ACC614 Week 6 Final Paper

Name

ACC614: Auditing & Fraud Detection (FSI2247A)

Prof

January 3, 2023

Case Studies Week 6 Final Paper

Case Study: Andersen: An Obstruction of Justice?

Even though corruption is one of the most pressing problems in the world today, there is still a lot of misunderstanding about what it entails (Rose, 2018). To be corrupt is to be willing to engage in dishonest behavior for the sake of financial gain or another personal gain. When people are corrupt, they have moral problems and will engage in immoral behavior for financial benefit. The definition of corruption relies on the premise that power has been legitimately granted, only to be abused to further the abuser’s personal goals. There is no guidance on how to deal with circumstances in which authority is not delegated but held, and no indication of how “private” a benefit must be to “count” in the explanation. In 2002, when Andersen’s case came before Judge

Harmon, the jury found him guilty of being a “corrupt persuader,” despite Harmon’s ruling. Judge Harmon instructed the panel that they could reach a guilty verdict even if they couldn’t agree on who committed the crime, so long as they were unanimous in their belief that “someone at the firm acted knowingly and with corrupt intent” to thwart federal regulators investigating Enron Corp. by urging another person to destroy or alter documents related to the energy company’s accounting (Jonathan Weil and Alexei Barrionuevo Staff Reporters of The Wall Street Journal, 2002). Intentionally corrupt influencers do not push their colleagues to destroy evidence of illegally obtained funds, as demonstrated by the destruction of records, including information on specific material proceeds.

Was Andersen’s behavior illegal? Instead of making sure Andersen was either innocent or guilty of the crimes for which she was tried, the arguments that were used to overturn the decision were based on erroneous jury instructions. Mr. Duncan, a partner at the firm, agreed with the Andersen administration in Chicago that they should destroy the records to prevent them from being used in an inquiry. Andersen is innocent of any wrongdoing related to the corruption claim. Convincing someone to withhold papers from an investigation is not criminal under these circumstances, primarily if the attorney­client privilege protects the documents.

When the jury implied that they “misunderstood” the definition of the word corrupt and construed it in a way that was concerning to the retention policy, the lower court’s verdict was overturned. Companies cannot be considered “corrupt persuaders” just because they shred firm files following established retention regulations. It is not illegal for management to instruct personnel to adhere to such policies. Regarding the matter at hand, the Supreme Court failed to consider the testimony of David Duncan, who stated that Andersen’s administration ordered the deletion of relevant files during an investigation. The destruction of paper records may not be ethical, but it is not immoral if it is required by company policy after a specified amount of time has passed.

Employees' destruction of paper records at management’s request does make the company liable for those destructions, at least within the context of the master­servant relationship. A retrial of Andersen at this stage, with a subsequent finding of innocence, would likely result in severe damage to the firm’s image from the SEC and the Department of Justice and widespread condemnation from the business community. The government would not gain anything in terms of money or other penalties. A fairer resolution of who was told what by management could have been possible if the SEC and DOJ had tried the individuals involved rather than the firm as a whole.

Despite the reversal of Andersen’s conviction, I still believe that the workers did not behave ethically. Workers should have insisted on conducting themselves ethically and assisting the investigator as needed. Employees who say they did not realize they were breaking the law despite their belief that they were doing so are deemed to be misinformed. Whatever the “beliefs” of the employees involved may be, they must all answer for their conduct.

David Duncan and Nancy Thomas should both be held primarily liable for the crimes.

Thomas and Duncan asked for papers to be destroyed that were “explicitly” from before the formal SEC investigation of Enron, one of Andersen’s top clients. Duncan had already stated that he had committed criminal acts of his own volition to avoid additional scrutiny and imprisonment. Thomas did alert management to the fact that the SEC was conducting an inquiry and that its findings could be detrimental to business.

Canadian Imperial Bank of Commerce, JPMorgan Chase, Citigroup, Merrill Lynch, and

Credit Suisse Group were named as defendants in a class action lawsuit alleging wrongdoing by Andersen. However, each of these institutions has denied the allegations and stated that they do not have a retention policy or were not involved in the destruction of documents.

Case Study: GM Running on Empty?

Looking at Exhibits 1 and 2, it is clear that GM’s financial problems first appeared in 2005. When a business faces this type of circumstance where the fixed costs are high, assets will be liquidated, and the revenue is highly sensitive to the economic circumstances, the business at that moment and point will be unable to meet its payment obligations since it is unable to generate income. If a company is insolvent, liquidation is the best course of action. If fundamental factors and the current proprietors cause, the economic difficulty is well­thought­out but unable to redeploy in managing the assets more effectively. Asset liquidation may be appropriate even in times of financial distress. In this situation, shutting down would pave the way for new, more moderately invested owners to take over operations. No corporation should ever disregard warning indicators that its economy is in trouble, as doing so can have far­reaching consequences. When accounts payable and other expenses exceed cash flow, when interest payments are missed, and when cash flow is not reduced, a company knows it’s in severe financial trouble. In light of the data provided by GM’s financial filings, exhibit 1 illustrates that financial trouble started in 2005 when there was a decline in operating income that will also lead to a loss for GM. Data for General Motors' annual high and low closing prices are provided in Exhibit 2. Price increases reflect the year’s peak stock price, while price drops reflect the year’s trough. High stock prices indicate that the stock is performing well in the market, which in turn, increases demand. However, a drop in stock prices would have the opposite effect, reducing demand. GM’s financial difficulties may be traced back to 2005 when stock prices hit a record low.

It should be noted that auditors need to take into account the company’s regular losses from a stockholder’s shortage, operations, and the failure to generate sufficient cash flow to meet the obligations and sustain the operations, all of which raise substantial doubt about the company’s ability to continue to be a going concern, to comply with professional standards. In accounting, the assumption of an ongoing business is only a hypothesis. The ability to continue operations for an extended period is a critical component in determining whether or not a business can be considered a “going concern,” meaning it can fulfill its obligations, fulfill its stated goals, and so on. In other words, there will be no need for the company to go bankrupt or liquidate. If there is a question as to a firm’s capacity to fulfill the going concern declaration, the reasons and circumstances must be given in its income statement. The decrease in a business’s indebtedness rate and the growth in the stock costs will also suggest that no continuing uncertainty exists.

Since GM has demonstrated financial hardship from 2005 to 2008, this student believes that the continuing uncertainty is warranted. General Motors has reported a massive deficit and is struggling to meet its financial obligations. In 2004, when Deloitte and Touché found the company’s financial statements to be fairly presented in conformity with GAAP, they concluded that the issuance of a going­concern opinion was necessary.

Deloitte and Touché’s ability to issue a revised opinion on the audit to highlight the goingconcern issues was hastened by the state of the economy at the time. Shares of GM fell to $1.45 each after the company revealed a net loss of more than $10 billion in 2005. As reported by Bloomberg, “President Obama’s administration provided interim finance to allow GM to prepare a reconstruction strategy, urged then­CEO Rick Wagoner to quit, and revealed a proposal to replace at least 6 to 12 members of General Motors' board of directors” (Louwers, Ramsay, Sinason, Strawser, & Thibodeau, 2015). A going­concern audit opinion may be issued depending on these considerations.

In this article, we explain, in broad strokes, the events that followed GM’s bankruptcy that alleviated the worries that would lead to the issuing of the continued uncertainty and the issues the auditors will need to evaluate. Following the bankruptcy, the United States and Canadian governments built a stronger GM as a private corporation that is now publicly owned. Although the United States Car Allowance Rebate Program (CARP) was announced in 2009, it was not as successful as had been hoped. Later in 2009, GM decided to re­enter the public markets by issuing a massive initial public offering (IPO). Uncertainty over the company’s continued existence was a concern as stock prices rose. Increases in the stock price indicate that the new General Electric is likely to continue operating as a going concern.

Whether or not this student is encouraged to buy a GM vehicle or shares is unknown. Given the information provided, no reasonable individual would want to put money into a company that might end up losing money this year. The release of a going­concern opinion could encourage investors to put money into General Motors.

Case Study: KPMG: How Many Firms?

A person’s level of comprehension will determine the standards that determine whether or not an auditing firm may continue to operate independently while still providing tax services to a company. The Sarbanes­Oxley Act of 2002 requires audit committees to be directly accountable for the oversight of the engagement of the firm’s independent auditor, as well as the Securities and Exchange Commission rules are designed to ensure that auditors are self­reliant to their audit clients. These laws were passed to improve corporate governance (Securities Exchange Commission, 2017).

The rules of the Sarbanes­Oxley Act have placed certain constraints on the ability of publicly traded companies to select their auditors. If a company were to settle on a different group of auditors, they would need to take into consideration the consequences that would be immediately made upon the new auditors (s). If the auditor(s) were changed, then there may be a variety of concerns that need to be handled. There are only a limited number of global auditing organizations throughout the world that are capable of efficiently completing the task that is required. Sarbanes­Oxley prohibits auditors from providing audit clients with various services unrelated to auditing. This is done to increase auditor independence (Louwers, Ramsay, Sinason, Strawser, & Thibodeau, 2015). This challenging situation can be duplicated most accurately by combining the knowledge of two influential organizations.

What are some of the benefits and drawbacks of allowing auditors to provide non­audit services (such as tax services) to their clients, and why is this practice currently allowed? Auditors can show impartiality in their reports when they provide both internal audit and no auditing services to the same company or companies. This could be the result of an auditor becoming too close to the company that they have been employed to audit, becoming overly dependent on their client’s data, or having only one source of income. The company stands to gain a significant amount of money as a result of the new hire, which is a significant benefit (s).

What kind of implications does it have for publicly traded companies that there are fewer major worldwide accounting firms? If there are any instances where impeachment could be seen, only the accountants can be changed; as a result, the auditing firms will be allowed to continue performing audits; this will give them full kingship for them to inquire about exemptions to the stem emancipation policy on a case­by­case basis. The effect of a relatively small number of major worldwide accounting firms on public firms will be that if there are any instances where removal from office could be seen, only the accountants are able.

References

Accountingcoach.com. (2019). What is going concerned? [Web log post]. Retrieved from https://www.accountingcoach.com/blog/going­concern

Jonathan Weil and Alexei Barrionuevo are Staff Reporters of The Wall Street Journal. (2002, June

16). Arthur Andersen Is Convicted on Obstruction­of­Justice Count. Retrieved September

18, 2019, from https://www.wsj.com/articles/SB1023469305374958120

Louwers, T. J., Ramsay, R. J., Sinason, D. H., Strawser, J. R., & Thibodeau, J. C. (2015). Auditing

& assurance services (6th ed.). Retrieved from https://vitalsource.com/

Oxelheim, L., & Wihlborg, C. (2012). Corporate Distress and Restructuring with Macroeconomic

Fluctuations: The Cases of GM and Ford. Journal of Applied Finance, 22(1), 71–88. Retrieved from http://search.ebscohost.com.proxylibrary.ashford.edu/login.aspx?direct=true&db=eoh&A N=1315894&site=edslive&scope=site

Public Company Accounting Oversight Board. (2019). AU Section 420 ­ Consistency of Application of Generally Accepted Accounting Principles. Retrieved September 22, 2019, from https://pcaobus.org/Standards/Archived/Pages/AU420B.aspx

Rose, J. (2018). The Meaning of Corruption: Testing the Coherence and Adequacy of Corruption Definitions. Public Integrity, 20(3), 220–233. https://doiorg.proxylibrary.ashford.edu/10.1080/10999922.2017.1397999

Securities Exchange Commission. (2017, May 12). Audit Committees and Auditor Independence. Retrieved September 23, 2019, from https://www.sec.gov/info/accountants/audit042707.htm

Vale, S. (2019). The Disadvantages of Audit & Consulting Services on the Same Client. Retrieved

September 23, 2019, from https://smallbusiness.chron.com/disadvantagesaudit­consulting

­services­same­client­73857.html