The Treadway Commission: Fraudulent Financial Report

First and foremost, the accounting system used should be updated. The case stated that the system was 30 years old and that prior accounting period transactions could not be locked down, which enabled internal control processes to be bypassed. Enhancing internal

Scoping and Evaluation Judgments in the Audit of Internal Control over Financial Reporting 12.1 EyeMax Corporation . . Evaluation of Audit Differences

With different industry definitions and viewpoints, fraud can be a tough issue for audit committee members to grasp for oversight purposes. The legal obligations of audit committee members have intensified because their standard duty of care and loyalty to the entity has increased in light of management fraud activities.

Arel, Beaudoin, Cianci, (2011) argue that "executive ethical leadership and an "high-quality" internal audit function, can positively guide accounting managers ' making decisions involving uncertainties."

An effective system of internal control must be built on the basis of the analysis of enterprise-wide risks. Therefore, to create value for its customers and other stakeholders, an organization must have in place the ability to systematically assess and analyze all material risks that affect the entity’s planned objectives. (Integrated Framework, Volume II Guidance, June 2008). Internal control of the accounting process is designed to detect unintentional data errors rather than intentional errors. Garbage in, garbage out! Even good accounting systems can not catch

I recently finished a stint with the IRS-Criminal Investigation Division and I was exposed to some of the principles we are talking about. Effective and efficient internal controls are paramount in negating and mitigating the possibility of internal fraud.

Internal controls represent an organization’s processes and procedures used to meet its goals and objectives and serve as a defense in safeguarding assets and preventing and detecting errors, fraud, and abuse. Effective internal controls provide reasonable assurance that an organization’s objectives are achieved through (1) reliable financial reporting, (2) compliance with laws and regulations, and (3) effective and efficient operations. The passing of the Sarbanes-Oxley Act of 2002, as well as the numerous corporate frauds and bankruptcies over the past decade—including some

The act endorses companies to change the practice and regulations of accounting and auditing. It required them to maintain good financial recorded which were different than the past. The management team is held personally liable for the reliability and accuracy of the financial statements. All publically listed companies must establish a system of internal controls which must be evaluated by management at least quarterly and external auditors are required to conduct independent assessments of company’s in –house internal controls as well as report any fault or fraudulent acts they observe.

This case involved a fraud orchestrated by three senior executives of Fair Finance Company (Fair) which had its headquarters at Akron Ohio. This fraud occurred from at least 2005 through November 2009 the defendants involved were the three senior executives –Timothy S. Durham, Chief Executive Officer, James F. Cochran, Chairman, and Rick D. Snow, Chief Financial Officer. These executives defrauded their investors by raising approximately $230 million from at least 5,200 investors through the sale of investment certificates by making materially false and misleading misrepresentations and omissions concerning, among other and returns, and the use of investor proceeds to purchase discounted consumer receivables. (SEC litigation release 2012)

The Securities and Exchange Commission can also impose financial penalties on institutions and individuals for violations outside of insider trading for the breach of any Federal Securities Law following a report issued by the National Commission on Fraudulent Financial Reporting, also known as the Treadway Commission. The Treadway Commission’s objective was to detect fraud and identifying acts that contribute to fraudulent financial reporting. As a result, Congress took the Treadway Commission’s recommendations and passed the Securities Enforcement Remedies and Penny Stock Reform Act of 1990 known as the Remedies Act. This gave the Securities and Exchange Commission the authority to seek financial penalties against individuals or institutions

Internal control refers to methods, techniques and measures that are practices by a company to safeguard the assets, enhance reliability of its accounting records, increase efficiency of its operations and making sure everything they do is in line with laws and regulations as ordered by security and

ABSTRACT: Management and auditors face increased responsibilities to evaluate internal control and assess the risk of fraud. This case provides the opportunity to evaluate internal controls and the possibility of fraud in a very small not-for-profit child care

Phar-Mor Inc. fell prey to greed from the top. Unfortunately, the auditing firm assisted the organization with the conspiracy to defraud the users of financial reporting, the government, and the stakeholders. The chief officers used the funds for personal usage and appropriated funds to functions that were not related to the organization business. The financial statements were riddled with material misstatements and fraud acts of theft were blatant. For example, the senior financial officers including the CEO grossly over stated inventory to hide losses.

The final responsibility for the integrity of an SEC registrant’s internal controls lies on the management team. U.S. companies need to refer to a comprehensive framework of internal control when assessing the quality of financial reporting to determine that financial statements are being presented under General Accepted Accounting Principles, GAAP. The widely used framework is referred as COSO, Committee of Sponsoring Organizations of the Treadway Commission, sponsored by the following organizations American Accounting Association, the American Institute of CPA’s, Financial Executives International, the Institute of Internal Auditors, and the Institute of Management Accountants. COSO’s defines internal control as:

The lack of independence for external auditors will lead to the neglect of auditing risks (William R.K., 2003), which are the main reasons for the failure of certified accountants and professional accounting organizations. The consequence of the external auditors deprived of independence would be very serious. And there are many cases, which aroused by the failure of external auditors and most are related to the lack of independence. One famous example is the bankruptcy of Enron and the role played by its external auditor, Arthur Andersen (Todd, S., 2003). Arthur Andersen was once one of the biggest accounting companies in the world, and was canceled for the involvement in the Enron bankruptcy scandal.