Johnson & Johnson Fraud Analysis

One of the main defenses E&Y took during the early stages of the HealthSouth suit was the fact that the SEC had no well-defined rules with regards to audit-related practices. Another defense was the mere fact that E&Y never faced a criminal indictment for the HealthSouth fraud. This was mainly due to the statute of limitations placed on securities fraud. It sets it at the earlier of (a) 2 years after the discovery of the facts constituting the violation or (2) 5 years after such violation. Thus, the DOJ was unable to file criminal charges against the firm because the partner on the audit (G. Marcus Neas) was “unaware” of the fraud in 1993.

Our project team analyzed the Fraud and Illegal Acts Case (True blood Case Studies- Case 08-9), which involves a questionable sales transaction made between Jersey Johnnie’s Surfboard, an SEC registrant, and Mr. Sinaloa, an independent sales representative of the company. As a simplified overview of the case, an external audit firm was hired on to perform a year-end audit of Jersey Johnnie’s Surfboards, Inc. Towards the end of the audit, the engagement partner notified the auditors that there could be a possibility of fraud and illegal acts made by the company.

Organizational misconduct is the chief cause behind corporate accounting scandals. The trusted executives of the corporation participation in actions during a scandal are corrupt and illegal. In the United States, the Securities and Exchange Commission (SEC) is typically the government agency that investigates such scandals. One of the most notorious corporate accounting scandals in the United States is the HealthSouth Corporation scandal of 2003. HealthSouth Corporation is one of the United States largest health care providers with locations nationwide. A deeper inspection of the HealthSouth scandal is needed to understand how it transpired by assessing how it was executed, the accounting issues and root of the issue, how it was exposed, the results to the company and its officers, and warranted ramifications as an outcome of the scandal.

The auditing firm Coopers & Lybrand was accused of failing to perform a proper GAAS audit. One strategy the auditors could have performed was to follow the trail of revenue vs expenses. The auditor should have notice large sums ($10 million) of revenue going into one particular expense (Suppliers/Inventory). Considering Phar-Mor filed that they lost money in fiscal year 1984 and 1985 and they never cleared

According to an article in the CPA Journal, the accounting profession has long contended that an audit conducted in accordance with generally accepted auditing standards (GAAS) provides reasonable assurance that there are no material misstatements contained within financial statements. Suggest at least two (2) alternative methods that auditors can use to provide a more concrete level of assurance to investors. Provide support for your responses with examples of such methods in use.

Of these transactions, most of it was not in the interest of Enron of Enron’s shareholders; such as profits and cash flows were manipulated and grossly inflated which caused misleading to the investors. AA has also failed to recognise the Generally Accepted Accounting Principle (GAAP) – which is accounting rules used to prepare, present and report financial statements for a wide variety of entities used in United States. AA also did not advise Enron’s audit committee that Enron’s CFO – Andrew Fastow – and his helpers were involved in significant conflict of interests. Enron’s politics and internal control was also found out to be inadequate to protect the shareholders interests. These should have made known and clear as these are responsibilities of an auditor. AA has also make the mistake by which it did not act upon evidence found or neither has it find any audit evidence relating to the numerous share rights transferred to SPEs and the side deals between Enron and banks which remove the banks’ risk from transactions. In auditing, audit documentations are key part to the audit processes.

Fraud is a serious crime that should concern all parties of the U.S. health care system and is a costly reality that the government cannot overlook. While not all fraud can be prevented, by learning about the many different types of fraud, patients can be educated on how to protect themselves from fraud. If we use government programs to inform the public that they can be targeted, the dollar amount for these cases for fraud can be reduced. An informed public and a properly funded FBI will go a long ways in the overall crackdown of health care fraud.

As aforementioned, the Sarbanes Oxley Act’s requirements reduced fraud and increased corporate governance across both for-profit and not-for-profit organizations. That said, the SOX act has, in my opinion, been absolutely effective in regulating ethical behavior among for-profit as well as not-for-profit health organizations. The establishment of this law has contributed greatly to the investigations of fraud among health care organizations. According to attorneys at Post and Schell, several federal, criminal investigations have been started after the law’s enactment, making it clear that healthcare organizations were within the same scope of corporate governance and would not be immune from the same criminal prosecution. In 2003, United Memorial Hospital in Michigan—a not-for-profit healthcare organization—signed a guilty plea in federal court admitting to fraud for over use of pain management surgical procedures after the death of a patient. Even though sentencing has been deferred, this admittance of and plea agreement contained many of the corporate “not-tos” from the board down. The system of reporting for the hospital, its internal audit investigation, conflict of interest disclosures and response to complaints were all held as objects of interrogation (Levine & Short, 2004).

In this abstract, I will explain the specifics of my research and a detailed outline of my paper.

This case established that an auditor could be sued by a primary beneficiary for damages from negligence. A primary beneficiary is a party that has a direct benefit from the audit. Non-privity parties could also sue for gross negligence. This increased the auditor’s legal exposure to third parties. The SEC of 1934 reflected these changes and many others; one significant change was that auditor’s had a much higher litigation risk due to their new responsibility to third parties.

One of the main concerns in a fraud investigation is the analysis of facts and evidence. It is important to bear in mind that every fraud investigation is unique, as each fraud has its own set of facts and details. The investigator must be objective in her or his work and has to determine whether or not there is actually evidence of a fraud. Evidence of health care fraud includes patient medical records, computer files in processing the claims with Medicare, written or printed sources such as claim form, Medicare enrollment application, financial and billing data. It also includes testimony received from interviews of the witnesses or the patients themselves, bank records (personal and business account), and the explanation of benefits statement

The auditing firm has been in engagement with the company throughout the period when the fraud was being committed. One of the common and clear indicators of possible fraud was the company’s cash flow statement. The company experienced positive growth in its profits from the year 1996 through to the year 1998. However, a close analysis of the cash flow statement shows that the company had experienced negative figures of cash flow from both operating and investing activities and positive cash flow from financing activities which would not sufficiently offset the negative cash flows from operating and investing. It is therefore evident

Fraud continues to cost American businesses millions of dollars every year. The Association of Certified Fraud Examiners, or ACFE, prepared a detailed report in 2012 as well as a corresponding infographic to detail the devastating effects of fraud on global businesses. According to the ACFE infographic, the average organization loses five percent of its total revenue to fraud.

The purpose and responsibility of an audit is to provide reasonable assurance that the financial statements are free from material misstatements whether due to fraud or error. The audit will follow the authoritative guidance provided by the PCAOB and AICPA auditing standards. In relation to Johnson & Johnson Company, it would be a plus if the auditor had experience with the Consumer, Pharmaceutical and Medical Devices, but not necessary since a firm would be able to hire an expert to consult on the audit. The test will cover risk assessment procedures, tests of controls and substantive procedures.

How does a company truly know if they have accurate check and balancing in place to detect malicious activity that may impact financial statements? The main obligation for the sufficiency and release in the company’s annual statements resides within the management of the company (Whittington & Pany, 2014). It is a critical component, for management to have a strong financial management system that is documented, meaningful and well-considered accounting policies and procedures manual (Reineking, Chamberlain, Rudolph, & Smith, 2013); this has been demonstrated through other published audits as company have provided documentation around this policies and procedures. Additionally, all companies should create operational internal controls to improve the accuracy and validity of financial data and serve as a mechanism to defend the company’s financial assets, and to prevent fraud. The success of a company is directly influenced by procedures and policies, implementation of internal controls, checks and balancing, annual auditing, which all aid in ensuring that the company is acting in accordance to rules and regulation set forth, furthermore reflecting in positive results and successful audit reviews.