Just for Feet
1. Discuss three management events that occurred that should have been a “red flag” to the auditing firm.
The auditing firm has been in engagement with the company throughout the period when the fraud was being committed. One of the common and clear indicators of possible fraud was the company’s cash flow statement. The company experienced positive growth in its profits from the year 1996 through to the year 1998. However, a close analysis of the cash flow statement shows that the company had experienced negative figures of cash flow from both operating and investing activities and positive cash flow from financing activities which would not sufficiently offset the negative cash flows from operating and investing. It is therefore evident that the company did not have sufficient liquidity to meet its daily operations but still purported to make profits. This could have been one of the concerns to the auditing firm. Besides this, the management had maintained a very unfamiliar accounting method with regard to store opening costs that the company accumulated to asset accounts that were amortized over twelve month period. According to GAAP, such costs must be expensed within the month that a new store is opened (Georgiades,2008).The management’s deliberate violation of GAAP and the negative figures for the company cash flows could have been a clear warning and as such was not expected to record profits as it happened.
The management through Harold, his wife and son disposed off a large part of their securities worth $49.5 million. However, the CEO still continued to give positive projections about the future prospects of the company. It could have not been possible that a major shareholder like Ruttenberg would have taken such action without having prior knowledge of what’s on goings in the company. This is an issue that could have raised a red flag to the auditing firm.
The other shocking event by the management was the sell of junk bond for $200 million which are
The auditing firm has been in engagement with the company throughout the period when the fraud was being committed. One of the common and clear indicators of possible fraud was the company’s cash flow statement. The company experienced positive growth in its profits from the year 1996 through to the year 1998. However, a close analysis of the cash flow statement shows that the company had experienced negative figures of cash flow from both operating and investing activities and positive cash flow from financing activities which would not sufficiently offset the negative cash flows from operating and investing. It is therefore evident that the company did not have sufficient liquidity to meet its daily operations but still purported to make profits. This could have been one of the concerns to the auditing firm. Besides this, the management had maintained a very unfamiliar accounting method with regard to store opening costs that the company accumulated to asset accounts that were amortized over twelve month period. According to GAAP, such costs must be expensed within the month that a new store is opened (Georgiades,2008).The management’s deliberate violation of GAAP and the negative figures for the company cash flows could have been a clear warning and as such was not expected to record profits as it happened.
The management through Harold, his wife and son disposed off a large part of their securities worth $49.5 million. However, the CEO still continued to give positive projections about the future prospects of the company. It could have not been possible that a major shareholder like Ruttenberg would have taken such action without having prior knowledge of what’s on goings in the company. This is an issue that could have raised a red flag to the auditing firm.
The other shocking event by the management was the sell of junk bond for $200 million which are
References: Georgiades,G.(2008).GAAP financial disclosures manual, 2008-2009. Chicago, IL : CCH. Knapp, M. & Rittenberg, L. (2011).Advanced auditing: 2011 custom edition. Mason, OH: Cengage Learning. Needles,E.B.&Powers,M.(2009). Financial Accounting. Boston: Houghton Mifflin. Waters,D.J.(2003). Inventory control and management.2nd ed. Chichester [u.a.] : Wiley.