Comtemporary Auditing

In addition, associated with the misapplication of accounting methods, the financial industry has been plagued with one disaster after another involving numerous scandals from top leading American companies. Consequently, the Sarbanes-Oxley Act was passed in 2002 compromising eleven sections that are generated to insure the responsibilities of the company’s managers and executives. This act identifies criminal penalties for particular unethical practices and currently has new policies that a corporation must follow in their financial reporting. The following examples describe some of biggest accounting methods as a result of the greed and the outrage of the ethical and financial misconduct by the senior management of public corporations.

Such an intense focus has been placed on quarterly earnings as an indication of a company’s success by everyone from analysts to executives that ethics have for the most part been thrown out the window, sacrificed to the all important number, i.e. earnings per share. This is the theory in Alex Berenson’s book “The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America.” This number has become part of a game to be played, a figure to be manipulated – beat the number and Wall Street all but throws a parade, miss it and a company’s stock may be abandoned. Take into account the incentives that executives have to beat the number and one can find plenty of reasons to manage earnings.

Unfortunately, all those efforts have not been vindicated because of the following reasons: Accounting did not cause the recent corporate scandals such as Enron and WorldCom. Unreliable financial statements were the results of management decisions, fraudulent or otherwise. To blame management’s misdeeds on fraudulent financial statements casts accountants as the scapegoats and misses the real issue. Reliable financial reports rely to a certain extent on effective internal controls, but effective internal controls rely to a large extent on a reliable management system coupled with strong corporate governance. when management deliberately or even unlawfully manipulates business processes in order to achieve desirable financial goals and present untruthful financial reports to the public, accounting systems are abused and victims rather than perpetrators.

Overstock is currently audited by the CPA Firm KPMG LLP and has been since 2009. According to the proxy statement pursuant to schedule 14A KPMG’s aggregate audit fees for 2012 and 2011 were $1,037,000 and $1,092,000 respectively; all of which were approved by the audit committee. The amounts of $40,000 in 2012 and 21,000 is 2011 were related to the audits for Overstocks 401k benefit plan. Additionally, $88,000 in 2012 and $96,000 in 2011 were related to tax services, and 221,000 in 2012 were related to a cloud-based consulting project.

How did pressures for financial performance contribute to an organizational culture that tried to manipulate quarterly sales and to influence investors?.

Members of management even went as far to further control the timing and release of these already fictitious revenues and profit. Throughout the span of these fraudulent schemes, members of management including Wiles, Goodman, Schleibaum, and Wolfe, deliberately overstated reserves in certain periods of high earnings and subsequently released these reserves into income in less

Many organizations have been in the news over the past few years due to accounting ethical breaches that have affected their customers, employees, and the general public. I searched the Internet to locate a story in the news that depicts an accounting ethical breach. I selected Krispy Kreme. I enjoy their hot donuts and was curious to learn more about how they played with the numbers. For some reason I always want to dig into the trickery behind the manipulation of financial statements.

When we talk about financial planning we have to take step back, look at the whole picture, and understand how it begins. Financial Management is the key essential in an organization when you plan financially. Financial Management is the building blocks for all accounting records and business transactions that occur. We cannot forget that decisions are based on the organizations fiscal objectives others are based on general accounting principles. So to better understand you must ask the question of “Is the financial management of the organization strong and how is the financial reporting records validity”?

The United States has become increasingly concerned with the quality of earnings reported from companies. Although the quality of earnings should be able to be used as a predictor to the future of the company, management policies have been able to find a way that makes the company seem as if incoming income is steady, even if it is not. Ways like over and understating stating expenses can make a company seem better than they are. While the use of non-GAAP earnings can have benefits, many individuals are worried that using non-GAAP earning will lead to giving out false financial reports. No matter the accounting method used, all managers must act ethically on behalf of the law, and the company.

2. Ethical Issues in Business. It seems that every day in the news we are hearing of new company that has acted at least unethically and possibly illegally in the operation and financial reporting of their company's business dealings. There are many ethical issues in business. One major issue that we see is over and under reporting net income. Companies like to show that every quarter the net income of the business has an increase or profit. In order to show this they adopt unethical or illegal means in the operation and financial reporting. One such method is the indiscriminate use of stock options for employees that enable companies to take employment costs off balance sheet and inflate earnings. With the recent ethical issues we have

4 a) Do you think situations like this (i.e., aggressive accounting or even financial statement

1. Is it unethical for a company to intentionally understate its earnings? Why or why not?

When engaged in auditing a public firm, such as Apollo Shoe Inc., an auditor must determine when to trust in the company’s internal controls and when to ascertain auxiliary testing methods are obligatory to analyze control risks. The sales and collection cycle is rather a substantial fraction of the audit because this unique segment employs a multitude of documentation and records ranging anywhere from customer and sales orders, shipping documents, credit memos, and general journal entries; therefore, a working

The main strategy of completing the audit is to obtain an understanding of the client’s financial statements, operating processes, and governance policies. The auditor must adopt a blueprint to determine the external factors that could adversely affect the company’s operations. The auditor needs to evaluate regulatory practice and ongoing litigation events. With these strategies in place, the audit should be easily streamlined to stay on track and completed in the designated timeframe.

(a) As mentioned in the case study above, Kellogg is going through a challenging time. Perform an external audit on Kellogg. Discuss the opportunities and threats facing the company.