Balance Sheet and Financial Reporting Fraud free essay sample

There is clear evidence throughout the questionnaire that there is a measurable â€Å"tone from the top† regarding integrity and a commitment to corporate values. Dickinson maintains a comprehensive code of conduct that all employees are required to sign and follow. Senior management is highly respected and employees feel a sense of fairness and integrity when dealing with them. When problems do arise, management is quick and decisive in their actions to resolve. These aspects further â€Å"set the tone† in the organization and were evident in the Integrity and Ethical Values control factor section of the questionnaire. Other areas of note that suggest a low risk of fraudulent financial reporting come from responses within the Management’s Philosophy and Operating Style control factor section. Management does not put heavy emphasis on immediate, short-term operating results. This alleviates internal pressure for associates to meet specific numbers at month, quarter or year end cut-off periods. If Dickinson Technologies had a more myopic view on short term results, this could be a greater area of risk. There is also evidence that internal goals and metrics are reasonable and often met. Past achievements of meeting budgets suggest an ability for the company to hit financial goals without having to manipulate data. Management has also taken a conservative stance with accounting policies, such as revenue recognition, that further suggests a risk adverse attitude to financial reporting. Perhaps the strongest evidence in the case that suggests a low risk of financial reporting fraud comes from the Board of Directors and Audit Committee structure. A Board Committee does exist and is in compliance with SEC policies. An audit committee exists, as well as compensation and stock option committees, providing multiple levels of oversight. Members of committees have adequate industry knowledge and are properly appointed. There are annual reviews of audit activities, functions and findings, and relevant issues are brought to the attention of the appropriate executive officers. Internal and external auditors are also included in communications of findings. This policy of transparency and open communication provides substantial evidence that Dickinson Technologies is at a low risk for fraudulent financial reporting. Dickinson Technologies, Inc. faces a far greater risk of misappropriation of assets, than it does of fraudulent financial reporting. The key risk factors that were evident from the questionnaire placed a spotlight on areas of weakness. Management’s overall attitude towards overriding existing controls and the lack of oversight of the control structure create an environment where asset misappropriation can occur. In the Integrity and Ethical Values section of the questionnaire, rules were vague or non-existent regarding individuals’ abilities to override requirements. Overrides can happen without documentation or management approval and further investigation does not occur. Senior management also places a lot of responsibility on supervisory level employees and provides them with broad authorities that are not regularly reviewed. Without proper oversight, management simply relies on having good people in place and no control mechanisms to verify appropriate behaviors. This theme continued throughout the Assignment of Authority and Responsibility section of the questionnaire. Along with improper segregation of duties and inadequate levels of oversight, management’s most egregious violation of controls occurs with the protection of company assets. Under the Management Philosophy and Operating Style section, observations and documented occurrences of failures occurred. This suggests that policies are in place with regard to safeguard company assets, they are just not being met or followed up on. The existence of this type of culture can manifest into much larger problems, if gone unchecked. According to our readings, in-class discussions and text information, fraudulent financial reporting tends to have the largest impact on the outside investment community and financial markets. For this reason, close attention should be given when reviewing an organization’s control structure. This type of fraudulent activity tends to be perpetrated by upper levels of management; the very people responsible for substantiating the financial reports. Control systems are much more likely to prevent and or detect misappropriation of assets than they are to identify fraudulent reporting. Financial reporting fraud also tends to carry a greater magnitude in terms of materiality. The accumulated efforts of stealing inventories or cash equivalents can take long periods of time to accomplish. Massive changes in financial position can happen instantly on financial reports and carry far more financial significance. In this case study, Dickinson Technologies, Inc. poses more risk from misappropriation of assets occurring. The evidence suggests inadequate controls when it comes to safeguarding its assets, but a strong environment exists with its financial reporting controls. A proper tone from upper management of integrity and an adherence to values, as well as other strong control features protect Dickinson from financial fraud. This, however, is no guarantee that fraud could not happen. As our lecture discussions and text notes suggest, there is no one control system that can absolutely protect an organization from fraudulent activity. The goal is to make it as difficult as possible for these activities to transpire.