Question

Please read the attached case: Navistar International and prepare answers to the following four questions In...

Please read the attached case: Navistar International and prepare answers to the following four questions

In a bizarre twist to a bizarre story, on October 22, 2013, Deloitte agreed to pay a $2 million penalty to settle civil charges—brought by the PCAOB—that the firm violated federal audit rules by allowing its former partner to continue participating in the firm’s public company audit practice, even though he had been suspended over other rule violations. The former partner, Christopher Anderson, settled with the PCAOB in 2008 by agreeing to a $25,000 fine and a one-year suspension for violating rules during a 2003 audit of the financial statements for a unit of Navistar International Corp. According to the charges, “Deloitte permitted the former partner to conduct work precluded by the Board’s order and put investors at risk.”

After he settled the case and agreed to a one-year suspension, the PCAOB said Deloitte placed Anderson into another position that still allowed him to be involved in the preparation of audit opinions. Allowing a suspended auditor to continue working in that capacity is a violation of PCAOB rules, unless the SEC gives the firm permission. During the suspension, Anderson rendered advice on assignments involving three other Deloitte clients, according to the PCAOB. Deloitte said that it had taken “several significant actions to restrict the deployment” of Anderson. “However, we recognize more could have been done at that time to monitor compliance with the restrictions we put in place.”

In January 2013, Deloitte had settled a lawsuit alleging it committed fraud and negligence, forcing Navistar to restate earnings between fiscal year 2002 and the first nine months of 2005. Deloitte was dropped by Navistar in 2006, and the company was delisted by the New York Stock Exchange.

In response to charges by Navistar that sought to hold Deloitte liable for an incompetent audit, deceptive business practices, fraudulent concealment and basically everything that went wrong for Navistar, the Deloitte spokesman Jonathan Gandal, expressed the firm’s position as follows:

“A preliminary review shows it to be an utterly false and reckless attempt to try to shift responsibility for the wrongdoing of Navistar’s own management. Several members of Navistar’s past or present management team were sanctioned by the SEC for the very matters alleged in the complaint.”

Early in the fraud, Navistar denied wrongdoing and said the problem was with “complicated” rules under SOX. Cynics reacted by saying it is hard to see how the law can be blamed for Navistar’s accounting shortcomings, including management having secret side agreements with its suppliers who received “rebates;” improperly booking income from tooling buyback agreements, while not booking expenses related to the tooling; not booking adequate warranty reserves; or failing to record certain project costs.

It is clear that Navistar employees committed fraud and actively took steps to avoid discovery by the auditors. The auditors did not discover the fraud, according to Navistar, and in retrospect, the company wanted to hold the auditors responsible for that failure. Deloitte maintained that in each case, the fraudulent accounting scheme was nearly impossible to detect because the company failed to book items or provide information about them to the auditors.

Deloitte may have been guilty of failing to consider adequately the risks involved in the Navistar audit. After SOX was passed in mid-2002, all the large audit firms did some major cleanup of their audit clients and reassessed risk, an assessment that should have been done more carefully at the time of accepting the client. Big Four auditors, in particular, wanted to shed risky clients to protect themselves from new liability. Interestingly, to accomplish that goal with Navistar, Deloitte brought in a former Arthur Andersen partner to replace the engagement partner who might have become too close to Navistar and its management, thereby adjusting to the client’s culture.

Whether because of his experience with Andersen’s failure, fear of personal liability, a “not on my watch” attitude, or possibly a heads-up on interest by the SEC in some of Navistar’s accounting, this new partner cleaned house. Many prior agreements between auditor and client and many assumptions about what could or could not be gotten away with were thrown out.

One problem for Navistar was that it was too dependent on Deloitte to hold its hand in all accounting matters, even after the SOX prohibited that reliance. According to Navistar’s complaint, “Deloitte provided Navistar with much more than audit services. Deloitte also acted as Navistar’s business consultant and accountant. For example, Navistar retained Deloitte to advise it on how to structure its business transactions to obtain specific accounting treatment under GAAP . . . Deloitte advised and directed Navistar in the accounting treatments Navistar employed for numerous complex accounting issues apart from its audits of Navistar’s financial statements, functioning as a de facto adjunct to Navistar’s accounting department. . . . Deloitte even had a role in selecting Navistar’s most senior accounting personnel by directly interviewing applicants.”

The audit committee’s role is detailed in the 2005 10-K filed in December 2007:

“The audit committee’s extensive investigation identified various accounting errors, instances of intentional misconduct, and certain weaknesses in our internal controls. The audit committee’s investigation found that we did not have the organizational accounting expertise during 2003 through 2005 to effectively determine whether our financial statements were accurate. The investigation found that we did not have such expertise because we did not adequately support and invest in accounting functions, did not sufficiently develop our own expertise in technical accounting, and as a result, we relied more heavily than appropriate on our then outside auditor. The investigation also found that during the financial restatement period, this environment of weak financial controls and under-supported accounting functions allowed accounting errors to occur, some of which arose from certain instances of intentional misconduct to improve the financial results of specific business segments.

The complaint against Deloitte also references audit discrepancies cited in PCAOB inspections of Deloitte. Navistar believed the discrepancies related to Deloitte’s audit of the company. However, the names of companies in PCAOB inspections are not made publicly available due to confidentiality and proprietary information concerns.

*****

Questions

  1. Would you characterize the Deloitte audit of Navistar a failed audit? Refer to the ethics rules of conduct in the AICPA Code as they pertain to audit engagements and the facts of the Navistar case.                                                               (6 marks)

  1. Evaluate the deficiencies in internal controls and corporate governance at Navistar. Do you believe external auditors should be expected to discover fraud when a company, such as Navistar, is so poorly run that its personnel did not have the necessary training and expertise, its internal controls were deficient, and it relied too heavily on Deloitte to determine GAAP compliance? Explain.                                       (6 marks)

  1. If you were the CEO of Navistar what action you would take to improve the internal control mechanisms and mitigate risk associated with accounting fraud. Do you think Audit committee can be used as the substitute for internal control department (4 marks)   

What is the purpose of the PCAOB audit firm inspection program with respect to ensuring that auditors meet their ethical and professional responsibilities and obligation to place the public interest above all else? (4 marks)

0 0
Add a comment Improve this question Transcribed image text
Answer #1

D As per the given data :- P. No. 1 According to the AicpA code, auditors should enhance public confidence by performing theiP.NO.2 NAV management, It is plausible that there Some both sides. collusion on 4. DEL to NAV Continued to extend Support inP. No.3 3. As mentioned in the audit Committee report, NAV management had effort to develop it Competencies to internally audP.No.4 The POMOR inspection programs objective is to investigate the firms Compliance with PCAOB Standards and rules and alP.NO.S performance, independence policies and procedures, and processes for responding to defects of potential defects in qua

Add a comment
Know the answer?
Add Answer to:
Please read the attached case: Navistar International and prepare answers to the following four questions In...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
  • Which of the following statements about the Medicis fraud is false? a. The PCAOB found that...

    Which of the following statements about the Medicis fraud is false? a. The PCAOB found that EY and its partners failed to properly evaluate a material component of the company's financial statements—its allowance for doubtful accounts. b. EY did not properly evaluate Medicis' practice of reserving for most of its estimated product returns at replacement cost, instead of at gross sales price. It appears that EY accepted the company's basis for reserving at replacement cost when the auditors should have...

  • 1. Do you agree with Deloitte's assertion that Adams had no "substantive role" in the 2008...

    1. Do you agree with Deloitte's assertion that Adams had no "substantive role" in the 2008 and 2009 Caesars audits? Defend your answer. 2. The SEC applies a principles-based approach to mitigating the risks that may undercut auditor independence. Identify the four guiding principles applied by the SEC to protect the independence of auditors of public companies. 3. Assume Adams had used his personal funds to finance his gaming activities in the Caesars casino. Under those circumstances, would he have...

  • Please help ASAP. Will rate! 1. Intro: Read through the meeting minutes &find an engagement letter...

    Please help ASAP. Will rate! 1. Intro: Read through the meeting minutes &find an engagement letter in the textbook and read it (don't have to write one) then write a list of the staffing you thing you need for the engagements (tax specialist, IT specialist for when the computers stop working, etc) Board minutes are in document 5 2. Board Minutes: Read through the board minutes (board minutes provide a history of every important event and transaction that the client...

  • 3) Role of internal audit function 30 Chapter 1: Auditing and Internal Contrel Management ii External...

    3) Role of internal audit function 30 Chapter 1: Auditing and Internal Contrel Management ii External auditor i Internal audit To whom should the Director of Internal Audits report. Explain your answer. Comment on the audit committee member's per- spective as to the committee's current composition. 3. Role of Internal Audit Function Nano Circuits Inc. is a publicly traded company that pro- duces electronic control circuits, which are used in many products. In an effort to comply with SOx, Nano...

  • Review the Audit report (found in the 10-K) for the following two companies. Highlight or summarize...

    Review the Audit report (found in the 10-K) for the following two companies. Highlight or summarize differences between the reports (other than the name of Company, Audit Firm, Financial statement period covered). Note: 1. Each Company may have two audit reports (one opinion on financial statements and one for audit of internal controls) or the two opinions may be combined into one report. 2. You are not required to review the entire 10-K. Find the audit report in the 10-K...

  • Which of the following matters would an auditor most likely consider to be a significant deficiency to be communicated to the audit committee

    1. Which of the following matters would an auditor most likely consider to be a significant deficiency to be communicated to the audit committee? A. Management's failure to renegotiate unfavorable long-term purchase commitments.B. Recurring operating losses that may indicate going concern problems.C. Evidence of a lack of objectivity by those responsible for accounting decisions.D. Management's current plans to reduce its ownership equity in the entity. 2. After obtaining an understanding of internal control and arriving at a preliminary assessed level...

  • E-mail from the Partner: Hi Team, I hope all is well. Sorry, I couldn’t be there...

    E-mail from the Partner: Hi Team, I hope all is well. Sorry, I couldn’t be there but I have a number of client meetings today and over the next few months that prevent me from being there in person. Prof. Qamar will be working with you throughout the audit to help you reach the right conclusions. Remember this is a new client and we want to keep them happy but also want to complete an audit in accordance with PCAOB...

  • In each of the following, identify which of the elements of the fundamental principles (responsibilities, performance,...

    In each of the following, identify which of the elements of the fundamental principles (responsibilities, performance, or reporting) is most applicable. An entity has contacted you about performing its audit engagement. You have not previously served a a. client in the entity's industry, which has many industry-specific accounting issues that are both technical and complex. An entity has entered into a number of lease agreements. Based on the requirements of GAAP. you believe that these obligations meet the criteria for...

  • Include in your report the answers to the questions listed below. Also, remember to include the...

    Include in your report the answers to the questions listed below. Also, remember to include the source of your answer, by indicating the document (SEC Form 10-K, or Proxy Statement) and page number where the answer was found. -Company: Nike Company -Use the 2019 10-k Annual report (No need to be long answers and can be obtained directly from 10-k form, but please state the page the answers were found).   I:Background a. Name of the company b. Fiscal year covered...

  • The PTL CLub - Jim and Tammy Faye Bakker I need help with the discussion questions listed at the bottom... THE PTL CLUB...

    The PTL CLub - Jim and Tammy Faye Bakker I need help with the discussion questions listed at the bottom... THE PTL CLUB Jim and Tammy Faye Bakker launched the PTL Club in January 1974. This show was one of the most successful television ministries for more than a decade. The broadcast of the PTL Club utilized almost 200 television stations to reach a national audience of approximately 12 million viewers. PTL stood for both “Praise the Lord” and “People...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT