A former chairman, CFO, and controller of Donnkenny, Inc., an apparel company that makes sportswear for Pierre Cardin and Victoria Jones, pleaded guilty to financial statement fraud. These managers used false journal entries to record fictitious sales, hid inventory in public warehouses so that it could be recorded as “sold,” and required sales orders to be backdated so that the sale could be moved back to an earlier period. The combined effect of these actions caused $25 million out of $40 million in quarterly sales to be phony.
a. Why might control procedures listed in this chapter be insufficient in stopping this type of fraud?
b. How could this type of fraud be stopped?