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Essay – Nextcard Inc

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    Assignment 1 – Nextcard Inc. In the late 1990’s internet companies and their stocks were booming. Nextcard was among the group of companies, whose stocks were soaring, creating overnight multi millenaries. While some of these companies, such as eBay, Yahoo, and Monster, would survive the stock market burst Nextcard would not be so lucky. It turned out that Nextcard was not being completely honest in representing its financial position and would eventually be taken over by the Federal Deposit Insurance Corporation (FDIC).

    When that happened it lead to an audit partner from Ernst & Young (E&Y) to make some bad ethical decisions in order to cover up the fact that an unqualified opinion was issued for a company being investigated for issuing materially misstated financial statements. Since several instances of fraud have been uncovered, the American Institute of CPAs (AICPA) and Public Company Accounting Oversight Board (PCAOB) have issued standards and a code of conduct to prevent unethical behavior. 1.

    Given PCOAB oversight of accounting firms and the AICPA Code of Conduct, discuss whether or not you believe that public accounting firms can successfully manipulate audit work papers and records of clients engaged in fraudulent activity. I do not feel that, even with PCOAB and the AICPA code of conduct, that manipulation of audit work papers can be eliminated. The PCOAB Audit Standard No. 3 clearly states, who, how long, and what audit papers must be retained by the auditing firm.

    If additional documentation to the audit papers is needed, article 16 describes how the changes need to be documented. “Circumstances may require additions to audit documentation after the report release date. Audit documentation must not be deleted or discarded after the documentation completion date, however, information may be added. Any documentation added must indicate the date the information was added, the name of the person who prepared the additional documentation, and the reason for adding it. (Public Accounting Oversight Board, 2004-06) However, even when the PCOAB reviews the firm’s audits, they may be able to check if changes are documented, but they are counting on the honesty of the audit firm to ensure ethical practices. The AICPA also relies on voluntary cooperation, peer, and disciplinary proceedings to insure there is no client work papers and record manipulation. The AICPA Section 54 – Article III – Integrity, states that in order to “broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity. (American Institute of CPAs) The AICPA and virtually all of the state societies have also joined together to create the Joint Ethics Enforcement Program (JEEP). When a complaint is filed JEEP responds, investigates and then concludes the investigation. This program does subject conduct violators to punishment however the program does offer the offender to undertake corrective action. In the case of corrective action the investigation and results are kept confidential so by allowing this choice of action there is little deterrence of violation.

    I believe SOX Section VII will deter some fraud by making it criminal to alter or destroy audit documents and protecting whistleblowers, but by relying on voluntary cooperation of the standards and code, it may help prevent but will not eliminate, manipulation of client work papers and records. A major part of any audit is analyzing fraud risk factors. 2. Analyze the fraud risk factors presented during the 2000 Nextcard audit and how each should have impacted the audit procedure. The appendix to SAS No. 99 offers three fraud risk factors, Incentives/Pressures, Opportunities, and Attitudes Rationalization.

    The incentive and pressure that Nextcard managers felt was the desire to grow the company rapidly. One of the primary goals of Lent’s, one of the companies creators, was to obtain over 1 million credit card customers. In order to meet Lent’s goal over 1 billion in credit was extended. This should have been a sign to the audit teem. With extending so much credit the allowance for bad debts account should have been scrutinized to insure the proper amounts were being posted. Nextcard also had opportunity to misstate the account.

    It seems per the case that there were graphs and charts indicating there were problems at Nextcard, but since the audit partner signed an unqualified opinion the financial statement users were not aware of any problems and Nextcard stock prices continued to rise. An unqualified opinion should not have been given if there were indications of problems. The reason that this may have happened was that the audit partner was on the fast track and that the senior auditor had very little audit experience. The third factor is attitude and rationalization.

    There are several rationalizations Nextcard managers may have used. It is obvious that they wanted to be the biggest credit card company so they may have rationalized that the company could actually make money, or maybe they felt they were owed the money, or that it was not their fault that so many of their customers did not pay their debt. No matter what the rationalization was the audit team should have gotten a better understanding of management’s attitude toward ethical behavior in order to determine if they were capable of fraud.

    Financial investors rely on the accuracy of company’s financial statements so they depend on external auditors to insure that the financial statements are free of any material misstatements. 3. In the Nextcard case, discuss how Ernst & Young’s motivations to destroy the audit work papers reconciles with its obligation to provide assurance to financial investors. In this case it is clear that there were indications of problems with Nextcard’s charge-off numbers and trends. This is evident when Trauger instructed Mullen to delete charts, portions of tables, and discussion sections that indicated there were problems.

    The reason Trauger wanted the information deleted was that if the SEC or the public found out that E&Y had indications of the problems with the charge-off numbers they would want to know why an unqualified opinion was issued. By changing the documentation it would give the opinion that E&Y had found nothing during the audit, that they were justified in the unqualified opinion, and that the investing public has no reason not to trust in their audit work. There is sometimes no right or wrong answer when it comes to ethics.

    When faced with an ethical dilemma different people will decide how to address an ethical issue in different ways. 4. Assume the role of Oliver Flanagan in the case. Identify the actions you would have taken when Robert Trauger asked you to help him alter the 2000 Nextcard audit work papers. In answering this question, discuss alternative courses of action available to you. There are steps that can be taken to determine the appropriate course of action for an ethical dilemma. 1. Identify the issue. 2. Identify the affected parties and their rights. . Determine the most important rights. 4. Develop alternative courses of actions. Determine the likely consequences for each course of action. Asses the possible consequences, the greatest good for the greatest number of people. 5. Decide on the appropriate course of action. If this was me I feel that under no circumstances would I have altered the records. Depending on the situation I may or may not have reported Trauger. The circumstances dictating my decision would be if I felt I could go to another audit partner.

    If I felt that the other partners were more ethical then Trauger I would have reported him, if not I would either have found another job or possibly reported him to an authoritative agency. I may have even contacted a lawyer to find out what my legal reporting responsibility was depending on how threatened I felt by the firm. In any case I feel that too many people suffered from this action and the correct ethical decision was to not alter the documents. Altering the documents was not for the greater good. 6. Search the Internet for a public accounting firm that recently destroyed audit evidence related to a client.

    Identify the public accounting firm and evaluate the punishment that the firm received for the Professional Code of Conduct violation. Evaluate the severity of the punishment to determine whether you agree or disagree with the severity. I was not able to find a current case of a public audit firm that destroyed audit evidence but this case is about the former Skamania auditor, Garvison, who used thousands of dollars in public money for unauthorized travel, education, and office equipment along with shredding documents.

    Gavison was sentenced to 168 hours of community service and pay the county $62,000 in restitution. Along with the punishment he was banned from serving in any governmental finance management position ever again. Citizens felt the punishment was not a good indication of the crime that was committed. Since no evidence was actually found that Gavison embezzled any money I feel the punishment did fit the crim. He was made to repay the funds that were unauthorized and will never be allowed to be employed in a position where he will be able to commit the same crime again.

    If this was public accounting firm the destruction of documents could be considered a felony. Nextcard executives became millionaires by not accurately portraying the financial position of the company which inflated the stock price. They led the investing public to believe that the company’s bad debts were much lower than they actually were and that the company would be able to turn large profits in a short period of time. With the benefit of having an audit company that was willing to issue an unqualified audit opinion they were able to hide the truth.

    In the end they had to pay 1. 4 million in fines and other monitory damages and the AICPA and PCAOB now have standards and a code of ethical conduct in place to help insure the public that auditors act ethically. ? References American Institute of CPAs. (2006, June 19). Appendix to SAS No. 99, Fraud Risk Factors. Retrieved October 28, 2012, from AICPA: http://www. aicpa. org/interestareas/forensicandvaluation/resources/fraudpreventiondetectionresponse/pages/appendix%20to%20sas%20no. aspx American Institute of CPAs. (n. d. ).

    ET Section 54 – Article III – Integrity. Retrieved October 28, 2012, from AICPA: http://www. aicpa. org/Research/Standards/CodeofConduct/Pages/et_54. aspx CPAs, A. I. (n. d. ). Joint Ethics Enforcement Program (JEEP) Manual of Procedures. Retrieved October 28, 2012, from AICPA: http://www. aicpa. org/InterestAreas/ProfessionalEthics/Resources/EthicsEnforcement/Pages/jointenforceprocedures. aspx Knapp, Rittenberg, Johnstone, & Gramling. (2012). Contemporary Auditing. Mason : Cengage Learning. McVicker, L. (2012, October 25). Former Skamania auditor pleads guilty.

    Retrieved October 28, 2012, from The Columbian: http://www. columbian. com/news/2012/oct/25/former-skamania-auditor-pleads-guilty/ Pennsylvania Institue of Certified Pulblic Accountants. (n. d. ). Joint Ethics Enforcement Program (JEEP). Retrieved October 28, 2012, from PICPA: http://www. picpa. org/Content/Resources/Ethics/JEEP. aspx Public Accounting Oversight Board. (2004-06). Auditing Standard No. 3. Retrieved October 28, 2012, from PCOAB: http://pcaobus. org/Standards/Auditing/Pages/Auditing_Standard_3. aspx#retentionandsubsequentchanges

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