Coupon Accounting Abuse - Case Study Example

ABSTRACT THIS PAPER AIMS TO EVALUATE A CASE STUDY ON COUPON ACCOUNTING ABUSE. THIS IS DONE BY ANSWERING QUESTIONS REGARDING THE SITUATION IN THE CASE STUDY. QUESTIONS ANSWERED WILL FOCUS ON THE INTERNAL CONTROL SYSTEM OF A COMPANY, STEPS TO PREVENT ABUSE, WHO IS AFFECTED BY ANY ABUSE AND MANAGEMENT OR EMPLOYEE FRAUD. a) Discuss whether the situation described can happen to a company with a good control environment. The situation in question could not have happened if the company had in place a good control system. Instances of fraud only occur due to the exploitation of the weaknesses in a control system. Therefore, a good control environment should have safeguards against such exploitations and limit the instances if fraud and error in a company. An efficient control environment should have both preventive and detective measures against fraudulent activities. The preventive measures aim to dissuade any chances of fraud or errors and they include the implementation of thorough documentation and authorization practices in the company. In this instance, the company should have had an authorization channel in place such that for one to alter the income statement as Larry did, there had to be proper authorization and documentation to support this. This would therefore ensure that the transactions are accurate and complete, and the proper documentation provides evidence of all transactions. Detective measures would ensure that undesirable activities like fraud are identified. Reconciliation of transactions and their supporting documentation would identify any cases of fraud within the company. This would ensure that financial information is accurate and valid and that any unauthorized alterations of transactions do not occur. Therefore, in Larry’s case, his alteration of the expense estimate for the new coupon would have been detected if proper control measures had been in place. b) Describe any steps a company could take to prevent such abuse. A company must take preventive steps to protect the company from abuse from its employees and management. Preventive measures require efficient processes and should identify any risks that the company is prone to. There are two fundamental activities that act as deterrents of errors and fraud; documentation and authorization. Documentation is anything that provides evidence of a transaction; it may be in form of paper or electronic communication. This ensures the accuracy and completeness of transactions since the documentation provides a record of all the events and activities that have transpired as well as giving information whenever a discrepancy occurs. Authorization involves delegation of the various stages of a transaction through proper recording, approving and reconciling. This ensures that all transactions are carried out and approved by employees with the proper range of knowledge and essential span of control. By installing proper authority channels in the firm, chances of committing acts of fraud are limited. Therefore, policies and procedures within an organization should outline the individuals responsible for each part of a transaction and the employees should also be well trained and informed of these procedures and other internal controls. To limit the falsifications after the approval of a transaction, a document should not be returned to the one who prepared it after it has been approved. c) List those parties who might be harmed by this situation. Existing shareholders evaluate the performance of the management and monitor their investments using the financial reports of the company. Their decisions may rely on wrongful financial reports in such a situation. Potential investors rely on the financial statements of the company to make investment decisions of whether or not to invest in the company. Wrong financial reports in this situation may lead to them making financially risky decisions. Financial institutions/lenders use the financial reports of companies to evaluate their credit-worthiness. Therefore, by the company stating higher profits than it has actually obtained, this would show their lenders/potential lenders that it is a credit worthy business which is false. Creditors also evaluate the financial statements of a business to know whether or not to offer credit services to its clients. Therefore, falsifying financial records would dupe the company’s creditors into offering more credit. Board of Directors can pin the performance of the management with the financial performance of the business. Thus falsifying financial records to show higher profits would make the board believe that the management is performing well, which is not true. Actual or potential joint ventures partners or any other business interests like franchisors/franchisees need to know the financial situation of a company. Any wrong information stated in a company’s financial records would therefore be detrimental to such business partners. d) Do you consider this example to be management fraud or employee fraud? Describe how it fits the definition of your choice. This situation is a case of management fraud since the perpetrator is Larry; the brand manager for a major consumer products firm. Management fraud occurs when there is intentional misstatement or omissions of figures or disclosures in a firm’s financial statements. In this particular situation, Larry reduced the redemption rate on the estimate sheet from 4% to 2% in order to reduce the amount of expenses in the income statement, thereby overstating the profits earned in that financial period. This misstatement was carried out with the knowledge that the newly stated figure was an unrealistically lower estimate but it still would not be challenged by the company auditors if Larry gave a good reason for it. This was an unethical gesture that was purely conducted out of greed for power. By perpetrating this fraud, Larry’s intention was that the higher valuation of profits would show the directors of the company his good leadership, therefore promoting him to a bigger brand. This intentional misstatement of the company’s financial statements by the company’s brand manager illustrates this as a clear case of management fraud. Works Cited Bagranoff N. A., Simkin, M. G. and Strand C.S. (2007) Core Concepts of Accounting Information Systems 10th Edition. Wiley. Romney M. and Steinbart P. (2006). Accounting Information Systems 10th Edition. Pearsonian Education. New jersey. Turner, L. & Weickgenannt, A. (2009). Accounting Information Systems 1st Edition. Wiley. Read More