Auditing and Fraud at Cendant Corporation - Case Study Example

Auditing and Fraud (Cendant Corporation) Name: Institute: Table of Contents Auditing and Fraud (Cendant Corporation) 1 Executive Summary 2 Question1 3 Part A 4 Part B 5 Question 2 5 Part A 5 Part B 6 Question 3 7 Part A 7 Part B 7 Conclusion 8 Executive Summary The report provides a critical analysis of fraud and audit that occurred in Cendant Corporation some years ago. In this regard, the report seeks to find the liability of an auditor in noticing material misstatements owing to fraud and miscalculations. Furthermore, the study will highlight a number of misstatements that were identified on account of the fraud pulled off by CUC management; highlight management assertion that was violated, and discuss audit procedure the auditor could have utilized to detect the misstatement. Finally, the report will give a reason why a company would desire to hire a member of its external audit team, and if hiring former auditors can influence the autonomy of the existing external auditors. Auditing and Fraud (Cendant Corporation) Question1 The main intention of declaration engagement is improving the dependability of the focuses; thus, it was the liability of Cendant’s auditor to offer a sensible level to guarantee the financial statement is factual and just. Chow (2008) defines financial statement as information accumulation which reveals the business stand. For that reason these users, which includes boards, investors, financiers, as well as the other involved parties can decide with regards to the data offered by the financial report. In this regard, materiality can be defined as the data which influences management processes as a result of using financial report. Basically, the auditor is responsible for planning and carrying out the audit to get hold of sensible assurance with reference to whether the financial reports are free of material misstatement, and if are brought about by fraud or error. Owing to the nature of Cendant fraud attributes and the audit proof, the auditor could attain sensible, but not complete, assurance of material misstatements detection. Part A Basically, fraud can be defined as a deliberate act by making use of dishonesty to gain an unmerited or unlawful advantage. There are two main categories of fraud and they include asset misappropriation fraud and financial reporting fraud. In general assets misappropriation fraud entails several type of stealing. As a result, assets misappropriation fraud reduce the assets and heighten the operating cost; thus, leading to equity reduction for the company owners. On the other hand, financial reporting fraud is deliberately neglecting essential information or misstating items from the financial statement. Based on Cendant Corporation fraud, it occurred when the accounting department stage-managed the returns to cope with the anticipation of Wall Street analyst. According to Fogarty, Graham, and Schubert (2006), the financial reporting fraud affect probably heightens sales and as a result, boosts the company’s revenue. Essentially, financial reporting with deception will reveal the prospect earning capability to the share market; thus, increasing the price of share within the exchange market.  Part B Looking for inducements and demands to carry out a fraud, material expressed in the beginning and mid-1990's CUC took over a number of companies through acquisitions to increase its market share. Some of the acquisitions entailed business organizations such as Net Market, Sierra On-Line, Entertainment Publications, Davidson & Associates, Welcome Wagon International, and Privacy Guard. What’s more, CUC signed contracts with enormous business organization like s American Airlines, Time Warner and Intel. Through such acquisitions, CUC managed to twofold its profits from an estimated $738 Million to $1.4 billion in a span of two years (1993-1996), and simultaneously net profits of CUC went up from $ 25 Million to an estimated $163 Million (McLaughlin, 1999). This arguably increased the competitive advantage of CUC tremendously. However, for the reasons of year-end reporting, CUC was compelled to make a range of year-end modifications in order to allow misstatements to be integrated into the general ledger; therefore, those modifications created the chances to carry out a fraud (Chow, 2008). Question 2 Part A Fundamentally, there were three misstatements recognized in the CUC: lopsided charges in opposition to merger reserves, phony services coding vended to clients as well as belated acknowledgment of membership annulments and charges dismissal by banks with regards to credit card accounts of the members. According to Chow (2008), lopsided charges in opposition to merger reserves are abnormally inflate earning by deceitfully accounting profits or decreasing costs and cutting down the CUC’s merger reserve. In this regard, an audit can make use of the assertions utilized for dealings and transactions, which entails items of income statement. According to Fogarty, Graham, and Schubert (2006) the accuracy assertion is utilized to examine amounts along with other information regarding recorded dealings and transactions that have been recorded properly. For this reason, the profit and cost for the merges must be recorded properly. Phony services coding vended to clients is termed by McLaughlin (1999) as classification fraud. Classification as that dealings and transactions recorded within the suitable accounts. Yet, CUC recorded their income into a distinct account it can be identified as revenue instantly rather than overdue revenue; thus, the income became inflated. What’s more, belated acknowledgment of membership annulments as well as charges dismissal by banks with regards to credit card accounts of the members was a disconnected issue. Part B When Cendant auditor was examining for precision he/she had to look for proof that dealings and transactions had been accounted at acceptable amounts. From CUC Fraud perspective, Fogarty, Graham, and Schubert (2006) suggest that the auditors should have gathered the transaction as well as contract record that pertains to the merge to compute the accurate amount that should have been integrated in the financial statement. What’s more, when an auditor tests for classification he must ensure that dealings and transactions are accounted in the appropriate accounts. In this regard, the auditors tasked with examining CUC records should examine the records to recognize whether or not every transaction in that record fit into the approved account. When an auditor tests for cut-off, he/she looks for proof that transactions had been accounted in the acceptable accounting moment in time. For this reason, CUC’s auditors should have examined every possible deal and transaction that had been recorded within the proper accounting time.  Question 3 Part A Principally, Cendant desired to hire an external audit team member just because of know-how. In case an audit manager, for example, has been employed for a certain task for numerous years, then he/she could be acquainted with more concerning the processes of auditing than auditors available for hiring. Conversely, if a company constantly hires external auditors, it will raise the question regarding the entire reliability of the in-house audit team as well as management. Chow (2008) believes that a company can hire an external audit team member because of the enhanced skills they have. Moreover if the external auditors have been auditing the company for a moment, then they have knowledge pertaining to how the company operates and what is needed to enhance the in-house audit department. Besides, the company may as well desire to hire them for the reason that it provides the company a perception of what auditors are actually searching for and can easily discern if any member of staff was planning to commit fraud. However, the hiring of former external auditors might make the existing self-regulating auditors decision to be damaged, particularly if they are familiar with ex-external auditor. Part B According to Fogarty, Graham, and Schubert (2006), hiring an external audit team member may not inevitably prejudice independence.  On the other hand, in case there was an unaccounted effort to hire a member of audit team or an unaccounted effort to be hired for the period of the audit, independence is damaged.  Other effects based on independence may crop up after the individual is hired, but he/she have to be measured individually. Basically, Independence can be defined as a state of being autonomous, or the freedom from manipulation, support, power, or assistance. Furthermore, independence can be defined as the capability to act with reliability, impartiality and professional agnosticism. However, independence can be compromised by threats such as selfishness, self-review, coercion, or over-familiarity. With regards to CUC fraud, the independence threat that arose is familiarity threat, which can be defined as a threat that crops up when a close association develops or subsists between the client and assurance company or between directors and assurance team. The consequence is that the assurance team turns out to be too susceptible to the desires of the customer and misplaces their independence. Conclusion Even though in-house control over financial statement is helpful and stylish, the override of management still occurred in scores of entities. It has been observed that Cendant top management was responsible for financial statement. Basically, it was complicated to recognize the threat of fraud committed by Cendant‘s management override for the reason that management is responsible of the plan, execution and protection of in-house controls; thus, actions must be enforced to deal with this threat. Read More