scholarly journals White Collar Fraud: A Case Study of KOSS

2016 ◽  
Vol 3 (1) ◽  
pp. 22
Author(s):  
Gagan Kukreja ◽  
Robert Brown
Keyword(s):  
Audit Committee ◽  
Internal Audit ◽  
White Collar ◽  
Internal Controls ◽  
Accounting System ◽  
Financial Statement Fraud ◽  
External Auditors ◽  
Executive Staff ◽  
American Express

Fraud does not draw community and political reaction like other crimes (Chapman & Smith, 2001) yet many believe that fraud can be as serious or even more serious than certain types of street crimes (Rebovich & Kane, 2002). The financial statement fraud of KOSS, an American company of more than $34 million was discovered in 2009 after the tipoff from American Express to Michael Koss, CEO. The fraud was significant relative to the size, turnover and profit of the organization perpetrated by senior accounting professional (white collar). KOSS would be classified as an SME and this fraud emphasizes that it is not only large organizations that need to be vigilant regarding accounting frauds and internal controls, but smaller companies as well. Because of its size, KOSS had little segregation of duties and, as was later revealed, massive weaknesses in internal controls. The external auditors, (Grant Thornton, LLP or “GT”) upon whom management were relying, did not have a full understanding of the business and clearly did not meet the expectations of senior management. It is also appeared that auditors failed to apply required audit standards during the audit. Later on, the external auditors agreed to pay KOSS compensation worth $8.5 million in July 2013 as a settlement.The board of directors including audit committee appeared to be unconcerned regarding effective internal controls, risk management and (wrongly) assumed that they could trust their senior executive staff. The board’s limited policy of ethics and compliance was outdated and did not include a whistleblowing policy. There was no internal audit function reporting to the board. Further, the computerized accounting system was outdated and lacked the application controls found in more modern applications. The purpose of this case study is to analyze what went wrong at KOSS, who was involved in fraud and how such kind of frauds can be avoided in future.

External Auditors' Involvement in the Internal Audit Function's Work Plan and Subsequent Reliance Before and After a Negative Audit Discovery

2016 ◽  
Vol 35 (4) ◽  
pp. 159-173 ◽  
Author(s):  
Byron J. Pike ◽  
Lawrence Chui ◽  
Kasey A. Martin ◽  
Renee M. Olvera
Keyword(s):  
Internal Control ◽  
Internal Audit ◽  
Internal Controls ◽  
Professional Standards ◽  
Data Availability ◽  
Internal Auditors ◽  
External Auditors ◽  
Internal Audit Function ◽  
Anchoring Bias ◽  
Before And After

SUMMARY To reduce redundancies and increase efficiency in the evaluation of internal controls (PCAOB 2007, 402–403), professional standards encourage coordination between external auditors and their clients' internal audit function (IAF). Recent surveys of internal auditors find that a component of this coordination is external auditors' involvement in developing the IAF's audit plans. Nevertheless, it is not known how such involvement affects external auditors' reliance on the internal control test work of the IAF, either before or after a negative audit discovery. Based on an experiment with 107 experienced auditors, we find that external auditors involved in the development of the IAF's audit plan perceive the IAF as more objective and that both objectivity and involvement contribute to these auditors' placing more reliance on the IAF as compared to external auditors with no involvement. This initial reliance results in the involved auditors' proposing reductions to the audit budget and re-performing less of the IAF's work. Consistent with an anchoring bias, we find that involvement leads to external auditors' continuing to place greater reliance on the IAF's work, even after they become aware of a negative audit discovery that should not have occurred had the client's controls been effective. Data Availability: Data are available from the authors on request.

The Role of Accounting Mechanisms for Corporate Governance in Reducing Creative Accounting Practices in Telecommunications Sector Companies in Riyadh City: An Empirical Study: دور الآليات المحاسبية لحوكمة الشركات في الحد من ممارسات المحاسبة الإبداعية في شركات قطاع الاتصالات بمدينة الرياض: دراسة ميدانية

2020 ◽  
Vol 4 (15) ◽  
Author(s):  
Lamis Jameel Banasser, Maha Faisal Alsayegh
Keyword(s):  
Corporate Governance ◽  
Internal Control ◽  
Audit Committee ◽  
Internal Audit ◽  
Internal Auditors ◽  
External Auditors ◽  
Riyadh City ◽  
Creative Accounting ◽  
Telecommunications Sector

The study aimed to identify the role of accounting mechanisms for corporate governance in reducing creative accounting practices in telecommunications sector companies in Riyadh city. A descriptive analytical approach was followed to conduct the field study. Sample of the study consisted of members of the audit committee, internal auditors, accountants from the surveyed telecommunications’ sector companies, and the external auditors in the audit offices that specialized on auditing the examined sample of companies. Questionnaire was used as a data collection method. Results showed that activating the role of accounting mechanisms for corporate governance can greatly contribute in limiting creative accounting practices. As they are controlling mechanisms that capable of protecting companies, shareholders and stakeholders from any manipulation or misleading information in the financial statements. Further, internal audit plays a major role in limiting creative accounting practices by examining and evaluating the effectiveness of the internal control system. Furthermore, the independence and competence of the external auditor and his commitment to the rules of conduct and ethics of the profession contribute greatly in limiting creative accounting practices in the examined companies. The study recommended the necessity of holding specialized training courses for members of audit committees, internal auditors and external auditors on methods of detecting creative accounting practices to combat and reduce them.

The Effect of Frequency and Automation of Internal Control Testing on External Auditor Reliance on the Internal Audit Function

2015 ◽  
Vol 30 (1) ◽  
pp. 21-40 ◽  
Author(s):  
Maia J. Farkas ◽  
Rina M. Hirsch
Keyword(s):  
Internal Control ◽  
Work Performance ◽  
Internal Audit ◽  
Internal Controls ◽  
External Auditors ◽  
Internal Audit Function ◽  
Remediation Strategies ◽  
Low Degree ◽  
External Auditor ◽  
Manual Testing

ABSTRACT Failure of the internal audit function (IAF) to detect a significant deficiency in internal controls is a significant shortcoming in the IAF's work performance. This shortcoming in the IAF's work performance reduces external auditors' willingness to rely on the IAF's work. Using a two-stage experiment, we investigate how the implementation of three different internal control testing remediation strategies (akin to CCM, ACL, and periodic manual testing), which vary in their automation and frequency, affect external auditors' perceptions of IAF strength and planned reliance on the IAF's work. We find that automated remediation strategies fully remediate external auditors' perceptions of poor IAF work performance and low degree of reliance on the IAF, whereas manual remediation strategies result in only partial remediation. Counterintuitively, less frequent remediation strategies are more effective at improving perceptions of poor IAF work performance and low levels of reliance on the IAF, relative to continuous remediation strategies.

scholarly journals Does Internal Audit Function Quality Deter Management Misconduct?

2014 ◽  
Vol 90 (2) ◽  
pp. 495-527 ◽  
Author(s):  
Matthew S. Ege
Keyword(s):  
Internal Control ◽  
Audit Committee ◽  
Internal Audit ◽  
Audit Committees ◽  
Regulatory Requirements ◽  
Difference In Differences ◽  
External Auditors ◽  
Internal Audit Function ◽  
Auditor Quality ◽  
External Auditor

ABSTRACT Standard-setters believe high-quality internal audit functions (IAFs) serve as a key resource to audit committees for monitoring senior management. However, regulators do not enforce IAF quality or require disclosures relating to IAF quality, which is in stark contrast to regulatory requirements placed on boards, audit committees, and external auditors. Using proprietary data, I find that a composite measure of IAF quality is negatively associated with the likelihood of management misconduct even after controlling for board, audit committee, and external auditor quality. This result is robust to a variety of other specifications, including controlling for internal control quality and separate estimation during the pre- and post-SOX time periods. A difference-in-differences analysis indicates that misconduct firms have low IAF quality and competence during misconduct years and improve IAF quality and competence in the post-misconduct years. These findings suggest that regulators, audit committees, and other stakeholders should consider ways to improve IAF quality.

Why did management and auditors fail to identify ineffective internal controls in their initial SOX 404 reviews?

2008 ◽  
Vol 7 (4) ◽  
pp. 338-354 ◽  
Author(s):  
Kam C. Chan ◽  
Picheng Lee ◽  
Gim S. Seow
Keyword(s):  
Internal Control ◽  
Audit Committee ◽  
Internal Audit ◽  
Internal Controls ◽  
Control Group ◽  
Corporate Boards ◽  
Content Type ◽  
Factors Affecting ◽  
Factors Associated ◽  
Client Relationship

PurposeThe purpose of this paper is to investigate the rationale for the failure of management and auditors to identify material internal control weaknesses (ICWs) in their initial Sarbanes‐Oxley Act of 2002 (SOX) 404 reviews, resulting in subsequent restatement of their opinions.Design/methodology/approachThe paper focuses on the factors associated with the failure of management and auditor to identify material internal controls weaknesses in their initial SOX 404 reports. Logistic regression is run on a sample of 56 firms that reported material internal controls weaknesses in their amended internal control reports and a control group of 344 firms that reported material internal controls weaknesses (i.e. ineffective internal controls) in their initial internal control reports for 2004.FindingsThe results show that firm size, the use of a Big 4 auditor, the ratio of non‐audit to total fees, and the need for accounting restatements are positively associated with the probability to file an amended internal control report. The number of ICWs and the number of audit committee meetings are negatively associated with the probability to file an amended internal control report.Practical implicationsThe paper's findings suggest that regulators and corporate boards should consider providing more guidelines on audit committee practices in addition to the audit committee structure. For example, more guidance by the board is needed to ensure that the audit committee is active in overseeing the company's auditor–client relationship and its internal audit function.Originality/valueEmpirical findings on factors associated with the failure of management and auditor to identify material ICWs in their SOX 404 review can contribute to an understanding of factors affecting the efficiency of the SOX 404 review by attributing such failure to either inherent factors such as operational complexity and industry membership or to managerial choices in auditor‐client relationship and corporate governance issues. An understanding of these factors can help companies and the Public Company Accounting Oversight Board and the Securities and Exchange Commission in their efforts to improve the effectiveness and the efficiency of the current SOX 404 process.

Fraudulent Financial Reporting: Consideration of Industry Traits and Corporate Governance Mechanisms

2000 ◽  
Vol 14 (4) ◽  
pp. 441-454 ◽  
Author(s):  
Mark S. Beasley ◽  
Joseph V. Carcello ◽  
Dana R. Hermanson ◽  
Paul D. Lapides
Keyword(s):  
Health Care ◽  
Corporate Governance ◽  
Financial Reporting ◽  
Financial Services ◽  
Audit Committee ◽  
Internal Audit ◽  
Financial Statement ◽  
Audit Committees ◽  
Financial Statement Fraud ◽  
Governance Mechanisms

This paper provides insight into financial statement fraud instances investigated during the late 1980s through the 1990s within three volatile industries—technology, health care, and financial services—and highlights important corporate governance differences between fraud companies and no-fraud benchmarks on an industry-by-industry basis. The fraud techniques used vary substantially across industries, with revenue frauds most common in technology companies and asset frauds and misappropriations most common in financial-services firms. For each of these three industries, the sample fraud companies have very weak governance mechanisms relative to no-fraud industry benchmarks. Consistent with prior research, the fraud companies in the technology and financial-services industries have fewer audit committees, while fraud companies in all three industries have less independent audit committees and less independent boards. In addition, this study provides initial evidence that the fraud companies in the technology and health-care industries have fewer audit committee meetings, and fraud companies in all three industries have less internal audit support. This study of more current financial statement fraud instances contributes by updating our understanding of fraud techniques and risk factors in three key industries. Auditors should consider the industry context as they evaluate the risk of financial fraud, and they should compare clients' governance mechanisms to relevant no-fraud industry benchmarks.

How Effective are Organizations' Internal Controls? Insights into Specific Internal Control Elements

2012 ◽  
Vol 6 (1) ◽  
pp. A31-A50 ◽  
Author(s):  
Dana R. Hermanson ◽  
Jason L. Smith ◽  
Nathaniel M. Stephens
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Financial Services ◽  
Audit Committee ◽  
Internal Audit ◽  
Internal Controls ◽  
Component Level ◽  
Public Companies ◽  
Tone At The Top ◽  
Survey Responses

SUMMARY Based on survey responses from approximately 500 Chief Audit Executives (CAEs) and other internal auditors, this article provides an insider's view of the perceived strength of organizations' internal controls (i.e., internal control over financial reporting) in the Control Environment, Risk Assessment, and Monitoring components of the Committee of Sponsoring Organizations' (COSO 1992a) Internal Control—Integrated Framework. Although the respondents largely rate control strength as relatively high, we identify several areas for potential improvement of internal controls, especially related to assessing the “tone at the top,” as well as following up on deviations from policy and management override of controls. In analyzing individual control elements, we find that public companies' controls are consistently rated as more effective than those of other organizations. We also find a number of interesting differences across key industries, especially in the Monitoring component, where banks and other financial services firms appear to have more robust Monitoring controls than do healthcare and other services firms. The component-level analysis reveals that internal control component strength is positively related to the CAE reporting primarily to the audit committee, public company status, and the average tenure of the internal audit function staff, among other findings. Based on the survey findings, we describe key implications relevant to internal and external auditors, accounting researchers and educators, and management.

scholarly journals The Triangle Defense for Financial Reporting Quality: The Interplay between Internal Auditing, the Audit Committee, and the External Auditor

Wahana ◽  
2020 ◽  
Vol 23 (1) ◽  
pp. 112-130
Author(s):  
Djoko Susanto
Keyword(s):  
Corporate Governance ◽  
Financial Reporting ◽  
Audit Committee ◽  
Academic Research ◽  
Internal Audit ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Working Relationships ◽  
External Auditors ◽  
External Auditor

The internal audit function, audit committee, and external auditor are three crucial stakeholders of corporate governance that safeguard the quality of financial reporting. In this article, I discuss the interrelationships between these monitoring mechanisms. I also provide insights about what we have learned from academic research about the working relationships between these three governance entities. This article should be of interest to academic researchers as well as to corporate stakeholders, which include management, investors, regulators, and Dewan Komisaris members. Future researchers can make use of this article as they contribute more work in areas related to auditing, monitoring and corporate governance, and financial reporting quality. Insights from this article can also guide corporate stakeholders to assess the effectiveness of the internal audit, audit committee, and external auditors in their organizations.

scholarly journals Islamic corporate governance and financial statements fraud: A study of Islamic banks

2021 ◽  
Vol 10 (2, special issue) ◽  
pp. 361-368
Author(s):  
Hasan Mukhibad ◽  
Prabowo Yudo Jayanto ◽  
Indah Anisykurlillah
Keyword(s):  
Corporate Governance ◽  
Audit Committee ◽  
Supervisory Board ◽  
Financial Statements ◽  
Financial Statement ◽  
Islamic Banks ◽  
Financial Statement Fraud ◽  
External Auditors ◽  
Or Economics ◽  
Incorrect Information

Financial statement fraud (FSF) in Islamic banks is unethical because it generates incorrect information for the stakeholders (Anisykurlillah, Jayanto, Mukhibad, & Widyastuti, 2020; Obid & Demikha, 2011). We identify some institutional factors, specifically corporate governance, as factors that can control FSF. Using the sample of Islamic banks in Indonesia, we found that the attributes of the bank’s Sharia Supervisory Board (SSB), such as its expertise, the number of members, and the number of meetings it holds, can reduce FSF. Besides, the number of audit committee members, and the reputation of the external auditors, can also help control FSF. This research does not find any influence of the board of commissioners’ structure toward FSF. Another finding is that of the three SSB attributes used in this research, the most decisive influence for controlling FSF is each SSB’s expertise in accounting, finance, or economics. We suggest that every SSB should have experts in those fields to complement the expertise in Islamic legal fields.

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