Analyzing a Personal Accounting Ethical Situation

Material Misstatements

This memo is to address the fact that what appear to be material misstatements have appeared in our companys financial statements.

As a publicly traded company, we have a legal and ethical duty to inform investors and stakeholders of potential fraud.

While our external auditor is unaware of these material misstatements, they have come to my attention and it as a legal accountant that it is my responsibility to inform you of them so that you may take the necessary steps of rectifying the matter.

In this memo, I will lay out the issues as they appear to me under PCOAB and AICPA rules and regulations as well as the State of Texas CPA rules, which I am bound by law to observe.

Following this overview, I will provide a brief list of recommendations of the actions that I believe the company would do well to consider as it takes its next steps in addressing this issue.

Legal Responsibilities

The PCAOB states under Auditing Standard No. 12:

In an integrated audit, the risks of material misstatement of the financial statements are the same for both the audit of internal control over financial reporting and the audit of financial statements. The auditor's risk assessment procedures should apply to both the audit of internal control over financial reporting and the audit of financial statements.

The AICPA under section 315.21 states:

If during the audit or reaudit, the successor auditor becomes aware of information that leads him or her to believe that financial statements reported on by the predecessor auditor may require revision, the successor auditor should request that the client inform the predecessor auditor of the situation and arrange for the three parties to discuss this information and attempt to resolve the matter. (AU 315.21)

An internal audit has been conducted and a material misstatement has been identified. According to the AICPA, it is therefore the legal responsibility of all parties to convene and resolve the issue.

Additionally, section 316.79 through 316.82 provides instructions on communicating potential fraud in material misstatements to management and those in charge of overseeing governance:

Whenever the auditor has determined that there is evidence that fraud may exist, that matter should be brought...…would be necessary out of respect for the law and stakeholder opinion.

However, let us first conclude our investigation into this matter with your assistance that we may be sure of the facts and nature of the statements as they currently stand.

At your earliest convenience, I stand ready with the rest of our team to be at your disposal to these ends.

Should there be no response from you on this matter, I may be obliged by law to hand over the information I have obtained to third party authorities.

In Closing

This matter is extremely important and should be taken extremely seriously.

Action Required

Material misstatements have been identified in our public report.

We are bound under law to address these statements and assessing whether they were made in error or fraud.

The statements must be clarified and rectified if shown to be incorrect.

My team is standing by to work with you or rectifying this matter.

If no response from you is forthcoming within the week, I shall be obliged to report this findings to the appropriate third party authorities, in accordance with duties under…