Introduction
Molex Inc. designs, manufactures, and distributes electronic connectors that are used by a variety of industries. Despite being a successful company, Molex experienced some downfall in 2002 and 2003. Demand for their products sunk and their financial performance declined. This occurred around the same time as the accounting scandal with Enron happened. Then, in 2004, Molex ended up having an inventory error that was caught by Diane Bullock, CFO and brought to attention to Joe King, CEO. The following case analyzes the inventory error, the external auditors’ opinion, and what the board should do about the problem.
The Need for External Auditors
Most importantly, because Molex is a publicly traded company on NASDAQ, it is a requirement that they have an external audit done. If the company did not produce audited financial statements the company would not meet exchange listing requirements and there would be a chance of NASDAQ pulling their stock off the market.
The issue of independence is another reason why companies choose to have an external audit done. Independence refers to when different employees perform different tasks within a specific department. We will use the accounts receivable section of the accounting department as an example. For independence to occur, a company would want to have separate employees collecting cheques and/or cash, preparing the deposit, and actually depositing the cheques and/or cash. For some companies, usually smaller ones,
The auditor must assess the transactions for how much of a risk factor is involved. When reviewing these transactions, auditor must be able to review the internal controls of the company’s accounting personnel. The segregation of duties is associated with the safeguarding of an organization 's assets and the topic known as internal control. An example of the segregation of duties would be a company 's requirement that the bank statement for its checking
The Molex Corporation is an electronic connector manufacturing firm, which is based in Illinois. This company is facing a financial reporting problem in which the financial statements were overstated. Joe King ,the CEO of the company, was appointed in July of 2001, and was responsible for managing and inventory control, among other very important duties. Diane Bullock was hired in 2003, to replace the previous CFO. Both Bullock and King were being accused of what? by the external auditors, Deloitte & Touche, for not disclosing an 8 million pre-tax inventory valuation error.
1- Independence: - The internal auditor should have the independence in terms of organizational status and personal objectivity which permits the proper performance of his duties.
Auditor Independence contains 9 parts which stablish standards for external auditor independence, so it will have limit conflicts of interest, also contains that an approval requirements for new auditor, audit partner rotation, and auditor reporting requirements. Also restrict auditing organization from providing non audit services for the same clients they audit.
Kathryn McNeil’s was recently hired and her undertakings as an IBM product manager were complex and extensive. She dealt with the stream of stock for all IBM PCs across the nation, which arrived at the averaged to $40 million every month. To do this, she spoke with the IBM Corporate Headquarters Team regularly to place requests and ensure that each retail outlet had a six-week supply of PCs available. The procedure included arranging conveyance dates and guaranteeing that conveyed items met client details. When IBM reported another product, McNeil evaluated the plausible effect it would have on current items and decided the amount of the new change that ought to be bought. She additionally gave the Sayer administration staff with every day, week by week, and month to month examinations of the product offerings as reports and spreadsheets. At last, McNeil remained in near contact with the field delegates who sold the PCs at the different Sayer-claimed retail outlets all through the nation. She issued declarations to the field delegates when there was a change or an issue with an item, and her phone was an open line for any illustrative who had a question or consumer loyalty issue that required McNeil 's consideration. Her reports were dependably on time and sensibly elegantly composed, great
Independent audit in turn makes the financial statements more credible and reliable source of information
If we take into account cost indices of US VS JAPAN and above cost factors, cost of manufacturing operations of DJC in US would be as low as 25% of the current production cost of 26.10 $.
In 1985, an attempt was made to falsify certain store inventories which was uncovered by the auditors. The auditors accepted an excuse that it was not sanctioned by management.
Independence is extremely important, necessary, and appropriate because without an independent IAD, IAD’s objective of adding values and improving business operations cannot be achieved. Independence is also a key component in Attribute Standard. Accountability section states the chief audit executive’s responsibility to the management and audit committee. It is necessary and appropriate because it leads to significant communication between the CAE and top management and between the CAE and the Board; it also helps ensure that the standards and requirement of the internal auditing function is achieved.
According to ICAEW, auditor independence mainly refers to the independence of the external auditor from parties that have an interest in the financial statements of the business being audited. It requires having both integrity and an objective manner to the auditing process. In order for the concept to be deemed effective the auditor needs to carry out their work freely. One of the main purposes of auditing is to increase credibility of the entity’s’ financial statements, as they have expressed their own professional opinion on the truth and fair view in accordance with the proper accounting standards used. This is only possible if the audit is made with reasonable assurance that it has come from an independent source and has not been influenced by other parties, such as managers, directors or by conflict of interest.
3 pillars of effective internal audit services- independence and objectivitiy, proficiency, and due professional care.
Internal auditors cannot effectively provide an analysis on the company’s internal dealings as they are part of the company. External auditors, however, can observe these processes from the outside and then determine where the funds of the company and whether the dealings adhere to the regulations. Using external auditors in a company prevents conflict of interest from happening. Conflict of interest is a situation where an individual or organization has multiple interests and of those multiple interests, one could possible corrupt the motivation for an act on the other when the auditor has any kind of beneficial interest in their client’s performance. In other circumstances, there is also the threat of familiarity where auditors become
The American Connector Company (ACC) should be extremely concerned with the im-pending entrance of DJC to the US landscape. Any new entrant will most likely be of the mentality to try and take as much market share as quickly as possible. This course of action usually involves a period of time when the new company will plan on operating at a loss, and will thereby be will-ing to price below market average with small margins. Realization of this threat would immedi-ately disrupt ACC’s pricing strategy and could affect long term profitability.
The aim of this essay is to study the function of external auditors in order to analyze why it is important to be independent. The primary mission of external auditors is to review and evaluate all the financial records of a company or corporation. They provide an objective opinion on the organization’s financial statement and effectiveness of the accounting polices in order to help management to make decisions. If the independence of the external auditors is impaired, the public will doubt the quality of professional auditing services, and the consequence would be very serious, just like the bankruptcy of Enron led to the disorganization of Arthur Andersen, once a giant accounting company in the world. In order to maintain and increase
This paper will discuss the corporation WorldCom, a telecommunications company that was based in Mississippi. In 2002 WorldCom was involved in one of the largest accounting scandals in the United States. WorldCom inflated its assets by nearly $11 billion dollars, which eventually lead to about 30,000 employees losing their jobs, as well as, 180-billion dollars in losses for its investors. The CEO at the time of this accounting fraud was Bernard Ebbers and led to him receiving a 25-year prison sentence. This paper will go into the details of how WorldCom was able to manipulate its accounting records to deceive its internal auditors, as well as, investors.