Internal Accountant’s Report to Management Essay

Introduction Since our company is preparing for an upcoming government contract bid, management has decided that a full Financial Status Review (FSR) prior to the release of the bid is essential. This report is to provide supporting information prior to the bid in order to evaluate if any irregularities with regard to fraud and/or abuse of the company have taken place and if so, to what effect. The report is divided into four sections, which will cover information on the effect of potential occupational fraud and abuse on the company. It will also discuss U.S. government oversight of accounting fraud and abuse and its effect on the company. Section three will provide potential corruption schemes to be aware of in the company. Finally, some recommendations will be given of types of accounting evidence and methods of gathering evidence to support the FSR and to provide reasonable assurance that no irregularities have occurred. Occupational fraud and abuse According to 2009 Global Fraud Survey organizations lose about 5% of its gross revenues to all forms of fraud and abuse in the workplace. Moreover, having to report fraud is very unhealthy for the company and its stakeholders. It can result in some negative effects like remunerations and salaries, employee base, employee benefits, but also morale and profits. Also occupational frauds and abuses usually have an adverse effect on the reputation of the company. In case of a very significant fraud it may even lead to bankruptcy. U.S. governmental oversight of accounting fraud and abuse There have been many significant accounting scandals, like Enron, Computer Associates, Xerox, Adelphia, WorldCom and Royal Ahold, that have had extensive press coverage and, despite the fact that some of them are already some years in the past, they are still being discussed. Since then many new, different and strict accounting regulations and rules have been created in order to prevent or defer fraud, abuse or waste. Many of the frauds were with regard to revenue recognition, which has led to many improvements by now. Noticeable changes have been made in the way firms from particular industries book revenues as a result of the heightened SEC scrutiny of revenue accounting; companies have become more conservative when it comes to the timing of the revenue recognition. Particularly many Internet companies have reduced the total amount of the revenue being recognized compared to the situation before the heightened scrutiny. According to a survey in FORBES, less fraud cases have been reported recently. Enforcement cases and prosecutions over the last decade were very well publicized which had a positive effect on the attitude of many companies’ senior management. Also it is said that government’s enforcement efforts have had a deterring effect. Moreover, additional requirements imposed by Sarbanes-Oxley Act (SOX) made senior executives more concerned about the financial results reported and on which they have to sign off. It is clear that the US financial reporting environment has changed and based on the positive current events, constantly improving reporting requirements, rules and regulations, even greater changes are expected in the future. Corruption schemes Corruption has unfortunately been a very common phenomenon in the work environment throughout the years. It is defined as  ¨an intent to gain particular personal advantage at the cost of organization ¨ he/she represents. Corruption schemes are usually divided into 4 main categories: * Bribery and Kickbacks * Commercial bribery is the offering, giving, receiving or soliciting of anything of value to influence the outcome of a business transaction * It usually involves the submission of invoices that are overpriced or fictitious * Is usually undertaken by employees such as purchasing agents * Economic Extortion * Money extortion from a potential purchaser or supplier * Example: a corrupt purchasing officer demanding a payment in exchange to make a decision in the vendor’s favor * Conflicts of Interest * The situation occurs when an employee, manager or executive has an undisclosed personal or economic interest (with a negative effect on the company) * For example, the victim organization is not informed that its employees have divided royalties * This scheme includes the exertion of the insider’s influence to the detriment of the entity * Illegal Gratuities * This type of scheme is similar to bribery schemes. The only difference is that there is an intent to reward a business decision, rather than influence it * A common example is when purchasing agents are promised expensive vacations, etc. after a vendor’s contact is approved Accounting evidence and evidence gathering methods Gathering accounting evidence is a very common activity in auditing. Accounting evidence is being collected using investigative and auditing practices. For investigations, this is the evidence that lawyers and government officials can rely on for very important and high profile cases. For more routine reviews as the FSR prior to the bid, it is the type of evidence that we can rely on to give reasonable assurance that no irregularities have occurred. In both situations, the accounting evidence should be based on the following important qualities: * Relevance * Materiality * Competency The types of accounting evidence we are referring to include: * Physical evidence * Third-party representations * Documentary evidence * Computations * Data Interrelationships * Client representations * Accounting Records Since this is a FSR and not an investigative procedure, I recommend the following auditing methods to gather evidence that will provide reasonable assurance that no irregularities have occurred and that our financial statements are relevant and have been compiled in a competent manner and contain no material misstatements: * Compliance testing – to ensure that we have an adequate internal control system and that it is working effectively; an adequate level of transaction testing will have to be performed to provide this assurance * Substantive testing – a. Test of detail – for the purpose of the FSR I recommend these only when and where the internal control system does not provide the assurance we desire b. Analytical testing – I recommend these to provide further assurance that our financial statements adequately reflect the financial position of our company References: Wells, J. (2011). Principles of fraud examination (3rd ed). Hoboken, NJ: Wiley. Singleton, T. W., Singleton, A. J. (2010). Fraud auditing and forensic accounting. (4th ed.). Hoboken, NJ: Wiley. Online Source: http://safeside.ch/safeside.info/index.php/fraud-schemes/corruption/224-corruption-schemes-