Question

Please keep in mind that the discussion on fraud will evoke some emotions that is human. These are hypothetical situations.

On page 62 of the textbook, the Author Anderson and Enron case is discussed. This event demonstrates the breakdown of ethics and professional judgement in the 1990's / 2000 which resulted in accounting fraud. This occurred when accounting professionals failed to identify, report and correct unethical behavior because in doing so would harm the observer. Enron paid Anderson a total go $52 million making them the second largest client in there Houston Texas office.

The discovery of inaccurate financial statements and the failure to correct it and disclosure it in the 1997 earnings restatements were the primary reasons for fraud that has made Enron a household name today. This example demonstrates fraud from the top down where the professionals lost sight of there obligations during the audit.

The movie the Mule by Clint Eastwood proposed a similar dilemma in that ethics and professional judgement were ignored by all the individuals and fraud crimes were allowed to go uncorrected because there was no checks or voluntary disclosure which poses the question.

Question:

As a CPA or an accounting professional, how would you handle the issue of inaccurate earnings on financials statements if the lead auditor of your firm chose to allow it to go uncorrected.

How would you handle a $10 dollar variance versus a $10 million dollar variance?

Answer 1

As a CPA or an accounting professional I will handle the issue of inaccurate earnings on financial statements if the lead auditor of your firm chose to allow it to go uncorrected by making use the code of professional conduct and code of ethics that are applicable to me as an accounting professional. I will flag the issue of inaccurate earnings with the senior managers and executives of the firm so that the issue is corrected and financial statements give a fair picture of the financial position of the company. In case the top executives also do not pay any heed to this then I will act as a whistleblower and will expose this action of the firm which is unethical and also apparently illegal.

A $10 dollar variance and a $10 million dollar variance should be handled in the same manner, though more heed should be paid to the $10 million dollar variance because of it being highly material in nature. Proper checks and balances should be out in place and effective internal controls should be put in place to ensure that there are no variances. Any variance should be dealt with seriously even if the amount is small so as to ensure that financial statements are proper.