Accounting fraud detection and financial statement irregularities

Decision and Ethical Cases

Ethical Issue 22 -1

What is an ethical issue?

An ethical issue is when someone will engage in behaviors that are in violation of social, professional and morale guidelines. In many cases, the person is seeking to hide possible problems among other expenses by under or over reporting certain costs.

What are the options?

In this case, the new bookkeeper could report what was discovered to upper management. This will spark an investigation and can lead to problems from Dunn. Another approach is to simply follow her instructions. This is troubling, as it only encourages these practices to continue in the future. Once this happens, is the point they could be using company funds to cover personal expenses. As a result, the best choice is to disclose what was discovered and the scope of these activities. This will ensure that the firm is following the highest industry and regulatory practices.

What are the possible consequences?

The biggest impact of not reporting Dunn's accounting procedures are violating federal securities laws. The most notable include: Sarbanes-Oxley and the Securities and Exchange Act of 1934. Under these regulations, anyone who does not immediately make these kinds of disclosures can be found criminally and civilly liable.

What should you do?

The best course of action is to report Dunn's practices. This is because there is the possibility of improprieties occurring. The different securities regulations require making these disclosures to provide full and open access to the firm's records. This means that any kind of irregularities should be provided to upper management, regulators and investors as soon as possible.

Fraud Case 22-1

Why would Patrick's actions be considered fraudulent?

Patrick's actions are fraudulent based upon the fact that he did not disclose to his employer about how he is opening a competing business. In this situation, he charges less for similar services. At the same time, he is stealing parts from the company by encouraging them to order merchandise they do not need. He takes the extra parts home and uses them to keep his costs low. This is considered to be theft and Patrick can be prosecuted criminally.

What can the company do to protect against this kind of business risk?

The best approach is to have an outside accounting firm to conduct annual audits of the company's records. Another option, is to have a purchasing manager double check the inventory and orders. Once it arrives, is when security will hold the merchandise until it is properly checked in.

Decision Case 2-22

Budget

Assets

Figures

Cash

$25

Inventory

$175

Total Current Assets

$200

Loom

$500

Depreciation

$-240

Total Property, Plants and Equipment

$260

Total Assets

$460

Liabilities

Accounts Payable

$74

Stockholders' Equity

$386

Total Liabilities and Stockholders' Equity

$460

Assets

Figures

Cash

$25

Inventory

$280

Total Current Assets

$200

Loom

$500

Depreciation

$-240

Total Property, Plants and Equipment

$260

Total Assets

$765

Liabilities

Accounts Payable

$74

Working Capital

$1,000

Interest

$20.00

Stockholders' Equity

$-329

Total Liabilities and Stockholders' Equity

$-436

On the basis of financial considerations only, what should Magnuson do? Give you reason.