AUDITORS AND REGULATORY OVERSIGHT 7
Auditorsand Regulatory Oversight
Part1: The Audit Report that the CPA Firm Issued
On30thJuly 2014, two officials of Quality Services Group, Inc. (QSGI) werefound to have committed fraud these were the CFO (Edward Cummings)and CEO (Marc Sherman). The SEC found that the two had signed Form10-Ks having forged management reports concerning the internalcontrols of the company. Also, they had appended their signatures onSOX certifications, where they incorrectly represented that they hadassessed the management report regarding the internal controls anddisclosed all relevant deficiencies to auditors. The audit report forthe company revealed that the company’s inventory controls at theMinnesota facility were inadequate, which resulted in faultyinventory counts as commodities moved in and out of the facility.This led to incorrect entries in the organization’s records andbooks. In addition, the audit report showed that the companyofficials did not disclose faults in its internal control systemthough they knew there was a problem in the system. Furthermore, theaudit report indicated that the officials had hastened therecognition of accounts receivable to approximately a week, whichmaximized the company’s borrowing base. From the analysis of theaudit report, it is apparent that the two company officials acted ina way that denied third-parties access to the correct version of thecompany’s internal control.
Third-partyusers of financial statements may be misled in case erroneousinformation is not pointed out during a financial reporting.Nevertheless, under the federal securities and common laws,third-parties are offered security since they both fight againstmisrepresenting financial information with an objective of deceivinganother party (Pounder, 2013). In this case, the officials have theliability to the third-parties for not putting proper internalcontrols that led to incorrect entries in the books of accounts. Forinstance, the Securities Exchange Commission provides that publiccompanies have to maintain accurate books and have effective internalcontrols failure to which there are penalties.
Part2: Violation of Generally Accepted Auditing Standards (GAAS)
Theorganization violated Statement 2 of the Standards of Field Workthis is based on internal control. It is important that an auditorshould obtain an adequate understanding of a company’s environment,which should include its internal control. Thus, it is crucial for anorganization to provide the correct information concerning itsinternal controls to the auditor. However, in the case of theorganization under consideration, the CEO and CFO did not provide thetrue state of the internal controls of the company. It emerged thatthe framework that the two had indicated to use in evaluating theinternal controls was false since the CEO was not familiar with theframework. Also, it was revealed that the internal control issueswere not reported to the external auditors of the company, despitethe two officials having signed SOX certifications.
Part3: Comparison of the Responsibility of the Management and the Auditorin Financial Reporting
Infinancial reporting, both the management and the auditor havedistinct responsibilities. The auditor is charged with theresponsibility of planning and performing audit so as to obtain asensible assurance concerning whether the financial statements do nothave material misstatement that may be caused by fraud or error.Emanating from the characteristics of fraud, the auditor is in aposition to obtain sane, but not absolute, assurance regardingmaterial misstatements (Pounder, 2013). However, it is not the dutyof the auditor to plan and perform an audit with an aim of obtainingreasonable assurance of misstatements that may be caused by errors orfraud. Also, the auditor has the job of rendering an opinionconcerning whether the financial statements of an organization arepresented in a fair manner according to the framework of financialreporting (Cascarino, 2012). Through giving his/her opinion, theauditor provides users of financial information with increasedconfidence in using the financial report of an organization.
Alternatively,the management has the responsibility of adopting effectiveaccounting policies that would ensure sound financial reporting.Furthermore, the management is also responsible for putting in placeand maintaining proper internal controls that would ensure correctrecording, processing, and reporting of transactions (Riley &Rezaee, 2013). The management has to ensure that it presentsfinancial statements fairly in accordance with the Generally AcceptedAccounting Principles (GAAP). Also, the management has the role ofestablishing as well as maintaining disclosure controls duringfinancial reporting.
Inchoosing between the management and the auditor, I think themanagement has the greater burden. This is because it has to ensurethat it puts in place internal controls that would ensure effectivereporting. Without putting and maintaining proper internal controls,the management would be seen to fail, and the auditor would have aneasy task in identifying faults in the financial reports. Also, themanagement is required to follow strict accounting standards inpreparing financial records that would be used by the auditor inproviding an opinion during financial reporting (Riley & Rezaee,2013). It seems that everything has to start with the management, andthat is why I argue that the greater burden lies with it.
Part4: Sanctions Available under SOX, and Recommendation of the KeyAction
Thecreation of the Public Company Accounting Oversight Board (PCAOB) isusually considered a chief element of SOX Act. The board has theresponsibility of setting up professional standards, as well asinvestigating and disciplining companies and the associatedindividuals, for the abuse of the federal securities laws that governthe preparation and provision of audit reports. The board has been ina position to conduct different enforcement investigations andoffered resolutions to several enforcement cases (Riley & Rezaee,2013). It has unrestrained authority in investigating registeredcompanies and the associated individuals. Furthermore, the board hasheld firms and their officials accountable for abuses of theprocesses of the board. From the SOX Act, executives of corporationsare required to take SOX disclosure as well as the certificationrequirements exceedingly serious. This being the case, the board hasthe mandate of protecting the provisions of the SOX Act. In the caseunder consideration, the PCAOB will have the responsibility ofcarrying out investigations concerning the misconduct of the companyofficials, and once it verifies that the allegations are true, theboard will provide adequate penalties to the associated individuals.In this case, the two officers can be charged for not taking SOXdisclosures and certification requirements seriously.
Inconclusion, in Quality Services Group, Inc scandal, the SEC foundthat the CEO and CFO had signed Form 10-Ks having forged managementreports concerning the internal controls of the company. Also, theofficers had appended their signatures on SOX certifications, wherethey incorrectly represented that they had assessed the managementreport regarding the internal controls and disclosed all relevantdeficiencies to auditors. These actions led to putting third-partiesin trouble. However, under the federal securities and common laws,third-parties are offered security since the federal securities, andcommon laws fight against misrepresenting financial information withan objective of deceiving another party. In this case, the twoofficials have the liability to the third-parties for not puttingproper internal controls that led to incorrect entries in the booksof accounts.
Cascarino,R. (2012). Auditor`sguide to IT auditing.Hoboken, N.J: Wiley.
Pounder,B. (2013). Convergenceguidebook for corporate financial reporting.Hoboken, N.J: Wiley.
Riley,R., & Rezaee, Z. (2013). Financialstatement fraud: Prevention and detection.Hoboken, N.J: Wiley.