The existence of fraudulent financial reporting has been of great concern to both the accounting profession and regulatory agencies such as the SEC. It has been asserted that companies in trouble frequently go bankrupt shortly after receiving unqualified opinions from auditors. The auditing profession has historically argued that such cases are rare, and that the cases appearing in the press give the impression that the profession is doing a poorer job than it actually is.

Required

a. Distinguish between an “audit failure” and a “business failure.” Explain why the press may have difficulty in distinguishing between the two.

b. Identify a recent fraud that has been reported in the press. For the fraud identified:

• Identify the motivations for the fraud.

• Describe how the fraud took place.

• Identify the internal control failures that would have allowed the fraud to take place.

• Identify the audit procedures that should have found the fraud, or if the procedures would not have found the fraud, explain why not.