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Small Business Accounting Scandal document sample
Small Business Accounting Scandal document sample
Auditing and Assurance Services Update April 2006 Auditing and Assurance Services Part 1 Part 2 Part 3 Article Title 1 2 3 4 5 6 7 8 9 10 11 12 A B C D E F G H 1. Sarbanes-Oxley Update X X X 2. PCAOB Update X X X X 3. CFO Faulted for Royal Ahold X Scandal 4. Ex-KPMG Auditors Settle Tenet X X Charges 5. GAO Cites Poor SEC Information X X X Security 5. Nortel Stumbles over Revenue X Recognition 6. Deloitte Fired by 98-year Client X Navistar 7. Audit Firm Size and Going- X Concern Reporting Accuracy 8. U.K. Firm Settles Botched Audit X Case 9. Ben & Jerry’s Ex-CFO Sent to the X Cooler 10. The Influence of Client Importance X on Juror Evaluation of Auditor Liability 11. Audit Review: The Impact of X Discussion Timing and Familiarity 12. Effects of Discussion of Audit X Reviews on Auditors’ Motivation and Performance 13. SEC Rolls Up Accounting Fraud X X 14. Shopping for an auditor X 15. The Unexpected Benefits of X Sarbanes-Oxley 16. ON THE TRAIL: How X Financial Audits Mark the Path for Forensic Teams 17. Automating the Confirmation X Process 18. Three Men and a Fraud X X 19. KPMG’s Tax Troubles X X X 20. Business Solutions X X 21. Zale Faces SEC Accounting Probe X X Over Service Pacts and Payroll 22. Florida Couple Sues Ernst & X X X Young Over Tax Shelter 23. Comverse Plans to Restate Results X X for the Past Six Years 24. Continuous Auditing: An Effective X X Tool for Internal Auditors 25. Rate Yourself in the Paperless Race X 26. The New World of Auditing X Standards 1. Sarbanes-Oxley Update Small Business 404 Waiver Unlikely: Cox CFO.com, April 5, 2006, Stephen Taub. SEC Chairman Christopher Cox noted that the commission is attempting to enhance the cost-effectiveness of Section 404, rather than waiving it for smaller companies. The SEC Advisory Committee on Smaller Public Companies voted to exempt companies with market capitalizations of less than $700 from the provisions. http://www.cfo.com/article.cfm/6767198/c_6767453?f=TodayInFinance040506 Why Leave 404 to Your Auditors CFO.com, April 13, 2006, Stephen Taub. Discussed proposal to allow accountants other than a company’s auditor to attest to the company’s internal controls. Perceived benefits include controlling the costs of 404 attestation as well as allowing the company’s auditor to assist in the development and implementation of controls without having their independence compromised. http://www.cfo.com/article.cfm/6818276/c_6819180?f=TodayInFinance041306 Is SOX Driving Small Companies Overseas? CFO.com, April 13, 2006, Helen Shaw. In a discussion of the SEC’s Advisory Committee on Smaller Public Companies’ proposal for implementing Sarbanes-Oxley, concerns were raised that the provisions of Sarbanes may lead to more companies seeking initial public offering activities on foreign exchanges. The proposal, which will be presented to the SEC, discusses reducing the stringency of standards for smaller companies, indexing the definition of a “small” company to inflation, making it easier for companies to raise additional capital after filing their IPOs, and allowing non-auditors to attest to the fairness of financial statements. http://www.cfo.com/printable/article.cfm/6818562?f=options Conspiracy Against 404 Exemptions? CFO.com, April 17, 2006, Stephen Taub. Former SEC Chief Accountant Lynn Turner was accused by a member of the SEC’s Advisory Committee on Smaller Public Companies of using a media campaign to oppose proposals to reduce Section 404 requirements for small companies. http://www.cfo.com/article.cfm/6820263/c_6820808?f=TodayInFinance041706 Two Studies Give 404 Its Due CFO.com, April 25, 2006, Stephen Taub. In the second year of compliance with Section 404, only two percent of 300 year-end filers with revenues in excess of $1 billion disclosed that their controls were ineffective: American International Group, Dynegy, Eastman Kodak, General Motors, Loews, and Visteon. In addition, a study by PricewaterhouseCoopers found that almost 80 percent of companies receiving adverse opinions with respect to internal control over financial reporting improved their controls during 2005. http://www.cfo.com/printable/article.cfm/6848808?f=options SarbOx Doesn't Go Far Enough Don A. Moore. Business Week. New York: Apr 17, 2006., Iss. 3980; pg. 112 The calamitous scandals at Enron and many other companies were possible only because of breaches in a bulwark of our free- market system: auditor independence. Unfortunately, the Sarbanes-Oxley Act, Congress' response to the scandals, largely overlooks the conflicts of interest that represent the greatest threat to auditor objectivity. Only a radical reorganization of the current system will eliminate this risk. Sarbanes-Oxley, for all its reputation as a hard-hitting law, fails to correct a crucial accounting system weakness: the potential for what is called "moral seduction" of outside auditors. The Unexpected Benefits of Sarbanes-Oxley Stephen Wagner, Lee Dittmar. Harvard Business Review. Boston: Apr 2006.Vol.84, Iss. 4; pg. 133 In the view of a few open-minded firms, however, the second year of compliance turned out to be not only less costly and less onerous, but a source of valuable insights into operations, which management has translated into improved efficiencies and cost savings. The areas of improvement go well beyond technical statutory compliance. SEC Panel to Turn In Report on Sarbanes Debate, The Wall Street Journal, April 17, 2006, p. C3. An SEC advisory panel has recommended that smaller companies be exempted from all or part or all of the Section 404 internal control provisions of Sarbanes-Oxley. Internal-Control Help Becomes Less Costly, The Wall Street Journal, April 17, 2006, p. C3. In response to criticisms regarding the cost of Sarbanes-Oxley internal control provisions, a new study commissioned by the accounting industry has found a 31% decline in audit fees associated with internal control compliance. According to one consultant who conducted the study, “there was a lot to be done" in the first year of compliance; "In year two, a lot of those start-up costs didn't have to be repeated." 2. PCAOB Update PCAOB Censures California Auditor CFO.com, April 24, 2006, Stephen Taub. Reuben E. Price & Co., a firm with a single office in San Francisco, California, was censured when one of its clients issued an annual report that gave the appearance that an audit was conducted. The client (Universal Communication Systems, Inc.) filed its annual report and included a document that it alleged to be an audit report issued by Price; while Price provided Universal with a draft audit report, it had not completed the audit. Price was negligent in not taking action to inform users that an audit had not been conducted when it had knowledge that the document was included along with the financial statements. http://www.cfo.com/article.cfm/6847544/c_6848213?f=TodayInFinance042506 Board to Hold Forum in San Antonio on Auditing in the Small Business Environment Washington, DC, April 20, 2006 The Public Company Accounting Oversight Board will host a forum in San Antonio, Texas, to help bring important information concerning the PCAOB to the small business community. The Forum on Auditing in the Small Business Environment is a program for registered accounting firms and public companies in the small business community to learn more about the work of the Board, specifically the PCAOB inspections process and the impact of new auditing standards. The forum will be held at the Marriott Plaza Hotel in San Antonio on Tuesday, May 2, and Wednesday, May 3, 2006. http://www.pcaobus.org/News_and_Events/News/2006/04-20.aspx SEC and PCAOB to Host May Roundtable J Whitley. The Internal Auditor. Altamonte Springs: Apr 2006.Vol.63, Iss. 2; pg. 21, 1 pgs THE U.S. secURITIES AND Exchange Commission (sec) and the Public Company Accounting Oversight Board (PCAOB) will sponsor a roundtable on May 10 to discuss year-two experiences regarding the reporting and audit requirements of the Sarbanes- Oxley Act. The discussion relating to companies' internal control over financial reporting will include issuers, auditors, investors, and other interested parties. The SEC has indicated that it will consider facts presented at the event in developing policies to improve the reliability of financial statements for the benefit of investors, including possible modifications to the PCAOB's Auditing Standard No. 2. The commission is soliciting written feedback from registrants, auditors, investors, and others on their experiences with complying with the section 404 requirements before May 1 http://www.sec.gov/spotlight/soxcomp.htm Transition In The Office Of The Chief Auditor Of The Pcaob: Exclusive Cpa Journal Interviews With Douglas R. Carmichael And Thomas Ray Mary-Jo Kranacher. The CPA Journal. New York: Apr 2006.Vol.76, Iss. 4; pg. 18, 10 pgs In a series of interviews, Douglas R. Carmichael, PhD, CPA, CFE, Chief Auditor and Director of Professional Standards of the Public Company Accounting Oversight Board (PCAOB), and Thomas Ray, CPA, PCAOB chief auditor, discussed PCAOB's approach to the issues facing the profession. When asked about PCAOB achieving what it set out to do, he said he does not think the PCAOB's job will ever be over, because its mission is to protect investors and further the public interest in informative, fair, and independent audit reports, and that is an ongoing mission. Ray said that when the Board adopted the standards of the AICPA as its interim standards and adopting and amending them, as they saw appropriate. That will continue to be a near-term focus for them. He added that the Board needs to focus on the auditor's responsibility for fraud detection in financial statement audits. 3. SEC Update GAO Cites Poor SEC Information Security CFO.com, April 5, 2006, Stephen Taub. The Governmental Accountability Office found that the SEC has only corrected 8 of the 51 material weaknesses identified in the prior-year’s audit report. Some of the key weaknesses include failure to control remote access to servers, lack of controls over passwords, lack of restricted access to systems and data, lack of security in configuring network devices and servers, and the failure to implement auditing and monitoring mechanism to detect and track security incidents. In addition to the above, 15 new weaknesses have been identified with respect to electronic access controls to user accounts and passwords. http://www.cfo.com/article.cfm/6767230/c_6767453?f=TodayInFinance040506 SEC Slow on the Uptake, Says GAO CFO.com, April 25, 2006, Stephen Taub. Three material weaknesses in internal controls of the Securities and Exchange Commission identified during 2004 have not been remedied as of the 2005 audit. These controls were related to preparing financial statements and related disclosures, recording and reporting disgorgement and penalty activity, and enhancing information security. As of January, 2006, the SEC had only taken action with respect to 13 of the 34 recommendations of the Government Accountability Office. http://www.cfo.com/article.cfm/6848948/c_6848213?f=TodayInFinance_Inside SEC Rolls Up Accounting Fraud CFO.com, April 27, 2006, Stephen Taub. The SEC has charged HLI Operating Company (an automotive parts manufacturer) and four of its former executives with fraudulent financial reporting with the intention of meeting earnings targets. Mechanisms used to carry out the fraud include deferring operating expenses, failing to process vendor invoices, understating payroll expenses related to fringe benefits, and improperly recording customer discounts. http://www.cfo.com/article.cfm/6850320/c_6850639?f=TodayInFinance042706 4. CFO Faulted for Royal Ahold Scandal CFO.com, April 3, 2006, Tim Reason. A Dutch enterprise court concluded that the former CFO was primarily responsible for the Ahold accounting scandal. The court also accused Ahold’s management of overlooking internal control weaknesses, which led to the fraud. http://www.cfo.com/article.cfm/6764238/c_6764367?f=TodayInFinance040306 5. Ex-KPMG Auditors Settle Tenet Charges CFO.com, April 3, 2006, Stephen Taub. Three KPMG auditors settled charges for their role in the audit of Tenet; they have agreed to be barred from appearing or practicing before the SEC. Two of the partners were accused of improperly completing the audit and subsequently modifying the working papers to give the appearance that the audit was properly conducted. http://www.cfo.com/article.cfm/6764020/c_6764367?f=TodayInFinance040306 5. Nortel Stumbles over Revenue Recognition CFO.com, April 10, 2006, Stephen Taub. Nortel Networks announced another restatement with respect to recognition of revenue for contracts with multiple deliverables. According to CEO Mike Zafirovski, the issue isn’t the amount of revenue recognized, but the timing of the recognition. http://www.cfo.com/article.cfm/6791720/c_6792225?f=TodayInFinance041006 6. Deloitte Fired by 98-year Client Navistar CFO.com, April 11, 2006, Stephen Taub. Though no official reason was provided, Navistar’s decision to replace Deloitte & Touche with KPMG coincided with restatements that are occurring at Navistar as well as the PCAOB’s investigation of Deloitte’s 2003 audit of Navistar. http://www.cfo.com/article.cfm/6793645/c_6794624?f=TodayInFinance041106 7. Audit Firm Size and Going-Concern Reporting Accuracy Accounting Horizons, March 2006, Marshall Geiger and Dasaratha Rama, 1-17. Concluded that Big 4 firms make fewer reporting “errors” related to going-concern status (issuing a modified opinion for companies that do not fail or failing to issue a modified opinion for companies that do fail) than either national firms or regional and local firms. 8. U.K. Firm Settles Botched Audit Case CFO.com, April 14, 2006, Stephen Taub. The SEC settled charges against PKF (a U.K. audit firm) for failing to bring illegal acts to the attention of AremisSoft’s management. Board of Directors, or audit committee and for failing to design appropriate audit procedures to determine whether AremisSoft’s senior management had committed fraud. The fraud was related to a reported $97.5 million of revenue from two subsidiaries that should have been recorded at $1.7 million. Under the settlement, PKF agreed to repay $309,048 in fees plus interest and to pay a $2 million penalty. http://www.cfo.com/article.cfm/6819689/c_6820312?f=TodayInFinance041406 9. Ben & Jerry’s Ex-CFO Sent to the Cooler CFO.com, April 20, 2006, Stephen Taub. Stuart Wiles, former Chief Financial Officer for Ben & Jerry’s Homemade, was sentenced to 27 months in prison and two years of supervised release after embezzling $300,000 used for vacations, car repairs, clothing, and an addition to his personal residence. The embezzlement was uncovered through an internal audit conducted at Ben & Jerry’s. http://www.cfo.com/article.cfm/6823121/c_6823889?f=TodayInFinance042006 10. The Influence of Client Importance on Juror Evaluation of Auditor Liability Behavioral Research in Accounting, Volume 18, 2006, 1-18, D. Brandon and J. Mueller. Found that potential jurors believed auditors were less objective, more blameworthy, and more deserving of punishment when the audit client is more financially important to the auditor. 11. Audit Review: The Impact of Discussion Timing and Familiarity Behavioral Research in Accounting, Volume 18, 2006, 53- 64, M. Favere-Marchesi. When evaluating various types of audit documentation review, found that review conducted following the audit (as opposed to concurrently during the audit) is more effective. Also concluded that audit documentation review is more effective when the reviewer has prior experience (or familiarity) with the preparer and reviewing the preparer’s work. 12. Effects of Discussion of Audit Reviews on Auditors’ Motivation and Performance Behavioral Research in Accounting, Volume 18, 2006, 135-146, C. Miller, D. Fedor, and R. Ramsay. Found that increasing the level of discussion during audit documentation review increases the preparer’s motivation to improve performance, particularly for more inexperienced preparers. While discussion improved the performance for less experienced preparers, it did not improve the performance for more experienced preparers. 13. Shopping for an Auditor Denise Dickins, Julia L Higgs. The Journal of Corporate Accounting & Finance. Hoboken: May/Jun 2006.Vol.17, Iss. 4; pg. 9 Hiring an auditor has always been complicated. And in today's post-SOX world, it's even more difficult to find the right auditor at a reasonable price - while still ensuring compliance. But the authors of this article have some answers. 14. ON THE TRAIL: How Financial Audits Mark the Path for Forensic Teams Paul R Brazina. Pennsylvania CPA Journal. Philadelphia: Spring 2006.Vol.77, Iss. 1; pg. 22, 4 pgs This article examines the rules that guide CPAs and certified fraud examiners (CFEs) in evidence gathering, the role of audit evidence, and the guidelines on audit evidence protection. 15. Automating the Confirmation Process George R Aldhizer, James D Cashell. The CPA Journal. New York: Apr 2006.Vol.76, Iss. 4; pg. 28, 5 pgs High-profile audit failures at Parmalat and CF Foods point to a need to improve current audit confirmation practices. Automating the confirmation process should enhance a confirmation's effectiveness by improving respondent authentication, which itself reduces the opportunity for confirmation fraud. The main limitations of the current manual confirmation practice are a lack of respondent authentication, and process inefficiencies. Specifically, Statement on Auditing Standards (SAS) 67, The Confirmation Process, does not require the auditor to validate the client-provided mailing addresses or to verify the confirmation respondents' competence and objectivity. The authors agree with the PCAOB that SAS 67 should be expanded to require not only accounts- receivable confirmations but also cash confirmations on every audit. The authors also concur with the ASB and the PCAOB that SAS 67 should provide guidance about how auditors can increase their use of accounts-payable confirmations. 16. Three Men and a Fraud Gordon Heslop. The Internal Auditor. Altamonte Springs: Apr 2006.Vol.63, Iss. 2; pg. 97, 2 pgs Poole worked for a southeastern US city as a municipal finance director for approximately 20 years. He was also treasurer of the local waterway commission. Allen, a local insurance agent, served on the county commission for approximately 10 years, most recently as chairman. Allen shared an office building with Morris, a general manager of the Thomas Insurance Agency, an independent agent that sold insurance for various insurance companies. A legislative auditor uncovered significant fraud within the city, as well as at the county and waterway commissions, that had been ongoing for years. The fraud, aided by lapses in control at the Thomas Agency and its local bank, was made possible by serious internal control deficiencies at the three government bodies. 17. KPMG’s Tax Problems Judge Denies Motion Of KPMG Ex-Partner, The Wall Street Journal, April 5, 2006, p. C10. A federal judge denied a motion to dismiss conspiracy and tax-evasion charges by a former KPMG LLP tax partner in connection with KPMG’s abusive tax shelters. KPMG Can't Shake Lawsuit, As Investors Reject Settlement, The Wall Street Journal, April 27, 2006, p. C2. Class action plaintiffs rejected a proposed settlement of the KPMG abusive shelter litigation. The 55 plaintiffs who did not agree to the settlement may now seek individual cases against the firm. A KPMG spokesperson spun the disagreement positively: "The positive response of a substantial number of plaintiffs to the amended agreement allows us to continue pursuing a fair and reasonable settlement of this matter." 18. Business Solutions, The Wall Street Journal, April 3, 2006, p. R6. “Scientists and researchers have known for a long time that the best way to decipher vast quantities of data is to display it visually”; “Visual analytics” software is designed to manage the tidal wave of information available as a result of data gathering technology. “With one of the new tools, a sales manager can look at a table showing sales for all of her company's products, and then with a few clicks zero in on the top seller in the Midwest for February and March. Then she can shift gears and see how that same product performed in other regions and other months.” 19. Zale Faces SEC Accounting Probe Over Service Pacts and Payroll, The Wall Street Journal, April 11, 2006, p. A3. The SEC has initiated an investigation into jewelry giant Zale Corp.’s accounting practices, including the company’s accounting for leases, executive compensations, and certain vendor payments. 20. Florida Couple Sues Ernst & Young Over Tax Shelter, The Wall Street Journal, April 11, 2006, p. C13. KPMG is not the only Big 4 firm associated with abusive tax shelters -- a Florida couple is suing Ernst & Young LLP, saying that they lost millions on an abusive tax shelter marketed by the Big 4 firm. They are seeking class action status on behalf of others that may have purchased similar tax shelters. 21. Comverse Plans to Restate Results for the Past Six Years, The Wall Street Journal, April 17, 2006. Admitting to misdating stock option grants in order to allow generous compensation to key executives, Comverse Technologies announced plans to restate results for the past 6 years. The restatement followed analysis by the Wall Street Journal which found that the odds of the pattern of grants received by six key executives and related stock performance were one in six billion. The dates of the grants corresponded to the lowest stock prices in each quarter. 22. Continuous Auditing: An Effective Tool for Internal Auditors, Donald Warren, Jr. and L. Murphy Smith, Internal Auditing, March/April 2006, pp. 27-35 The future of auditing lies, at least in part, in continuous auditing: testing transactions based on prescribed criteria throughout the fiscal year. This article explains the benefits, usage, and PCAOB impacts for continuous auditing 23. Rate Yourself in the Paperless Race, Stanley Zarowin, Journal of Accountancy, May 2006, pp. 50- 53 Survey by the Association for Accounting Administrators Evaluates the degree of paperless audits for firms responding to the survey 59% of the firms reported storing audit documentation in a paperless application (ACL, Idea, etc.) 73% use electronic means to reproduce client financial statements 83% import client’s trial balance electronically Other statistics and comparisons with 2003 survey are available in the articles 24. The New World of Auditing Standards, Robert Tie, Journal of Accountancy, May 2006, pp. 59-62 Interview with John A Fogarty, ASB Chairman and Chuck Landes, AICPA Vice-President and Director of Audit and Attest Standards. Article discusses activities of the ASB and how the mission of the ASB will be fulfilled in a standard setting environment that included the PCAOB.
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