Academic journal article Journal of the International Academy for Case Studies

Auditor Skepticism, Management Biases, and the Slippery Slope

Academic journal article Journal of the International Academy for Case Studies

Auditor Skepticism, Management Biases, and the Slippery Slope

Article excerpt

CASE DESCRIPTION

The primary subject matter of this case concerns auditor skepticism and the ability to recognize signs of financial reporting fraud. Secondary issues include promoting an understanding of the environment where financial reporting fraud is likely. The case is developed for use in both undergraduate and graduate classes in accounting, forensics, or auditing. The case has been successfully used in undergraduate classes (levels 3 and 4) and in graduate classes (level 5).

CASE SYNOPSIS

The case, based on actual SEC fraud action filings, examines a company where the CEO exhibits strong signs of overconfidence. The CEO had a compelling belief in the success of the company that contrasted with the economic realities. When economic conditions did not support the achievement of goals he had promoted with stock analysts and with investors, he chose to alter financials to meet his goals rather than adjust downward his goals. He promoted within the firm a culture that rewarded employees who found ways to misreport financials. The audit firm who examined the financials missed major fraud that affected many accounts. The total amount of the fraudulent misstatement was estimated at $60 million or 64% above the proper pre-tax income. The case is written from the standpoint of the audit team. Students should identify with the new hire, Valerie, as Valerie struggles to explain audit evidence and with the audit in-charge, Luis, who must decide whether to accept the audit evidence (and incur higher costs) or accept the viewpoint of his superiors. …

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