Case 7-1
1. Nortel was exhibiting several characteristics that would cause it to be identified as a high-risk audit by its auditors. The fraud triangle tells us that fraud occurs when you have opportunity, incentives/pressures, and rationalizations.
Nortel was particularly vulnerable to fraud due to the incentives and pressures that it was subject to. A combination of the business decision to invest in CDMA instead of GSM technology and the global slowdown put great pressures on management. In 2001 Nortel lost two-thirds of its workforce. There was a great deal of pressure to meet market numbers and estimates. After this downsizing, management would earn significant “bonuses for achieving profitability on a pro forma basis.” (Mintz, p.
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Bahsin argues that ethics should be the foundation for corporate governance. If the tone at the top communicates the expectations for ethical behavior throughout all levels of the company then fraud can be more easily avoided. If Raju, key corporate executives, and the directors of Satyam were following the ethical decision making model in their corporate governance, then the fraud probably would not have occurred.
Raju failed to identify all of the potential harms and benefits to the stakeholders of Satyam. His decisions regarding inflating operating profit started small but quickly magnified over time creating a great loss to stakeholders. The directors of Satyam also failed to identify the impacts to stakeholder’s interests. They were instead bowed to pressure from Raju and decided to “take a risk” without knowing what the outcome of their concerns would
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The attempt to buy out the Maytas companies should have sent up red flags for the directors and auditors because of the close family ties and the potential conflict of interest. Mintz argues that “these bonds created independence issues and questions about whether directors would be confrontational with top management when warranted.” This failure to apply ethical standards to corporate governance exposed Satyam and its directors to threats against their independence. The outside auditors also did nothing to address these known threats and their own deficiencies in performing the audit.
2. The difference in cultural values between the United States and India can explain the nature and scope of the fraud at Satyam. India has a much lower score for individualism on Hofstede’s cultural values scale. This cultural value of conformity would make it more likely that individuals would go along with what managers and others in power would want to
By deliberately falsification of their financial statements, by Martin Grass, Brown and Bergonzi. Among other things like:
However, circumstances changed “in cases in which an auditor fails to establish that applicable auditing standards were followed” (Zack 2011). Since WoolEx Mills’ auditors failed to properly identify the fraud risks that caused the material misstatements, they would be in breach of professional duty to shareholders. Litigation would mostly be pursued by WoolEx Mills’ shareholders, WoolEx Mills, third parties impacted by the auditors services, creditors, and other parties who rely on WoolEx Mills financial statements. Each plaintiff would have the right to sue the auditors for their negligence in performing the audit with due diligence. To prove a breach of contract, WoolEx Mills would need to provide the engagement letter as proof that the auditors did not peform the duties agreed upon. Additionally, WoolEx Mills’ auditors would be charged with either gross or ordinary negligence based on their deviation from proper auditing standards. Since the auditors failed to test the company’s internal controls, they would be found guilty of gross negligence. The auditors would be guilty of ordinary negligence if they forgot to complete a section of the vertical analysis of the Income Statement (Zack 2011) (Krishnan & Shah
Ulinski, Michael. "AN ANALYSIS OF SMALL COMPANY FRAUDS AND." American Society of Behavioral Society. Dept of Business, Pace University. 05 Feb. 2008.
The three main crooks Chairman Ken Lay, CEO Jeff Skilling, and CFO Andrew Fastow, are as off the rack as they come. Fastow was skimming from Enron by ripping off the con artists who showed him how to steal, by hiding Enron debt in dummy corporations, and getting rich off of it. Opportunity theory is ever present because since this scam was done once without penalty, it was done plenty of more times with ease. Skilling however, was the typical amoral nerd, with delusions of grandeur, who wanted to mess around with others because he was ridiculed as a kid, implementing an absurd rank and yank policy that led to employees grading each other, with the lowest graded people being fired. Structural humiliation played a direct role in shaping Skilling's thoughts and future actions. This did not mean the worst employees were fired, only the least popular, or those who were not afraid to tell the truth. Thus, the corrupt culture of Enron was born. At one point, in an inter...
The circumstance for the exposure to the fraud was Raju’s acquisition attempt. Both of the companies were owned by his two sons, with the companies valuing at US$1.3 billion and US$300 million. There was immediate resistance from investors towards this deal. Although Satyam broke off the deal, they couldn’t undue the damage.
"This is why the market keeps going down every day - investors don't know who to trust," said Brett Trueman, an accounting professor from the University of California-Berkeley's Haas School of Business. As these things come out, it just continues to build up"(CBS MarketWatch, Hancock). The memories of the Frauds at Enron and WorldCom still haunt many investors. There have been many accounting scandals in the United States history. The Enron and the WorldCom accounting fraud affected thousands of people and it caused many changes in the rules and regulation of the corporate world. There are many similarities and differences between the two scandals and many rules and regulations have been created in order to prevent frauds like these. Enron Scandal occurred before WorldCom and despite the devastating affect of the Enron Scandal, new rules and regulations were not created in time to prevent the WorldCom Scandal. Accounting scandals like these has changed the corporate world in many ways and people are more cautious about investing because their faith had been shaken by the devastating effects of these scandals. People lost everything they had and all their life-savings. When looking at the accounting scandals in depth, it is unbelievable how much to the extent the accounting standards were broken.
Cisco Systems, Inc. is a leader in networking for the internet, they develop hardware, software, and services to help create internet solutions that make internet networks possible. Cisco was founded in 1984 by a small group of computer scientists from Stanford University. They are a worldwide company with headquarters in: San Jose, California, Amsterdam Netherlands, and Singapore. Currently, they employ approximately 74,000 people throughout the world. Cisco operates on a set of values which include: change the world, intensely focus on customers, make innovation happen, win together, respect and care for each other, and always do the right thing. They show these values through global involvement in education, community, and philanthropic efforts. (Cisco, 2004)
Within Adelphia, there were assessments in regards to the company being over-leveraged. While knowing this, the Rigas family continued to work together and cover their tracks “to conceal the borrowings and inflate earnings” (Markon and Frank); rather than combating such issue of leveraging resulting in the fall of stock prices from the recession- in the late 1990s and early 2000s. Additionally, it seemed that employees and management of the company were ignorant to the fact of Adelphia being susceptible to such fraud. While many employees continued to add on to the fraud that the Rigas were committing, management did nothing to be able to stop such activity. They did not consider such activity or have controls set in place to detect such
The oversight responsibilities of the board, the CAE lacking of expertise or broad understanding of financial controls and responsibilities, and the understaffed internal audit functions lacking of independence and direct access to the board of directors contributed to the absence of internal controls. To begin with, the board should be retrained to achieve financial literacy to review financial reporting. Other than attending formal meetings, the board of directors should be more involved with the management. For the Audit Committee, the two members who were recruited as acquaintances to Brennahan need be replaced with experts who are more sufficiently knowledgeable about accounting rules beyond merely “financially literate”. Furthermore, the internal audit functions need to expand with different expertise commensurate with the expanded activities of the organization, testing financial reporting rather than internal controls from an operational perspective. The CAE should be more independent and proactive to execute audit plans, instead of following orders from the CFO, and initiate a direct and efficient communication between internal audit and audit
Dowd (2016) runs above and beyond with the clarification to state accounting fraud incorporates the change of accounting records in regards to sales, incomes, costs and different components for a profit motive, for example, boosting organization stock prices, getting ideal financing or maintaining a strategic distance from obligation commitments. Dowd is of the feeling that covetousness, absence of straightforwardness, poor administration data and poor accounting interior controls are a couple of explanations behind accounting fraud. (Dowd,
They were committing fraud by creative accounting, acting illegally when using insider trading and shredding their documents relevant to the investigation. Next, consider the stakeholders. Anyone who owns stock in the company would suffer, along with every employee. Under the values bullet we can assume that they have none. Greed and power got the better of every one of them.
Recently, three individuals were awarded with $170 million for helping investigators gather a record $16.65 billion penalty against Bank of America. Based on their action
Auditing has been the backbone of the complicated business world and has always changed with the times. As the business world grew strong, auditors’ roles grew more important. The auditors’ job became more difficult as the accounting principles changed. It also became easier with the use of internal controls, which introduced the need for testing, not a complete audit. Scandals and stock market crashes made auditors aware of deficiencies in auditing, and the auditing community was always quick to fix those deficiencies. Computers played an important role of changing the way audits were performed and also brought along some difficulties.
For those who do not know what fraud is, it’s basically deception by showing people what they want to see. In business it’s the same concept, but in a larger scale by means of manipulating figures that will be shown to shareholders and investors. Before Sarbanes Oxley Act there was “Enron Corporation”, a fortune 500 company that managed to falsify their statements claiming revenues over 101 billion in a span of 15 years. In order for us to understand how this corporation managed to deceive the public for so long, the documentary or movie “Smartest Guys in the Room” goes into depth by providing viewers with first-hand information from people that worked close with or for “Enron”.
Case Study of Dell Computer Corporation Introduction Michael Dell founded Dell Computer Corporation in 1984 with a simple vision and business concept – that personal computers can be built to order and sold directly to consumers. Michael believed his approach had two advantages: (i) by passing distributors and retail dealers eliminated the markups of resellers, and (ii) building to order greatly reduced the costs and risks associated with carrying large stocks of parts, components and finished goods. Its build-to-order and sell-direct approach proved appealing to growing numbers of customers in the mid 1990s as global PC sales rose to record levels. In 1998, it was already the 3rd manufacturer in the United States with a 12% share of PC market and a nearly 6% share worldwide. The company’s fastest growing market for the past several quarters was Europe.