Question 1: The Commonality in Practice of Aggressive Accounting and Financial Statement Fraud:
Situations involving aggressive accounting and financial statement fraud are common practices in the financial sector due to the fact that the preparation of financial statements involves the use of assumptions and absolute exercise of judgment. It therefore means that the results obtained from the financial statements, generates different results even in cases where the same person prepares them (Business Today, 2016, 1). The same also applies when a different party chooses to prepare the same financial statement over the same period of time as the former.
In situations where aggressive accounting is perceived as less fraudulent, it entirely sets stage for manipulation of earnings through motivation as well as when certain unaudited accounts requires rationalization (Dontoh, 2013, 301). In both scenarios, there are cases of scheming that involves manipulation of financial statements covering more than one area of a given financial statement and therefore such terms are common in majority of financial assertions that managers make.
Question 2: Violation of Financial Statements:
Based on the financial assertions in this case, there exists assertion claim that financial statements ought to reflect all transactions that a company carried out. It is only through disclosure of these transactions that the bank can proceed with funding their line of credit.
Question 3: Guideline to the Summarized Core Principle in FASB (Financial Accounting Standards Board):
Step 1: Identifying the contract with the client:
A contract is a key binding requirement between the client and the company whose identification helps in resolving future accounting problems that would involve a client and the company.
Step 2: Identifying performance obligation in the contract: Once a contract is established, the necessary obligation of the two parties within the same contract is clearly defined (Business Today, 2016, 1). It is from this point that it is determined whether to separate accounting or otherwise.
Step 3: Determination of the price of transaction:
The terms of contract determine whether the price of transaction can facilitate exchange of goods and services.
Step 4: Allocation of transaction price in the contract to performance obligation:
Through allocation of transaction price, any performance obligation that requires separate accounts is determined based on the standalone selling price and can be estimated in the absence of separate observable sales.
Step 5: Recognition of revenue even as an entity satisfies a given performance obligation through the ability to direct the use the revenue and equally receive any relevant benefits from entities in place.
How core principle was underachieved:
The core principle was never achieved as the senior executives had no accounting related backgrounds yet made sensitive deliberations involving accounting knowledge (Business Today, 2016, 1). In a contrary argument, the customers in this case have not placed any orders with the company for the transactions claimed by the top executives. Subsequently, that nullifies any imaginable recorded sales
Question 4: Audit Procedures used by Auditors in Fraud Detection:
It usually occurs at the beginning of an audit session and seeks to provide ample time for the team to determine how the company might have engaged in any form of fraud (Dontoh, 2013, 297). In such sessions, the specialists draw comparison with other similar organizations as they identify other possible risk factors associated with the client. Journal Entry Test:
First, the test appreciates the fact that most frauds from financial statements are committed through adjustments of a companys financial information. Through the test, the auditors engage the company in journal entries in order to detect any trace of manipulation of records. They actualize this through selecting a large entry that shows deliberation through the top management and has an accounting period that is considered later (Cohen, 2013, 1). It is only after the selection that the auditor proceeds to make inquiries about validation of each of the entries made.
Accounting estimates are usually subject to multiple command chains hence, most manipulations of estimates are executed through the efforts of the management. When looking out for any fraudulent transaction, the auditors make a lookback process that discover the procedure used for completing account estimates and the deviation from the previous year (Business Today, 2016, 1). In other instances, the auditor is on the lookout for the direction that the estimates take in general. For instance, if incomes are set to decrease in the previous year and are currently on the increase, the auditors raise their concern from that point.
Question 5: Conditions for Fraud to Occur:
The incentives or pressure to engage in fraud came from the fact that the company faced severe cash shortage while the bank had halted any funding towards the line of credit.
The opportunity to perpetrate fraud exists since financial statements need to reflect upon transactions and therefore the urgency of including sales transactions to customers which results into submission of statements with overstated sales (Dontoh, 2013, 304). The accounts payable clerk was also compromised as the CEO directed him to make entries related to new sales.
On the attitude and ethical conditions rationalizing the action, there is the need to stabilize small start-up enterprises that have constantly been operating at net losses for a long time. It therefore justifies the need for any action that would stabilize the company from poor results where the bank ceased from clearing checks drawn from the companys account.
Question 6: AICPAs Newly Structured Code:
There are three parts through which the reformatted ethics code shows organization:
Part 1: Applying to all AICPA members currently in both business and public practice
Part 2: Members in business
Part 3: All other members including the current working group and retired individuals.
Guidance on the importance of integrity would be found in the exposure draft having the revised AIPCA Code of Professional Conduct (AIPCA, 2016, 1).
a) Recommendation by Dr. Mitchell:
As Dr. Mitchell, the recommendation would point to the use of auditors to validate the callers fears before making any substantial move.
b) Risks of Continuing with Work in the Company:
The risks involved in working with the company include guilt where he compromises facts about the company.
c) Risks of Immediate Resignation:
On immediate resigning, it would render him jobless and the impacts are usually negative. The company would also regard him as a failure, having run away from real issues affecting the company.
Question 8: The Callers Responsibilities:
The caller has a responsibility of reporting financial statement fraud only with sufficient evidence. As the head control in the company, all accounting tasks are left for him to consider and make accurate reports over the same. The banks which are the financers are entitled to any information affecting their dealings with the company (Cohen, 2013, 1). While it may fail to work as anticipated,, where the bank may decide to cut off their funding, and the caller loses his job, calling the banks as an effort to enhance accuracy of financial statements is still viewed as subjective in nature.
Other parties to be notified of the Fraud:
Apart from the bank, other individuals worth notifying are other employees in the company, Directorate of Criminal Investigations and the companys Board of Directors.
b) Concerns for External Auditors:
The concerns about notifying external auditors would include: the level of the companys internal controls, knowledge of the right accounting procedures and independence of their team.
Pressures Used by Executives in Acknowledging the Situation:
The stoppage of the bank in clearing checks drawn off the account of the company
Failure of the bank in funding line of credit
The company operating at a net loss
b) Arguments used in resisting the Pressures:
The arguments in place to resist such pressures show that the caller is the top level accountant at the company yet the senior executives have no accounting related backgrounds (Business Today, 2016, 1). In another argument, the customers in this case have not placed any orders with the company for the transactions claimed by the top executives; it definitely nullifies any imaginable recorded sales.
c) Determination of Aggressive Accounting or Financial Statements Fraud:
A company can aggressively report yet still remain within the provisions or guidelines of GAAP in instances where accounts have a record of significant gains mostly on disposal of fixed assets. This scenario takes place mostly in cases of leases. Comparatively, fraudulent report of financial information involves legitimization of interest revenue through production of documents that show unaudited onward sales belonging to receivables (Cohen, 2013, 1). In most cases, such documents lack commercial sense and hence end up becoming pieces of evidence of fraudulent activities.
AICPA Ethics Codification Project - AICPA., (2016). Aicpa.org. Retrieved on 9th September2016, from: http://www.aicpa.org/interestareas/professionalethics/community/pages/aicpa-ethics-codification-project.aspx
Cohen, J. R., Krishnamoorthy, G., Peytcheva, M., & Wright, A. M. (2013). How does thestrength of the financial regulatory regime influence auditors' judgments to constrain aggressive reporting in a principles-based versus rules-based accounting environment?.
Accounting Horizons, 27(3), 579-601. Retrieved on 9th September, 2016 from: http://dx.doi.org/10.2308/acch-50519
Dontoh, A., Ronen, J., & Sarath, B. (2013). Financial statements insurance. Abacus, 49(3), 269307. Retrieved on 9th September, 2016 from: http://dx.doi.org/10.1111/abac.12012
Pfeffer, J., & Sutton, R. I. (2006). Hard facts, dangerous half-truths, and total nonsense: Profitingfrom evidence-based management. Harvard Business Press. Retrieved on 9th September,2016 from: https://books.google.co.ke/books?hl=en&lr=&id=u-0azU5bcL8C&oi=fnd&pg=PP4&dq=Accounting+For+Half-Truths&ots=5rCq0IWMtV&sig=OTJp99bRPj-dCDa4QLHjdyLjaYg&redir_esc=y#v=onepage&q=Accounting%20For%20Half-Truths&f=false
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