Essay Sample on Navistar International Corporation

The business world is going through serious change and every organization is working their best to manage the competitive edge. In order to make great products and build great financial freedom a business should be accountable for every finance in the organization. The Navistar case involves an International Corporation that manufactures and sells trucks, school buses, engines, and service parts for engines. Additionally, the company has four segments through which its activities are operated: parts, truck, financial services, and global operations. The company established an independent accounting and auditing relationship that was retained for a long period of time (Borucki & Barnett, (1990). Over that period, Navistar believed that Deloitte would provide professional and quality auditing and accounting services. However, Navistar dismissed the audit firm following some fraudulent accounting actions that were discovered.

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Various accounting frauds occurred at Navistar

One fraud is that of maintaining an old audit firm that Cyrus McCormick II retained from 1908. This implies that the company was relying on old and outdated accounting techniques despite modern changing and advanced accounting practices and techniques. Another fraud includes the fact that Navistar's management had been duped to believe that Deloitte offered professional quality counting and auditing services (Borucki & Barnett, (1990). Lack of proper and accurate records as the Deloitte auditors didn't keep an accurate record of Navistar's accounts a fact that delayed it from filing deadline for its annual 10-k with the SEC. According to Borucki & Barnettn1990, accurate, proper and up-to-date records are vital when it comes to the financial operations of any given business organization.

Why the auditors of Navistar were unable to prevent fraudulent activities

The fact that the company believed in an independent audit firm prevented it from trying out other modern and professional auditors. According to GAAP and the material provided in the text, it is clear that the management of Navistar did not engage in a coordinated scheme for misrepresenting the financial statements of the company. As a result, the company had a deficient system of internal controls (Borucki & Barnett, (1990). Along with this line, the lack of a coordinated scheme meant that senior management could not manipulate the reported results of the company. Additionally, the deficient internal controls system reflected a kind of misconduct.

From an auditing standpoint, the audit procedures that should have conducted so as to detect the fraud in accounting by the management of Navistar include the fact the Deloitte practiced improper accounting practices, the first step should be adopting the modern and professional accounting practices so as to be able to detect accounting fraud once it happens.

One way of approaching this analysis is by identifying the fraud in accounting actions that occurred at Navistar and discussing the auditing procedures that could have been followed in detecting the fraud. Therefore, one fraudulent accounting action that happened is that of improperly accounting for the vendor rebates which according to the auditors was dictated by the volume of purchases the company made in a given period of time (Borucki & Barnett, (1990). Therefore, instead of strictly recording when they were earned, the Navistar's accountants started by recording the foreseen rebates that should have been gotten from the merchants of the organization depends on the volume of purchases expected to be made in future through them.

According to accounting principles, the audit process should detect the fraud by only recognizing rebates if only they were actually earned. In the case of Navistar, it is important to note that the audit risk that the auditor expresses an appropriate audit opinion when financial statements are misstated materially. As a result, Navistar should have recorded a full rebate as income in the then current period if only there were no existing contingencies that existed on its right to receive the rebate.

Other fraudulent actions include improper deferring of 'start-up' costs that related to a long-term contract negotiation with one of the major customers. Moreover, there was a misstatement of the reserve warranty related expenses on its product line of automotive engines. In order to solve some of the challenges, it is important to understand that the detection risk involved the risk that the procedures conducted by the auditor so as to create a reduction to the audit risk to an acceptably low level will not end up detecting a misstatement which exist and in most cases it could be material.

Conclusively, it very important for companies to adopt modern management techniques for success to be achieved, this makes the organization manage their financial performance and take advantage of some of the opportunities in achieving the organizational goals. Moreover, companies should adopt proper accounting practices and principles. Lack of proper and accurate records as the Deloitte auditors didn't keep an accurate record of the Navistar's accounts a fact that delayed it from filing deadline for its annual 10-k with the SEC. Based on auditing, the audit procedures that should have conducted so as to detect the fraud in accounting by the management of Navistar include the fact the Deloitte practiced improper accounting practices, the first step should be adopting the modern and professional accounting practices so as to be able to detect accounting fraud once it happens.

References

Borucki, C., & Barnett, C. K. (1990). Restructuring for self-renewal: Navistar international corporation. Academy of Management Perspectives, 4(1), 36-49.