Feb 10 Hamilton Case

1628 Words Feb 15th, 2015 7 Pages
MEMO
This memo is regarding Hamilton Corporation and the fraud that occurred. When people make decisions they don’t always do it with the right mindset. There are limitations in our judgment processes and we can identify methods to mitigate bias and improve judgment (KPMG Judgment Framework). The four common tendencies that cause limitations in our judgment processes are, availability, confirmation, overconfidence, and anchoring. In this memo I will explain each of the four tendencies, talk about which tendency I believe to have manifested in the Hamilton case, clarify issues relating to auditing the warranty reserve and describe the alternatives that should be considered in auditing the warranty reserve, and finally provide factors that
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Background on Hamilton
Hamilton (the Company) was a subsidiary of Motor Company (MC). In 1999 the Company spun off from MC and incorporated. After the separation MC informed the Company that they owed $350-$800 million in warranty claims related to sales that occurred prior to the separation in 1999. Hamilton’s management believed that any warranty claims related to sales prior to the separation should be limited to the reserve amount that was agreed upon separation. MC wanted the full payment for what they owed relating to warranty claims. MC remained Hamilton’s largest client and because of that, Hamilton’s management was motivated to find a solution that would appease MC. Management realized that in paying anything over $100 million to MC would cause a significant reduction in operating income. For this reason, management had significant incentives to mask the true level of warranty expense in order to meet analysts’ forecasts. Management made the decision to report favorable results, no matter what.
The tendencies or bias manifested in Hamilton Corporation
Hamilton’s auditor employed multiple tendencies. Confirmation was used in the scheme to support management when they obtained a letter from the Company’s actuary that provided the “reasonable range” for pension assumptions that had been made in the past. Management also convinced MC to allow the meeting minutes between the two companies to

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