Accounting Fraud Case Study

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SCHOOL OF ACCOUNTANCY

   BKAL 3063 INTEGRATED CASE STUDY

SECOND SEMESTER 2015/2016

GROUP: B

LETTER FROM A PRISON

PREPARED FOR:

PROF. DR. MOHAMAD ALI BIN ABDUL HAMID

PREPARED BY:

DATE OF SUBMISSION:

22ND MARCH 2015

Table of Contents

1.0 Executive Summary        

2.0 Statement of the Problem        

3.0 Causes of the Problem        

4.0 Decision Criteria and Alternative Solutions        

5.0 Recommended Solution, Implementation and Justification        

6.0 External Solutions        

1.0 Executive Summary

This article tells about the Accounting Fraud that refer to the Richard who was the executive of the company named Computer Associates. The Computer Associates was start up in 1976 and its founder was Charles Wang. It offers database application and finance software services in line with the needs of the growing mainframe computing software for IBM personal computer. This company sells software product that have licensed for a period of time.

This company faced an earning management problem when the CEO and the chairman was the same person, Kumar. Since, the manager has collaborated each other that involve Chief Executive Officer(CFO), Chief Finance Officer and Head Sales Of Department which is Richard himself, they planned manipulated the financial report to get some benefits for them. This company also having ethical issues which is involve in hiding documents. Other than that, the company have poor internal control related with the signing of contracts which not following the rules. Lastly, the auditor was lacking of skills in detecting the fraud. Although the auditors came from professional bodies, the fraud that occur in this company was unable be solve by the auditors.

In this situation, we have recommended several alternative solutions for CA in solving this problem. CA should change the CEO and management team. The company should rotate is external auditor so that fraud can be easily detected. Increasing the periodically financial report also can be done. It helps to reduce the opportunity in earning management. Other than that, the company can create whistle blower system to report the wrong doing in management. The code of ethic also play an important roles to have a guidelines to in line to business with ethic. The company also should have an independent director which means outside director to monitor the business.

In conclusion, we recommended CA to hire a new CEO to substitute Kumar as Kumar has been prisoned. Besides, CA should hire an independent director who holds minimal or no shares in CA to chair the board as the board was previously chaired by Kumar who acts as the CEO at that time.

2.0 Statement of the Problem

Earnings management

The main problem faced by Computer Associates (CA) was earnings management. Earnings management is the use of accounting techniques to produce financial reports that may paint an overly positive picture of a company's business activities and financial position. Earnings management takes advantage of how accounting rules can be applied and are legitimately flexible when companies can incur expenses and recognize revenue. In this case, management are responsible for this illegal action because they are internally target to achieve specific requirement. Management set the sales target to achieve and been rewarded based on the sales which is the higher the sales, the higher the reward. Richard that act as Heal Of Sales for sure will richly reward if the company met or exceeded their sales target.

In addition, management also do earning management to boost their income. As a director that also act as management, earnings is important to measure how much they will rewarded since the reward is based on the earnings. The company applied improper recognition of revenues by backdated some contract so earnings will record higher, thus compensation for director is higher so do EPS. Besides, they also need to make their earning have a good figure, to attract investor to believe that their risk of investment are low and the investor can have good return.

Based on our analysis, we found that several factors enable the top management to play around at grey areas. The factors are as follow:

1. Weak regulatory environment

2. Ethical Issues

3. Poor Internal Control

4. Failure of auditor in detecting fraud

3.0 Causes of the Problem

1. Weak regulatory Environment

Computer Associates (CA) was operating in a weak regulatory environment which allowed the management to play in the grey areas that led to manipulation on its revenue account. Management tends to report on higher income by ignoring the rules specified by US Generally Accepted Accounting Principles (GAAP). According to US GAAP, ASC 606 specifies that revenue can only be recognized when the company has met the performance obligation agreed in the contract signed by both parties. However, the management ignored this principle by backdated the contracts in order to fill in the gap between estimated and reported revenue. CA has violated the revenue recognition principle as at the date they recognized the revenue, it doesn’t incurred nor the products and services have been delivered to customers. It is getting serious when CA claimed that they have fulfilled all the requirements of US GAAP. As a result, CA has overvalued its revenue of US$ 3.5 billion. Even though the contracts do exist, it has given a false picture of quarterly reported earnings. It might give an opportunity to the shareholders of CA to sell their shares at a higher price. But, it is not an acceptable act as it is unfair and will affect the decisions made by the shareholders and the potential investors. The shareholders might decide to retain theirs shares in CA as the increased reported earnings, while the investors might invest in CA as they expect to get a higher decision.