Question

Use the Internet to research at least two (2) accounting scandals within the past five (5) years. Based on the accounting scandals you researched, identify the accounts that the fraud had affected, and analyze the auditor’s responsibility to detect fraud. Next, suggest key internal controls that would have either prevented or detected the fraudulent behavior or transactions. Justify your response

Answer 1

Two recent accounting scandals within the past 5 years are discussed below:

(1): Wirecard AG – This is a German financial institution. The accounting scandal with regards to this company came into picture at the end of January 2019. The accounting scandal involved a fraud in which ‘round tripping’ practice was used by the company to transfer its money from Germany to a dormant subsidiary in Hong Kong and then shift this money in Wirecard’s Indian books as revenue. The accounts that were affected were cash and revenue. The auditors of Wirecard had the responsibility to detect this fraud that occurred due to ‘round tripping’ by planning the audit in such a way so that there is a reasonable expectation of discovery of the fraud.

Key internal controls that would have either prevented or detected the fraudulent behavior or transactions are “the control environment”. The control environment refers to the policies and practices as put in place by the top management of a company. The control environment consists of organizational structure, management’s philosophy, HR policies etc. The control environment, in this case, should have been strengthened with control activities. This would have ensured that movement of cash was not done in a manner that was used by the company.

(2): Tesco – Tesco is a UK supermarket chain and the company had overstated its profits by GBP 263 million. The accounts that were affected were net income and retained earnings. The profits were overstated by accelerating the recognition of commercial income and delaying the accruals of certain costs. In this case the auditor should have identified the overstating of profits and this identification was not done as the auditor, most probably, had not obtained reasonable assurance about whether the financial statements are free of material misstatement.

Key internal controls that would have either prevented or detected the fraudulent behavior or transactions are control environment along with risk assessment and monitoring. Risk assessment involves identification and analysis of risks. Monitoring involves periodic assessment of the quality of internal control process. If the quality is found to be lagging then modifications will have to be made in the internal control systems. These components of internal controls would have raised a flag when revenue recognition was accelerated and cost accruals was delayed.