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Auditing Chapter 2 Part III

This document describes several cases of corporate fraud, categorizing each as primarily involving either asset misappropriation or fraudulent financial reporting. It discusses frauds at Enron, WorldCom, Parmalat, HealthSouth, Dell, Koss Corporation, Olympus, and Longtop Financial Technologies. Koss Corporation's fraud primarily involved asset misappropriation through the misuse of company funds by the CFO. The frauds at the other companies primarily involved fraudulent financial reporting through practices like overstating revenues and assets, understating debts and expenses, and improper capitalization and recording of transactions.

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Regine A. Ansong
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264 views

Auditing Chapter 2 Part III

This document describes several cases of corporate fraud, categorizing each as primarily involving either asset misappropriation or fraudulent financial reporting. It discusses frauds at Enron, WorldCom, Parmalat, HealthSouth, Dell, Koss Corporation, Olympus, and Longtop Financial Technologies. Koss Corporation's fraud primarily involved asset misappropriation through the misuse of company funds by the CFO. The frauds at the other companies primarily involved fraudulent financial reporting through practices like overstating revenues and assets, understating debts and expenses, and improper capitalization and recording of transactions.

Uploaded by

Regine A. Ansong
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Refer to the Auditing in Practice feature, “The Great Salad Oil Swindle of 1963,” and answer the

following questions.

a. How did management perpetrate the fraud?

Knowing that oil and water cannot be mixed to their properties, the company did a
fraudulent act during the inspection of the auditor. As a vegetable oil company, it is
expected that the inventories stored in their tanks would be pure oil. Nonetheless, they
have filled it with a large amount of water and the oil was only placed on the top layer so
that all the auditor could see upon inspection is the salad oil. Moreover, they have also
pumped the oil underground from one tank to another based on the anticipated inspection
route of the auditor.

b. What was management’s incentive to perpetrate the fraud?

They have perpetrated the fraud to overstate their inventories which, as result, would
decrease expenses and increase income. This will their financial performance look better
to external users.

c. Is this fraud primarily a case of asset misappropriation or fraudulent financial


reporting?

Considering that the management did not use the assets personally and their intention
was to manipulate the amounts presented in the financial statement, this means that the
fraud was a fraudulent financial reporting. The fraudulent act was intended to make their
financial position and performance in a better perspective.

2-35. Refer to Exhibit 2.3 and briefly describe the frauds that were perpetrated at the following
companies. For each company, categorize the fraud as involving primarily (1) asset
misappropriation, or (2) fraudulent financial reporting.

a. Enron – Fraudulent Financial Reporting

Enron manipulated the information in their financial statements by not recording their
debts in the company’s books and transfer it instead to special purpose entities.
Furthermore, they have recorded revenues without even actually earning it and significant
related party transactions are also evident.

b. WorldCom - Fraudulent Financial Reporting

The company was committed in acquiring other telecommunications companies as


their growth strategy. However, when such acquisition failed, they have manipulated
their financial statements in a way that their revenues would increase while they
expenses are reduced. They have capitalized some of the costs that were supposed to be
treated as expense. Barter transactions are also treated as sales and restricting reserves
were used to reduce expenses.
c. Parmalat - Fraudulent Financial Reporting

It was the largest bankruptcy in Europe. The company overstated their cash and
recorded some entries of cash that is false and non-existent. Also, they have understated
their debt which, in effect, creates a higher financial position of the company.

d. HealthSouth - Fraudulent Financial Reporting

The employees were instructed to overstate their earnings to make it look better in
the shareholders’ and analysts’ expectations. A service provided to a group which was
supposed to be treated as one sale was recorded in their books as an individual session
making one sale transaction into five different sales if the group is composed of five
individuals. Additionally, they have used adjusting journal entries to manipulate their
expenses and revenues.

e. Dell – Fraudulent - Financial Reporting

Intel and Dell entered into an agreement indicating that the former will pay the latter
in exchange of not using the central processing units of Intel’s rival. The large payment
received by Dell was used to deceive their investors as they treated it as part of the
company’s earning that allows them to meet investors’ expectations. After Intel refused
to continue making payments, the company fails to explain and disclose the cause of
their profitability decline.

f. Koss Corporation – Asset Misappropriation

The CFO misappropriated a large amount of the company’s assets. Approximately,


she had used $31 million of the funds. This was perpetrated due to the ineffective
internal controls and corporate governance of Koss Corp. She had abused her authority
by intimidating lower-level employees and solely approving expenditures. The
responsibility of the CEO, audit committee and internal audit function was ineffectively
executed making it easier for the CFO to commit fraudulent acts.

g. Olympus - Fraudulent Financial Reporting

The perpetrated fraud in Olympus involves its top-level executives and board. It was
found that company concealed large losses in security investments for two decades to
make it appear that it has been doing well. The have replaced their audit firm due to
conflicts regarding accounting practices of the company and removed the president for
opposing the malpractices made.

h. Longtop Financial Technologies - Fraudulent Financial Reporting

This company was considered to have a weak corporate governance making it riskier
for investors. They recorded fake cash to cover up the fake revenues recorded in the
preceding accounting period. Also, they have utilized another entity to carry their
staffing expenses which resulted a higher profit margin. Lastly, the audit firm personnel
were threatened and retain the workpaper to prevent the auditor from revealing the
fraud.

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