Molex
To: ACCY 303 Class, AE5
From: Man Fun Daniel Yeung, Seung Kim, Young Jae Lee, Max Kirsch
Date: Oct. 18, 2010
Re: Financial Reporting Problems at Molex, Inc.
INTRODUCTION
This report discusses Molex, Inc.’s conflicts with its auditor, Deloitte and Touche, over a reporting issue in 2004. The report explains the details of the firm’s issue while also addressing the intentions behind Molex’s decisions, Deloitte’s concerns, and the resolutions for the conflict.
MOLEX’S PROBLEMS
In mid-July 2004, Molex’s corporate finance group identified an on-going accounting issue within the firm: for several years, Molex had mistakenly recognized “profits on inventory sales between Molex subsidiaries (but which had not been sold to an external customer by period-end)” in its earnings and inventory accounts. In other words, Molex recorded extra profits and inventories from internal inventory sales without reversing the accounts at the period-end (Exhibit 1). As a result, several accounts including retained earnings, net income, and inventory were inflated.
The total amount of error accumulated to a before tax amount of $8 million ($5.8 million after tax) with $3 million before tax ($2.2 million after tax) of the error directly related to the fiscal year that ended on June 30, 2004. Dianna Bullock (CFO) and Joe King (CEO) discussed the issue during an executive meeting in July of 2004 and decided to ignore the problem because they perceived it as immateriality. In the same month, the managers signed its representation letter for its 10-K reports without notifying Deloitte of the reporting issue. The management team did not disclose the matter with Deloitte until October 2004 prior to the first quarterly report. Deloitte was unsatisfied with the firm’s dishonest behavior. After Molex failed to provide explanations for the accounting errors to the public, Deloitte demanded Molex to remove both Bullock and King from the executive team.
CORRECTIONS TO
From: Man Fun Daniel Yeung, Seung Kim, Young Jae Lee, Max Kirsch
Date: Oct. 18, 2010
Re: Financial Reporting Problems at Molex, Inc.
INTRODUCTION
This report discusses Molex, Inc.’s conflicts with its auditor, Deloitte and Touche, over a reporting issue in 2004. The report explains the details of the firm’s issue while also addressing the intentions behind Molex’s decisions, Deloitte’s concerns, and the resolutions for the conflict.
MOLEX’S PROBLEMS
In mid-July 2004, Molex’s corporate finance group identified an on-going accounting issue within the firm: for several years, Molex had mistakenly recognized “profits on inventory sales between Molex subsidiaries (but which had not been sold to an external customer by period-end)” in its earnings and inventory accounts. In other words, Molex recorded extra profits and inventories from internal inventory sales without reversing the accounts at the period-end (Exhibit 1). As a result, several accounts including retained earnings, net income, and inventory were inflated.
The total amount of error accumulated to a before tax amount of $8 million ($5.8 million after tax) with $3 million before tax ($2.2 million after tax) of the error directly related to the fiscal year that ended on June 30, 2004. Dianna Bullock (CFO) and Joe King (CEO) discussed the issue during an executive meeting in July of 2004 and decided to ignore the problem because they perceived it as immateriality. In the same month, the managers signed its representation letter for its 10-K reports without notifying Deloitte of the reporting issue. The management team did not disclose the matter with Deloitte until October 2004 prior to the first quarterly report. Deloitte was unsatisfied with the firm’s dishonest behavior. After Molex failed to provide explanations for the accounting errors to the public, Deloitte demanded Molex to remove both Bullock and King from the executive team.
CORRECTIONS TO