Houston Case Study about paid bounce (Ethics and Fraud)
Question 1
Determine if fraud should be suspected and conclude on the type of fraud as well as determine whether fraud risk factors are present?
Paragraph 02 of AS 1001, Responsibilities and Functions of Independent Auditor gives auditors responsibility to organize and perform an audit on a firm to obtain reasonable assurance on the financial statements of the firm to determine where the materials are free of material misstatement caused by fraud or error (Lawson, Muriel, & Sanders, 2017). Therefore, when the employees or shareholders of a firm such as the one presented in the above case study becomes suspicious of the activities of the top managers, or any other firm’s officials, it is highly important to allow for the firm’s auditing. Auditing reporting and transparency about the financial position of the firm is highly required during these turbulent times. In most cases, the auditors are interested in the financial statements of the firm to determine the company’s going concerned.
Regular analysis of the financial statements is required to determine the risk exposures of the firm. In FASB’s standards, accountants can use creative accounting techniques to report what they think is favorable to the firm. The management of Houston needs to assess whether there is a substantial doubt the ability of the entity to continue as going concern of the firm in the near future is the main reason for affirming analysis of audit reports. Auditors should be given maximum time to conduct their audit report of the firm to determine whether the firm’s going concerned is appropriate and, if not, advise the firm on what to do to avoid the worst scenario, such as the firm experiencing financial distress in the future.
Fraud Risk Factors
In the Houston case study, fraud risk factors are present. The fraud risk factors include a large amount of cash and other valuable inventory items being left in the hand of a few individuals, and there is no adequate security put in place of these assets. In the firm, there is also heavy dependence on a few individuals at the top of management. These individuals have too much power but few checks and balances. Therefore, the threat to fraud and misuse of the firm’s assets is happening in the organization under the watch of top managers who seems to be too powerful to be audited.
QUESTION 2
Determine possible courses of action when senior management fraud is suspected and the
Steps to be taken to further investigate?
The top management has the responsibility of ensuring the organization progresses from one step to another by taking control of all the activities that take place in the firm. In case of investigation of suspected fraud involving senior employees of the firm, the first step is to allow the suspected individuals to step aside to avoid interference with auditor’s work. The auditors require maximum time and the kind of cooperation to carry out the investigation and examine all records of financial statements and the internal controls of the firm (Hajiha, Oradi, & SALEH, 2017). From a fraud auditing perspective, senior managers can use their influence to manipulate financial records. Therefore, the first step would be to step aside and allow for the auditing process to continue but cooperate with the officials where necessary. The first step would be to convene a meeting and express the desire to allow auditing to take place in the firm, ask for the senior employee to step aside and conduct the possible factors that led to insider attack, conduct root cause analysis and some of the failures of the office and develop an entry plan in case the senior employee is found innocent of committing any offense.
Question 3
In the organization, since there are high levels of senior management fraud, the need for designing a controlled environment that majors on prevention and detection of senior management fraud are effective. For the internal fraud controls, they are not the fire and forget type of fraud. Hence the need for coming up with a smart collaboration and an ongoing improvement that will assist in keeping senior management fraud on the check (Hajiha, Oradi, & SALEH, 2017). Vanderville Plastics Company needs to have a critical effective fraud prevention plan as well as ensuring that they have strong internal controls. The environment of controlling fraud will be effective depending on VPC’s attitude towards fraud as well as the internal controls and ethical organizational culture.
The first essential part is on audit interaction. For the VPC environment to be effective in managing and preventing senior management fraud, there will be the strengthening of internal controls, which entails shifting of attitudes that seniors of the organization have towards auditors. In VPC, the management might view auditors as that police department that is concerned about the internal affairs of the company (Hess & Cottrell 2016). Their main focus being ferreting the wrongdoings happening in the company. However, for the company to have a successful design for then, the management should start viewing auditors as critical partners and those considered as allies of fighting against fraud. The company must ensure that then it is reinforcing that role as an auditor’s role of ensuring that they are at the forefront of the corporate policies and procedures, which makes auditors have a valuable source of getting corporate information. Hence, as a company, VPC must ensure that it has a robust internal control that views the process as a whole and gets a team approaches valuable.
It will help in ensuring the process is effectively managed and that all departments function together interactively. It will help in the creation of issue awareness and strengthening of communication leading to a reduction in the opportunities for fraud and ensuring that they are more comprehensive internal control processes. Further, the company should eliminate all the individually owned internal controls process since one can quickly get the temptation of engaging in fraud activities.
Communication
Interaction with the audit will involve communication, which is one of the ways of strengthening internal controls. All the senior management and employees should be aware of what events are happening within the company (Hess & Cottrell 2016). VPC should establish a communication protocol which has to be developed as well as agreed upon in the industry. Further, there must be a critical incident of event distribution and procedures which are put in place for ensuring that every senior management is aware of any fraud event and get an understanding of what their roles are in addressing the issue.
Delegation of duties
One area that will help Vanderville Plastics Company in strengthening the internal control of senior management fraud, the adequate delegation of duties will entail custody and control authorization of sources and documents. This will help in ensuring that there is precise information on what is right and not right in the recording. In that case, it becomes easy to identify any fraud happening in the senior management department (Khelil, Hussainey, & Noubbigh, 2016). For the establishment of fraud prevention practices, the three should be a financial duty which helps in the segregation of duties to different employees (Hess, & Cottrell 2016). Hence, even though the company does nor not enough experience of internal and external fraud event control, it can work to incorporate an environment that helps in fighting senior management fraud.
Question 4
Determine fraud vs. non-fraud (including the use of accruals /estimates) and Basic internal controls
There are several keys to detect fraud and prevent fraud in the organization. Committee of Sponsoring Organization suggests various strategies for preventing fraud in the firm. Internal controls are required to be effective in targeting any kind of fraud in the firm. According to, there are accounting guidelines for detecting fraud. Therefore, firms need to use a prudential principle when recording financial statements not to overestimate or underestimate expenses. Accruals should be recorded at face value and not the amount likely to be recovered because if done in such a way, accountants may end up misleading recording figures in their book of accounts. Internal controls must be effective to ensure all financial transactions are recorded according to IAS and IFRS. Adult interaction is also required to strengthen internal controls.
Question 5
Employee fraud is a significant problem in modern society. In order to improve organizations’ control environment and manage both fraud and risks, there should be effective controls put in place to ensure all departments function as effectively. One way of doing this is to ensure the responsibilities of each department are clearly stated. They should be clearly boundary between different departments and each employee understand their role because it is only through this process that each department would be held accountable for all their department duties (Muel Kaptein en Johan Wempe, 2011). There is also a need to check, and balance of all activities that take in the organization with the aim of ensuring the resources are properly managed.
There is also a need to restrict access to financial systems and ensure only authorized are allowed to access the books of accounts of the firm. If possible, accounting duties should be segregated, and they have external auditors to look at the books of accounts of the firm on a regular basis to ensure all transactions are recorded with their dates and no changes made without the approval of the majority decisions. Major decisions to make in the firm such as issuing of bonuses should be made in agreement with all stakeholders and not a particular group of individuals such as the senior employees, as presented in the Houston case study.
In dealing with risk management and fraud in the organization, corporate governance will play a significant role. Corporate governance comprises the relationship between shareholders, management, and stakeholders. Through corporate governance, the auditors and the directors will manage their responsibility towards the stakeholders and shareholders of the company. A strong system of control will be significant in preventing fraud in the company. A control system of the company is made of procedures and policies that support the efficient and effective operations of VPC (Muel Kaptein en Johan Wempe, 2011). Internal control deals with authorization accounts reconciliations and approval process the procedures include divisions of tasks and responsibilities and checks balances of the organization to mitigate risks (“Operational Risk: Fraud Risk Management Principles | OCC,” 2020). The operations and culture of the organization should be embedded with the internal control systems of the organization. It is also important to periodically assess fraud risks in the company. The management can use the auditor’s report to assess and identify the fraud risks associated with the company. Fraud risks are identified from all spheres of the organizations and in all processes of the company. Risk can be assessed according to the likelihood and impact of the risks. The assessment done by the auditors of the firm should consider other factors such as the reputation of the organization. Effective assessment of fraud highlights new risks on the firm and strengthens the fraud prevention systems. The firm should ensure that they follow the accounting principles when creating their financial statements. Accountants of the organization should ensure that they follow the ethical requirements of accountants to avoid unethical practices.
Question 6
Genuine transactions is an important issue for management. Creative accounting practices have resulted in the ethical challenges of the organization. With the aim to resolve this ethical dilemma, an ethical framework provides a remedy to prevent such an issue from occurring. VPC should ensure they carry out a regular revaluation of items in their financial statements. Regular revaluations ensure that the losses and gains on the changes in values are identified as soon as they occur (Amat, Blake & Dowds, 2020). VPC should ensure that they carry out their revaluation at the end of each year. The accountants and managers of VPC should ensure that they divide their duties on the checklist of the internal control. The company should establish an accounting committee that has skilled personals with very strong backgrounds in accounting. The VPC internal auditor should work with other external auditors to find out where fraud accrued and the reasons that fraud occurred in the company. Another measure that VPC can take is adhering strictly to the ethical standards that it has put in place. Adhering to the ethical standards will not only provide a short term solution, but it will help the company in the long-run. The company should follow ethics in their financial dealings.
Question 7
The accounting manipulations that have occurred at VPC include process values and unfairness. VPC has regulations that are easily floated, therefore providing a platform that allowed manipulation to occur in the company. Unfairness in another ethical issue that happened at VPC. Ken, one of the shareholders at VPC, was not notified about the increase in bonuses.
Question 8
The issue that occurred at VPC is a macro-manipulation. Macro-manipulation occurs were preparers of the financial statements are aware of the alter proposal on the accounting regulations in a way that they are aware of how disadvantageous it could be. The payroll manager, the then CFO, and investors at VPC engaged in a macro-manipulation practice.
References
Operational Risk: Fraud Risk Management Principles | OCC. (2020). Retrieved 4 May 2020, from https://www.occ.gov/news-issuances/bulletins/2019/bulletin-2019-37.html
Gowthorpe, C., & Amat, O. (2005). Creative accounting: some ethical issues of macro-and micro-manipulation. Journal of Business Ethics, 57(1), 55-64.
Houston We Have A Problem: They Paid Themselves Bonuses
Hess, M. F., & Cottrell Jr, J. H. (2016). Fraud risk management: A small business perspective. Business Horizons, 59(1), 13-18.
Jonck, P., van der Walt, F., & Sobayeni, C. N. (2020). Demographic Predictors of Work Ethics in a South African Sample. African and Asian Studies, 18(4), 325-341.
Muel Kaptein en Johan Wempe. Three General Theories of Ethics and the Integrative Role of Integrity Theory
Lawson, B. P., Muriel, L., & Sanders, P. R. (2017). A survey on firms’ implementation of COSO’s 2013 Internal Control-Integrated Framework. Research in accounting regulation, 29(1), 30-43.
Khelil, I., Hussainey, K., & Noubbigh, H. (2016). Audit committee–internal audit interaction and moral courage. Managerial Auditing Journal.
Hajiha, Z., Oradi, J., & SALEH, A. M. (2017). Internal control weaknesses and Audit report lag.
52 Pages Posted: 7 Oct 2011 Muel Kaptein en Johan Wempe
Amat, O., Blake, J., & Dowds, J. (2020). Retrieved 4 May 2020, from https://core.ac.uk/download/pdf/6475312.pdf