Molex Essay

Decent Essays
To: ACCY 303 Class, AE5
From: Man Fun Daniel Yeung, Seung Kim, Young Jae Lee, Max Kirsch
Date: Oct. 18, 2010
Re: Financial Reporting Problems at Molex, Inc.

This report discusses Molex, Inc.’s conflicts with its auditor, Deloitte and Touche, over a reporting issue in 2004. The report explains the details of the firm’s issue while also addressing the intentions behind Molex’s decisions, Deloitte’s concerns, and the resolutions for the conflict.
In mid-July 2004, Molex’s corporate finance group identified an on-going accounting issue within the firm: for several years, Molex had mistakenly recognized “profits on inventory sales between Molex subsidiaries (but which had not been sold to
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Without the inflationary effect of the accounting error, it is highly likely for Molex miss the forecasted EPS by a slight amount. Failing to achieve forecasted EPS, Molex’s stock prices would probably decline by a large amount.
Secondly, Molex’s management team may have chosen to hide the accounting issue because it was reluctant to harm its investor confidence. If the firm discloses the issue to the auditors, the auditors would probably force Molex to report the error to the public. Especially during that period of intense accounting frauds, investors’ trust for the Molex’s management team would probably degrade significantly. The managers’ concerns for investor trusts justify why the firm failed to disclose details of its adjustment in its 2004 first quarter earnings report.
Thirdly, Molex’s managers decided not to raise the accounting issue with the auditors because they believed the error was immaterial. The management team did not fully understand GAAP’s definition for materiality; the managers probably thought the adjustment amount was immaterial relative to the $2 billion total revenues. According to GAAP definition for materiality, "information is material if its omission or misstatement could influence the economic decision of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement.”
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