internal auditing: assurance & advisory services. 4th edition CH. 8

CASE 1 Oxalite Inc.: A Cautionary Tale Note: "Oxalite Inc. is a fictional company created illustrative purposes. It appears as the opener" to Center for Audit Quality's (CAQ November 17, 2 publication, "The Fraud-Resistant Organization: T Traits, and Techniques to Detect and Report Finan Reporting Fraud." The publication resulted from work of the Anti-Fraud Collaborative formed in and consisting of the CAQ, Financial Executives Inte tional (FET), the Institute of Internal Auditors (IIA) the National Association of Corporate Directors (NA The headlines stunned investors, regulators, and the busi- hers of the management team at Oxalite Incorporated had discovered included revenue-timing schemes and the cre- encaged in fraudulent financial reporting. The offenses of Nictitious revenue in both U.S. and Asian offices. Prior to the discovery, a cursory look at Oxalite would have individuals. Oxalite had a written code of conduct. It had fraud Its board of directors was populated with respected unded at a healthy rate, even opening facilities in Asia. The company had experienced steady profits. But a bok behind the curtain revealed a culture that encouraged and enabled fraud. Promotions were based on loyalty rather than competence. "Fast" and "new ure the watchwords trumping "deliberate" and docu- mented." Employees did not feel safe bringing bad news forward. Furthermkepticism was discouraged and questions were frow upon. Discussion questions: 1. For discussion purposes, treat Oxalite, Inc. as a public company. Based on this assumption, refle on the following: a. What were some internal control deficiencies even material weaknesses? How would they been discovered? What would be the implica for Sarbanes-Oxley Section 404 compliance b. Analyze this case using the COSO Fraud Ris Management Guide Principles 1, 2, and 5 rel to the COSO internal control components of control environment, risk assessment, and monitoring 2. How could the external auditors have helped avoid this adverse corporate governance outco Executives shared company code of conduct with investors, media, anothers outside the company; how. ever, employees were amply provided with a weblink to the code upon hire a few had ever accessed or read it. A significant portion of executive compensation hinged on making the numbers." The Asian offices came under particular pressure, as hopes for ever-higher earnings were pinned on rapid-growth markets. Executives strug- gled to hit targets but learned to manipulate the books to make it appear they had. 3. How could the internal audit function have helped evaluate the design and operating effectiveness of internal controls? 4. Mr. N. G. Shankar, CAE of the Aditya Birla Group, a large conglomerate in India and a for member of the Internal Audit Standards Boar of The IIA, has remarked, "Poor culture leads to organizational disaster." In what way wash observation justified in the case of Oxalite, In The board of directors and audit committee met regu- larly but rarely availed themselves of the opportunity to engage internal or external auditors, or the company's ethics and compliance personnel. Board meetings dis- couraged two-way discussion, and the board frequently tof time before ethics and compliance issues could be discussed. The audit committee rarely met with execu- thies or middle management, and when they did, failed to ask questions whose answers might have raised red flags. In short, the participants in the financial reporting sup- ply chain were insufficiently inquisitive or skeptical. They CASE 2 A number of large cases of fraud have come to t the postmortems are completed. You have le lot related to identifying fraud risk, mitigating activities, as well as promoting organizationa and compliance. You now should understand th sumed all was well. It was not. RISK OF FRAUD AND ILLEGAL ACT CASE 1 Oxalite Inc.: A Cautionary Tale Note: "Oxalite Inc. is a fictional company created illustrative purposes. It appears as the opener" to Center for Audit Quality's (CAQ November 17, 2 publication, "The Fraud-Resistant Organization: T Traits, and Techniques to Detect and Report Finan Reporting Fraud." The publication resulted from work of the Anti-Fraud Collaborative formed in and consisting of the CAQ, Financial Executives Inte tional (FET), the Institute of Internal Auditors (IIA) the National Association of Corporate Directors (NA The headlines stunned investors, regulators, and the busi- hers of the management team at Oxalite Incorporated had discovered included revenue-timing schemes and the cre- encaged in fraudulent financial reporting. The offenses of Nictitious revenue in both U.S. and Asian offices. Prior to the discovery, a cursory look at Oxalite would have individuals. Oxalite had a written code of conduct. It had fraud Its board of directors was populated with respected unded at a healthy rate, even opening facilities in Asia. The company had experienced steady profits. But a bok behind the curtain revealed a culture that encouraged and enabled fraud. Promotions were based on loyalty rather than competence. "Fast" and "new ure the watchwords trumping "deliberate" and docu- mented." Employees did not feel safe bringing bad news forward. Furthermkepticism was discouraged and questions were frow upon. Discussion questions: 1. For discussion purposes, treat Oxalite, Inc. as a public company. Based on this assumption, refle on the following: a. What were some internal control deficiencies even material weaknesses? How would they been discovered? What would be the implica for Sarbanes-Oxley Section 404 compliance b. Analyze this case using the COSO Fraud Ris Management Guide Principles 1, 2, and 5 rel to the COSO internal control components of control environment, risk assessment, and monitoring 2. How could the external auditors have helped avoid this adverse corporate governance outco Executives shared company code of conduct with investors, media, anothers outside the company; how. ever, employees were amply provided with a weblink to the code upon hire a few had ever accessed or read it. A significant portion of executive compensation hinged on making the numbers." The Asian offices came under particular pressure, as hopes for ever-higher earnings were pinned on rapid-growth markets. Executives strug- gled to hit targets but learned to manipulate the books to make it appear they had. 3. How could the internal audit function have helped evaluate the design and operating effectiveness of internal controls? 4. Mr. N. G. Shankar, CAE of the Aditya Birla Group, a large conglomerate in India and a for member of the Internal Audit Standards Boar of The IIA, has remarked, "Poor culture leads to organizational disaster." In what way wash observation justified in the case of Oxalite, In The board of directors and audit committee met regu- larly but rarely availed themselves of the opportunity to engage internal or external auditors, or the company's ethics and compliance personnel. Board meetings dis- couraged two-way discussion, and the board frequently tof time before ethics and compliance issues could be discussed. The audit committee rarely met with execu- thies or middle management, and when they did, failed to ask questions whose answers might have raised red flags. In short, the participants in the financial reporting sup- ply chain were insufficiently inquisitive or skeptical. They CASE 2 A number of large cases of fraud have come to t the postmortems are completed. You have le lot related to identifying fraud risk, mitigating activities, as well as promoting organizationa and compliance. You now should understand th sumed all was well. It was not. RISK OF FRAUD AND ILLEGAL ACT