S Corporation Fraud by kdu88896


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									Fraud, Audit Risk &
Material Misstatement
      Presented By:
      Erin Sullivan-Hogan
      Roberta Collier Ferguson
      Siobhan Pardy

  Cendant Corporation

    Formed December 1997

    CUC International and HFS Incorporated
Overview (…cont’d)

  Cendant Operations

    Alliance Marketing

    Travel

    Real Estate Services
Overview (…cont’d)

  Employees – 40,000

  Countries – 100

  Customer Contacts – 100 million
Overview (…cont’d)

  Merged – December 1997

  Press Release – April 1998 (four months after

  Accused CUC of Fraud

  1997 earnings were overstated by $115 Million
Overview (…cont’d)

  Cendant hired Arthur Anderson to Audit

  Audit Report August 1998 findings:

    CUC‟s CEO and COO created a culture that
     accepted fraudulent accounting activities

    Failure to implement appropriate controls and
Overview (…cont’d)

  Fraud: intentional misstatements

  2 types:
    Misstatements arising from fraudulent
     financial reporting; and

    Misstatements arising from misappropriation
     of assets
Overview (…cont’d)
  Misstatements arising from fraudulent financial
   reporting include:
    Manipulation, falsification, or alteration of
     accounting records or supporting documents from
     which F/S are prepared
    Misrepresentation in, or intentional omission from,
     the F/S of events, transactions, or other significant
    Intentional misapplication of accounting principles
    Management override of internal controls that
     otherwise may appear to be operating effectively
Overview (…cont’d)

  Misstatements arising from
   misappropriation of assets involve the
   theft of an entity‟s assets where the theft
   causes the F/S to be misstated and they
    Embezzling cash receipts
    Stealing assets
    Causing the entity to pay for goods or
     services not received
Overview (…cont’d)

  Fraudulent financial reporting is
   committed, usually by management, to
   deceive F/S users.

  Misappropriation of assets is committed
   against the entity, most often by
Question a)

  Discuss the fraud in terms of the three
   conditions for fraud.
        Audit Risk and Fraud

 The determination of audit risk requires considerable
judgment on the part of the auditor.
The risk of fraud must be evaluated based on criteria
and risk assessment procedures set out in the Handbook
and through GAAS.
The audit must be planned knowing the risk factors for
fraud and how they relate to the entity.
                                       Fraud Risk Factors

Incentives/Pressures                        Opportunities

                                                                              • Employees where aware of history
                                       • Large multi-national corporation
•Pressure on management to meet                                               of earnings inflation
                                       • Complex organizational structure
analyst expectations                                                          • Employees rationalized the inflation
                                       • Serious lack of internal controls
                                                                              as necessary to meet analyst
                                       • Management had the abilities to
•Incentives to keep earnings high to                                          Expectations
                                       create and delete accounting entries
hide „personal transactions‟                                                  • No moral leadership for employees
                                       at will – no monitoring
Question b)

  From the information given, speculate
   about signs of potential fraud that EY
   perhaps should have recognized.
 “The auditor should specifically assess
  the risk of material misstatement of the
  F/S due to error or fraud and should
  consider that assessment in designing
  the audit procedures”.
      (p. 84, Auditing & Assurance Services)
Example: point #3

  EY should have carried out proper
   procedures to assess the level of risk
   before beginning the audit.
    This would have included interviews with
     management and the employees involved in
     processing & recording complex or unusual
Example: point #5

  Amounts held in reserve accounts are rarely
   used and when they are it is usually in
   connection with specific transactions.

  Unusual or unjustified changes to the reserve
   accounts each year should have prompted EY
   to carry out further investigation.
Example: point #5
  EY should have examined the unaudited
   F/S for the first 3 quarters of the year
   each year.

  They would have identified the obvious
   misstatements and had been able to
   provide CUC with the opportunity to
       (or they could have withdrawn as the auditors).
Example: point #6

  EY had communicated with CUC with
   regards to the misstatement but were
   satisfied when they should not have
    The auditors from EY should have
     recognized this as a material amount; further
     investigation of the matter was required.
Other potential signs:

  EY should have recognized that because
   the company had such a complex
   organizational structure and had so many
   subsidiaries, the risk for fraudulent
   activity would be higher, thus more in-
   depth planning for audit testing would be

 This case clearly shows CUC to be guilty
  of committing fraudulent accounting

 It is openly evident that it was the
  intention of CUC to deceive the users of
  their financial statements.
Summary (…cont’d)

  EY should have taken due care in
   performing their audit of CUC, even if this
   resulted in issuing a qualified, adverse or
   denial of opinion, or removing
   themselves as auditors for the company.

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