Anonymous Caller Case Study

1 a) What would you recommend to the caller if you were Dr. Mitchell?

Since it appears that the firms top executives are all apart of the fraud and don’t plan on correcting their unethical action. I recommend that the anonymous caller completely remove himself/herself from the situation by resigning or by reporting the situation to the firm’s board of directors or a governmental agency.

b) What are the risks of continuing to work with the company?

There are many risk involved with staying with the firm. If the caller decides to stay with the company and the bank finds out about the fraudulent entries, as the controller of the company, the caller would take most of the blame for allowing the fraud …show more content…

However, the company was operating at a net loss for a while and so if the company had presented its real financial statements the bank would have stop funding the firm’s line of credit. So the firm’s senior executive members decided to overstate the firm’s sales and receivables accounts.

Opportunity:
Because the firm is not publically traded, external auditing is only performed on the firm’s annual reports. The firm’s creditors have no access to the authenticity of the firms quarterly report. Another opportunity for this fraud came when the firm’s controller stepped out of the office for a couple of days.

Attitude:
The firms top executives believe that companies engage in aggressive accounting or fraudulent practices all the time, so its no big deal if the firm bends the rule a little every once in awhile.

6) How did the company violate the revenue recognition criteria established by Staff Accounting Bulletin No.101?

With Staff Accounting Bulletin No.101, the SEC established that revenue is realized or realizable and earned when all of the following criteria are met: * Persuasive evidence of an arrangement exists * Delivery has occurred or services have been rendered * The seller's price to the buyer is fixed or determinable * Collectability is reasonably assured.

By recording revenue before the sales actually occurred and creating transactions out of thin air, the company violated the revenue recognition criteria