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"The PCAOB (which was created by Sarbanes-Oxley Act of 2002) is a nonprofit corporation established by Congress to oversee the audits of public companies in order to protect investors and the public interest by promoting informative, accurate, and independent audit reports. The PCAOB also oversees the audits of broker-dealers, including compliance reports filed pursuant to federal securities laws, to promote investor protection." (PCAOB, 2012)
"The Code of Professional Conduct of the American Institute of Certified Public Accountants consists of two sections-(1) the Principles and (2) the Rules. The Principles provide the framework for the Rules, which govern the performance of professional services by members. The Code of Professional Conduct was adopted by the membership to provide guidance and rules to all members in the performance of their professional responsibilities." (AICPA, 2012)
Accounting firms cannot successfully manipulate audit papers and records of clients engaged in fraudulent activity. Accounting Firms has two oversight committees watching over them. Penalties for violations are pretty severe. Accounting firms are very careful to follow the rules and guidelines of both committees. Anyone that certifies any statement that does not comply with the SOX act may be fined not more than $1,000,000 and/or imprisoned 10 years, or both. Anyone who willfully certifies any statement that does not comply with the SOX act will be fined no more than $5,000,000 and/or imprisoned 20 years, These penalties is enough to deter fraud.
ï‚· Analyze the fraud risk factors presented during the 2000 Nextcard audit and how each should have impacted the audit procedures.
The three examples of risk factors provided in Appendix to SAS No. 99, Fraud Risk Factors are (a) incentives/pressure, (b) opportunities, and (c) attitudes/rationalizations. Nextcard's incentives/pressure was in rapid growth by extending credit of more than $1 billion to customers without profits but rather large losses. NextCard surpassed the entities growth targets and maintained strong parameters in their other core business elements. The need to raise additional debt or equity capital when the Internet bubble burst and their stock prices spiraled downward continued to cost rather than bring in revenue. Jeremy Lent and his executives dominated the organization and created ineffective monitoring and concealed the extent of the entities financial problems. NextCard's executives understated credit losses and refused to provide sufficient allowances for expected bad debts. The third risk factor relates to attitudes/rationalizations by Lent and his executives to increase Nextcard's stock price rose from a selling price of $20 per share to more than $40 thus making them instant multimillionaires. The executives also continued to promise and predict that they would turn the corner to eventually report a profit. Instead of making a profit NextCard and the executives concealed the extent of the company's financial situation by understating the allowance for credit losses. The three factors should have affected the planning and execution of the engagement had the audit team understood the business they were auditing, their reporting methods and operations, having established preliminary objectives, researched possible problems or issues for this particular industry and become familiar with Comptroller policies and laws. If the audit team had researched previous audit records, contacted the Comptroller of the Currency (OCC), the integrity of Lent and his executives would have been in question. With research, preparation and knowledge of the business to be audited the audit plan would have required more detailed planning, sampling and research.
ï‚· In the Nextcard case, discuss how Ernst & Young's motivation to destroy the audit work papers reconciles with its obligation to provide assurances to financial investors.
Ernst & Young's (E&Y) employees thought that by destroying and re-stamping records could erase the fact that they miss the mark on the last audit. They knew they had made a mistake. Trauger, Flanagan, and Mullen knew that they had an obligation to investors and they knew that they failed to honor that obligation. Flanagan and/or Mullen could have stepped back from destroying the documents. Public auditors have an obligation to look out for the best interest of the public. Ernst & Young motivation to destroy the audit working papers does not reconcile with its obligation to provide assurances to financial investors, because failed to provide assurance when they did not do a proper audit of NextCard.
ï‚· Assume the role of Oliver Flanagan in the case. Identify the actions you would have taken when Robert Trauger asked you to help him alter the 2000 Nextcard audit work papers. In answering this question, discuss alternative courses of action available to you.
If I was Oliver Flanagan I would have told Trauger that there was no way that I could alter 2000 NextCard audit work papers. I would explain to Trauger that even though I respect him a lot that I would not be willing to break the law or go to jail by changing the paperwork. Even if I was offered a promotion there is just no way that I would be willing to risk all of my years of education and my family to change some audit paperwork.
One thing that could have prevented this would have to been to discuss the matter directly with Trauger. Flanagan apparently did not view this as a viable alternative because of the forceful nature of Trauger's personality. Trauger might not even know that changing this information would be a bad idea. Another option that Flanagan could do is go to the rest of partners and let them know that Trauger wants to change the audit.
There were a lot of people who were affected by Oliver Flanagan's decision to cooperate with Trauger in altering the NextCard work papers. The main person that is affected is Oliver himself. Oliver Flanagan gave up everything for nothing. Oliver wasted all of the time he went to school and most importantly lost respect of family and employees at the firm. He lost respect and trust of the public. After something like this the public loses a trust in all audit firms. Trauger was also affected by Oliver Flanagan's decision to cooperate.
ï‚· Search the Internet for a public accounting firm that recently destroyed audit evidence related to a client. Identify the public accounting firm and evaluate the punishment that the firm received for the Professional Code of Conduct violation. Evaluate the severity of the punishment to determine whether you agree or disagree with the severity.
Searching the internet I could only find Arthur Anderson that destroyed audit evidence relating to a client. After the punishment Arthur Anderson received and the establishment of the SOX act, no one dared to repeat the same mistake. Arthur Anderson received a five year probation and $500,000 fine which was the max penalty for the crime. (Fowler, T., Flood, M., 2002) Arthur Anderson knowingly destroyed evidence that hindered case against Enron. The problem was Arthur Anderson had a history of committing such offense. They were caught doing the same thing with Waste Management and Sunbeam previously. Anderson was punished before the punishment. They lost most of their clients when they were indicted. The punishment handed delivered from the judge was the nail in the coffin for the company. The company eventually dissolved. It had lost the trust of the public and they could not work to regain the trust while on probation. While on probation they could not audit a public trading company. I have to agree with the punishment because they was caught and convicted of doing the same thing at least three times. When were they going to learn? It seems as though they had no controls in place to prevent something like this was happening.
When consumers and companies decide to invest in a company they are putting all of our trust in the companies that they are buying the stock from and the audit firms that audit those companies. When the consumers lose that trust then it is hard to trust other companies. As you saw in this case even trustworthy audit firms sometimes make mistakes. Those mistakes cost investors and the audit firm money. It cost more money for changing the audit rather just accepting that the audit firm might have made a mistake. People do not lose trust with an audit firm because the audit firm made a mistake. People lose trust with an audit firm when the investor finds out that the audit firm tried to change the findings of the audit.