accounting | | | | 9/17/2014 | | The demand for good judgment is high but the reality is most people receive very little formal training in what good judgment looks like or what may threaten good judgment. KPMG developed a training tool to enhance the professional judgment for all levels of audit professionals. The need for this training is a result of the economy, the use of fair value measurements, and changes in regulations. We all have a responsibility to improve our own judgment, both at work and in our personal lives. To make a good decision, you need to use judgment, since there will most likely be a number of solutions. The Professional Judgment Framework developed by KPMG serves as a guide the judgment process. “The Framework includes a number of components, such as mindset, consultation, knowledge and professional standards, influences and biases, reflection, and coaching” (Chevalier, 2013). The authors of the paper have provided five steps in their professional judgment process. The first step is to clarify issues and objectives by defining the problem and identifying the fundamental objectives. “In evaluating the data collected, the audit staff must eliminate the less important issues and focus on the problems” [ (Hefferon, 1980) ]. Identifying and clarifying the right problem can be difficult. Ask the right questions by asking what is important and also asking why something is important. Too often we offer solutions without taking the time...
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...CHARTER OF THE FINANCE AND AUDIT COMMITTEE OF THE ORACLE CORPORATION BOARD OF DIRECTORS (As last amended by the Board of Directors on July 13, 2008) I. PURPOSE The primary function of the Finance and Audit Committee (the “Committee”) is to provide advice with respect to the Corporation’s financial matters, to oversee the accounting and financial reporting processes of the Corporation and the audits of the financial statements of the Corporation, to assist the Board of Directors in fulfilling its oversight responsibilities regarding finance, accounting, tax and legal compliance, and to evaluate merger and acquisition transactions and investment transactions proposed by the Corporation’s management. Consistent with this function, the Committee endeavors to encourage continuous improvement of, and foster adherence to, the Corporation’s policies, procedures and practices at all levels. The Committee’s primary duties and responsibilities are to: • • • • • • Serve as an independent and objective party to monitor the Corporation’s financial reporting process and internal control system. Review and appraise the audit efforts of the Corporation’s independent accountants and internal audit department. Evaluate the Corporation's quarterly financial performance as well as its compliance with laws and regulations. Oversee management's establishment and enforcement of financial policies and business practices that are designed to manage business and financial risk and to comply with significant...
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...Part: A Internal Audit: An assisting tool for external audit (5) (a) Theoretical background (b) Practical knowledge Part: B Disclosure of Audit Committee (5) (a) Theoretical background (b) Practical background Part: A (Theoretical Background) Internal Audit: An assisting tool for external auditor Internal auditors are employees of a company hired to assess and evaluate its system of internal control. To maintain independence, they present their reports directly to the board of directors or to top management. They provide functional operation to the concern. Internal auditors are employed by the organization they audit; their familiarity with the organization provides more insight into potential fraud and wrongdoing. External auditors are independent staff assigned by an audit firm to assess and evaluate financial statements of their clients or to perform other agreed-upon evaluations. Most external auditors are employed by accounting firms for annual engagements. They are called upon from outside the company. However, two sorts of auditor’s goal are not the same. The internal auditor is assigned by the management of the bank. They are assigned to find out whether everything is going properly or not. If any problem exists they have to bring it to the notice of the top management and then the concerned authorities take necessary action. But in case of external audit the auditors come...
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...Board of Directors almost every year from 2004 to 2009. In these 5 five years, the company raised over $200 million by six funding events (see exhibit 1). For each time the company raised capital, Tesla Motors chose a lead investor to be the member of Board of Directors. For example, in 2004, Elon Musk invested $6.3 million out of $7.5 million during Tesla’s first funding event Series A. Therefore, he obtained chairmanship of the board in that year. Then through the following funding events Series B, C and D and E, several investors have become the members of board as well. In 2009, in order to meet the requirements of IPO, Tesla added its first fully independent director Brad Buss. The company also established formal board committees for audit, compensation and nominating and governance as preparation for the impending IPO. In June 2010, Tesla Motors finally went public in an initial public offering at 226.1 million. The IPO was priced at $17 per share. And by now, Tesla’s stock price is $198 per share, which is 11 times of its original stock price. Moreover, Tesla Motors increased its enterprise value to 24.87 billion four years after it went public. Roles and recent challenges of the Board Tesla’s Board of Directors has very defined roles and responsibilities within the company and is able to exercise a...
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...AMERICAN EXPRESS COMPANY AUDIT AND RISK COMMITTEE CHARTER (as amended and restated as of January 23, 2011) Purpose The Committee is responsible for assisting the Board of Directors in its oversight responsibilities relating to (i) the integrity of the Company’s financial statements and financial reporting process; (ii) internal and external auditing, including the qualifications and independence of the independent registered public accounting firm and the performance of the Company’s internal audit services function; (iii) the integrity of the Company’s systems of internal accounting and financial controls; (iv) legal and regulatory compliance; (v) the assessment and management of the Company’s risk and capital; and (vi) the performance of the other Committee functions set forth in this charter. In discharging its responsibilities, the Committee is not itself responsible for planning or conducting audits or for any determination that the Company’s financial statements and disclosures are complete and accurate or are in accordance with generally accepted accounting principles and applicable rules and regulations. This is the responsibility of the Company’s management and the independent registered public accounting firm. In addition, the Company’s management is responsible for managing its risk function and for reporting on its processes and assessments with respect to the Company’s management of risk. Organization and Certain Responsibilities The Committee shall be comprised of...
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...Clause 49 of Listing Agreement The company agrees to comply with the following provisions: I. Board of Directors (A) Composition of Board i. The Board of directors of the company shall have an optimum combination of executive and non-executive directors with not less than fifty percent of the board of directors comprising of non-executive directors. ii. Where the Chairman of the Board is a non-executive director, at least one-third of the Board should comprise of independent directors and in case he is an executive director, at least half of the Board should comprise of independent directors. Provided that where the non-executive Chairman is a promoter of the company or is related to any promoter or person occupying management positions at the Board level or at one level below the Board, at least one-half of the Board of the company shall consist of independent directors. Explanation-For the purpose of the expression “related to any promoter” referred to in sub-clause (ii): a. If the promoter is a listed entity, its directors other than the independent directors, its employees or its nominees shall be deemed to be related to it; b. If the promoter is an unlisted entity, its directors, its employees or its nominees shall be deemed to be related to it.” iii. For the purpose of the sub-clause (ii), the expression ‘independent director’ shall mean a non-executive director of the company who: a. apart from receiving...
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...& Rama, D.V. (2006). Audit Firm Size and Going-Concern Reporting Accuracy. Accounting Horizons, 20(1), 1-17. Additional articles: Carcello, J.V. & Neal, T.L. (2000). Audit Committee Composition and Auditor Reporting. The Accounting Review, 75(4), 453-467. Geiger, M.A. & Raghunandan, K. (2002). Auditor Tenure and Audit Reporting Failures. Auditing: A Journal of Practice & Theory, 21(1), 67-78. Name: Karlijn Dirks Student number: 10674837 Tutorial Group: 2 fulltime Lecturer: drs. Francesco Campisi RA Date: 10 February 2016 Paper: 8 * Summary The papers that will be discussed in this essay all revolve around auditor reporting. Especially about issuing going-concern modified reports in relationship with different variables. The variable discussed in the first paper is audit firm size. For the second paper auditor tenure is the variable and for the final paper audit committee composition is the variable that will be looked at. The rest of this section will provide summaries of the three articles. Paper 1. Geiger & Rama (2006) investigate whether audit firm size affects the accuracy of going-concern reporting. They look at two different type of errors, type I errors occur when a going-concern modified report is issued but the client does not go bankrupt. A type II error occurs when a client does go bankrupt but prior audit reports are without going-concern modifications. The authors identify three different audit firm sizes: big 4, national...
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...Internal audit Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.[1] Internal auditing is a catalyst for improving an organization's governance, risk management and management controls by providing insight and recommendations based on analyses and assessments of data and business processes. With commitment to integrity and accountability, internal auditing provides value to governing bodies and senior management as an objective source of independent advice. Professionals called internal auditors are employed by organizations to perform the internal auditing activity. The scope of internal auditing within an organization is broad and may involve topics such as an organization's governance, risk management and management controls over: efficiency/effectiveness of operations (including safeguarding of assets), the reliability of financial and management reporting, and compliance with laws and regulations. Internal auditing may also involve conducting proactive fraud audits to identify potentially fraudulent acts; participating in fraud investigations under the direction of fraud investigation professionals, and conducting post investigation fraud audits to identify control breakdowns and establish...
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