Specter One, Inc. is a publicly traded cable provider. Among its current services are providing cable services, including television, Internet access, and local telephone service. Specter One experienced rapid growth in all markets beginning in the late 1990s and continuing through now. While revenues continue to grow, income is showing signs of declining to a level beneath that expected by analysts who follow the company. In an analysis of why, Ethan Benedict, financial vice president, discovered that maintenance of cable systems has become an increasingly large cost—particularly in new cable coverage areas. He pointed out to Jillian Jonas, the president, that in the relatively new areas maintenance is high, particularly when viewed from the perspective that the areas currently have few customers. Jillian has suggested that it doesn’t seem right to face such high expenses when “everyone knows we will have a larger customer base in a few years in those areas.” Shortly thereafter, Ethan and Jillian decided to transfer out of Cable Maintenance Expense and into the Capitalized Cable account enough of these expenses to enable net income to meet analysts’ forecasts. Documentation in some cases was created indicating a correction of an error and in some cases, no documentation was created to support the entries. Subsequently, these types of transactions were posted quarterly, on an “as needed” basis. Ethan rationalized that it was indeed unfair to expense so much of the maintenance cost in rapidly growing areas. Jillian didn’t give it a lot of thought other than to periodically remind Ethan of how important meeting EPS growth rates were. The above scheme does not meet generally accepted accounting principles and led to materially misstated financial statements. Under generally accepted accounting principles, these transactions should have been expensed. Thus, Specter One, Inc. overstated assets and income.

Misstatements arising from Fraudulent Financial Reporting

1. Review Appendix 1 below. Which fraud risk factors are present in this case? List them and cite the example from the case.  

Incentives/Pressures	Opportunities	Attitude/Rationalization
1.Threatened financial stability or profitability High degree of competition or sales saturation High vulnerability to rapid changes (e.g., technology, interest rates) Declines in customer demand, business failures in industry Operating losses Negative cash flows from operations Rapid growth or unusual profitability New accounting, statutory, or regulatory requirements 2. Excessive pressure on management to meet requirements or third party expectations due to Profitability or trend level expectations Need for additional debt or equity financing Marginal ability to meet exchange listing requirements Likely poor financial results on pending transactions 3. Management or directors’ financial situation threatened by Significant financial interests in company Significant portions of compensation contingent on results of company Personal guarantees of debts of company 4. Excessive pressure to meet financial target set up by directors or management	1. Industry provides opportunities for Related-party transactions beyond ordinary Company can dictate terms or conditions to suppliers or customers (may result in inappropriate transactions) Accounts based on significant estimates Significant, unusual or highly complex transactions Significant operations across international borders with differing business environments and cultures Significant bank accounts in tax haven jurisdictions 2. Ineffective monitoring of management allows Domination of management by a single person or small group without controls Ineffective board of director or audit committee oversight 3. Complex or unstable organizational structure Difficulty in determining organization or individuals with control of company Overly complex structure High turnover of senior management, counsel, or board members Internal control deficient Inadequate monitoring of controls High turnover rates or ineffective accounting, internal audit or information technology staff Ineffective accounting and information systems	Relating to board members, management, or employees Ineffective communications, implementation, support or enforcement of ethics Nonfinancial management excessive participation in selecting accounting principles or determining estimates Known history of violations of securities or other laws Excessive interest in maintaining or increasing stock price Aggressive or unrealistic forecasts Failure to correct reportable conditions on a timely basis Interest by management of employing inappropriate means to minimize earnings for tax reasons Recurring management attempts to justify marginal or inappropriate accounting based on materiality Strained relationship with current or predecessor auditor

             Misstatements Arising from Misappropriation of Assets

Incentives/Pressures	Opportunities	Attitude/Rationalization
Personal financial obligations Adverse relationship between company and employees Known or anticipated layoffs Changes in compensation Promotions, compensation or other rewards inconsistent with expectations	1. Characteristics of assets Large amounts of cash on hand or processed Small, high value, or high demand inventory items Easily convertible assets (bearer bonds, diamonds, computer chips) Small marketable fixed assets 2. Inadequate internal control, including inadequate: • Segregation of duties Job applicant screening of employees with access to assets Recordkeeping for assets Authorization or approval of transactions Reconciliation of assets Documentation of transaction s(e.g., credits for merchandise returns Requirements for mandatory vacations Management understanding of information technology Access controls over automated records	Attitude or behavior of those with access to assets susceptible to misappropriation Disregard for need for monitoring or reducing risks Disregard for internal control Behavior indicating displeasure or dissatisfaction with company or its treatment of employees Changes in behavior or lifestyle that indicate assets may have been misappropriate

Answer rating: 100% (QA)

IN THESE CASE SPECTER ONEINC OVERSTATED ASSETS AND INCOMEAS IT IS A PUBLICLY TRADED COMPANY IT WILL MISLEAD THE USERS OF THE FINANCIAL STATEMENT LET US LOOK INTO WHAT ALL ARE THE FRAUD RISK FACTORS PR... View the full answer