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Critical Thinking Case - - Essay Example

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This issue arises when a company does not abide by the accepted accounting principles (GAAP) when documenting and analyzing the reserve accounts. The security and exchange…
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Download file to see previous pages The company should ensure its financial reports abide by the GAAP.
The Microsoft Corp may have violated the rules and regulations of the security and exchange commission. Microsoft documented reserves minus a properly substantiated or recorded basis. The SEC noticed that from the year 1995 to 1998, the company maintained secret liability, allowances, accruals, and reserves accounts that are termed as reserve accounts or reserves by the SEC. These undisclosed accounts stretched from $200 million to $900 million on quarter-end in the course of those 4years. At the operational level, regional controllers upheld reserve accounts in conformity with the accepted accounting principles and were correctly documented and reviewed systematically by the internal audit department of Microsoft Corp. However, at the high-ranking company level, the journal entries were carried out to several reserve accounts without applying accurately based statistics, analysis or formulas. Additionally, there was minimal or no recording to support the alterations to these reserve accounts. The main justification was founded upon the decision of the probability of forthcoming events. Therefore, these reserves lacked the needed documentation as required by the national securities statute and did not have sufficient substantiation as speculated in GAAP (Sandretto, 57).
Microsoft Corp was not doing the right thing as all the reserve accounts were not being maintained according to the GAAP, and they were not reviewed accordingly with the company’s internal audit department. Additionally, the documentation and changes depended on subjective judgments instead of factual analysis and statistics. Furthermore, the actions of only maintaining some reserve accounts and having others undisclosed are termed as fraud, and this affects the company’s profitability. Therefore, the company should make sure there are no undisclosed accounts and all ...Download file to see next pagesRead More
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