Collins & Aikman Corporation is a manufacturing company specializing and engaged in the engineering manufacture and design of automotive components. The company has employees averaging to 15000. Its management is comprised of a ten personnel board of directors with Stephen F. Cooper been the acting chairman to the board. It basically has three supply categories on its primary output, i.e. plastic, soft trim and roof systems, which are convertible. The company has been in the manufacturing industry since early 1990’s.
In 2001 the company had actually placed itself in a good place in the US market share with its profits relatively been high. Since a declaration by the board of members in 2001 the company was to expand its manufacturing context to even capture a bigger market share. The company is an affiliate of other 10 subsidiary companies placed in Australia, Asia, and Europe.
Financial statement for Collins & Aikman Corporation between the periods of 2002 to 2004 had a fluctuating trend in its financial statements. Despite high sales turn over it had continued to show an unstable financial state, with the condition even becoming worse in 2004.
Due to the highly falling income statement in the companies trade affairs for 2004 there arose a lot of interest in the nature of operations for the company with the shareholders wanting an examination of the management system of the company. The low revenue in the September 2004 total quarterly statement which had shown a turnover of about $860 million was seen a threat towards the companies bankruptcy. However in the period between 2002 and 2004, the company state of affairs was un-remarkable reaching an operating loss with net income for the 2002, 2003 and 2004 been $-57, -57 and –55 millions respectively.
This was a big loss to the company despite the fact that its sales were still booming in the market. In 2004, the situation was even worse considering that the net income of $-55 was of the quarterly statement released in September. Through out the three years the company was seen to have even more loss in its operation.
On investigation to its balance sheet for the three years the company had a total quarterly statement in 2004 as $654 millions compared to annual statement for 2003 and 2002 as $655 and 803 millions. It was either observable that the balance sheer statement for the quarterly release in September 2004, was even lower than that of 2003 by $1 million. He biggest drop was seen between annual balance sheets 2003 and 2002 where a drop in $ 148 million was discovered. With this state of balance sheet affairs, the company was seen to be operated under a fraudulent management system especially with regard to the high sales turnover that were seen in its inventory system.
With a highly fluctuating equity ratio between the three years of $340 for 2004 quarterly statement and 440 and 397 millions of the annual total equity statement for 2003 and 2002 respectively. It was seen as undesirable state in the countries operational system. However, equity was seen to have increased in 2003 than 2002 by $ 43 million, with however a reduction of $ 100 in 2004 compared to 2003
Observing the company’s cash flow statement the company was seen to have a continued decreasing net incomes over the three year with $-55.60 million for the quarterly statement in 2004, and $-57, -53 million for the 2003 and 2002 annual statement respectively. Down the three years, the net starting income was seen to be reducing. Likewise, the cash flow net change in cash statements was highly fluctuating and depicting an operating loss in them.
The most adverse statement was a loss in the net change in cash between 2003 and 2003, which was realized to be $-75 million. However in the quarterly 2004 net cash statement had an improvement from the previous 2003 annual statement from $-68 million was seen where the company had a recoup of $ 61 million. (Rutledge, Karim, 2004)
In 2005, I was appointed as the new external auditor to the company through the shareholders annual meeting. Before issuing a letter of engagement to the company board of directors I choose to seek an advice from the then outgoing external auditor to the company. Doing this was the first step required by the international accounting standards. In a reply that I got from the outgoing external auditor, some specific weakness within the internal control was evident and perhaps the most attributable was lack of independence in the internal audit system of the corporation.
In the report, the internal audit system was described as been under full control of the board of directors and that every aspect in the financial accounts control and audit were manipulated and authorized by the board of directors. In the report, the finance department was described to have been weak and working against the conceptual requirements of the finance protocols of the international accounting standards.
It was described as having poor documentary control where the system was deficient of document correct keeping. Above all, the finance department was described to have been keeping huge sums of money within their control for a long time. As an auditing requirement, business finances should not be held for a long time within the business setup. (Razaee, et al, 2002)
With this information from the outgoing external auditor I entered into an engagement with the company as the new external auditor through writing an engagement letter. In the letter, I had clearly stated the requirement of the audit and the frontiers of exercises that my auditing was to cover. After an extensive exercise in the auditing of its accounts, there was an act of accounts manipulation of figures that the accounting department had done. However the manipulation was doubled with financial adjustments of the accounts that was to cover up any mis-adjustments in the balancing of the accounts
Information available for discovering the fraud
Many weaknesses were depicted of the company management systems that were bound to the cause of such fraud. Firstly, the documentary system of the company accounts department was inefficient with huge draw back in the actual context of these documents.
To accomplish my audit exercise adequately I had drawn a concrete audit plan that was to foster an extensive understanding of this company’s accounting system. To ensure correctness to the accounting system, the audit plan was scheduled to strictly involve complete tracing all source documents of the cash transactions to their entries in specific journal entries. (Barrese, Scoris, 2003)
Either, for assets clear instruction were to emphasize recognition in the source documents and then physically observing the asset within the company’s structures or in its subsidiary companies. From the internal control questionnaires that I had drawn for compliance test to the adequately internal control system of the company there were a number of weaknesses. These were;
-The accounting system was keeping huge sum of, money within the corporation premises. This was a high chance of fraud commitment by the department.
– The internal audit system comprised of members who were close relatives to two of the board of directors
-The internal control system totally lacked independency and all its control and authority was derived solely from the directives of the board of directors.
-The documentary system was highly inadequate where inefficiency was a problem in terms of update ness, correctness and authenticity.
-Most of the financial transactions were done without documentary system and that huge sums of money could be passed without entering into a clearly written documents. (Barrese, Scoris, 2003)
In the entire findings in my audit procedures, many internal control procedures had highly been violated; firstly as a role the independency of the internal audit system could only be safeguarded through employing an auditor who was not of any affiliate relationship with the management system. In all cases he was never to be an affiliate relative friend or a member of a corporation. However to act against this the management had appointed close relatives to act under this position. (Sundem, Stratton, 2006)
Either, as a role the internal audit system should be independent and never under control of the management in drawing their conclusions. However, the internal audit system was comprised of performance of duties under a total dictate of the board of directors.
As a rule a company internal control system should comprise of highly adequate documentary system. Documents are the proofs of the undertakings of a corporation. For every transaction entered into, documents about such transactions should never be compromised. They should be stored in a well-organized system free from any inefficiency and inconsistence. However for this internal control such qualities were lacking and this formed leeway for fraud cases within the premises. (Hollingsworth, White, 1999)
Business money should be banked adequately and often on daily basis. This is made to ensure that business money is protected against any possible fraud cases that may even arise during business undertakings. Elsewhere, banking money frequently safeguards it from other chances of theft.
Management control recommendations to the board of director
In order to safeguard the assets of the corporation efficiently on behalf of the corporation’s shareholders, there should be proper implementation in the internal control system that ensures proper system and organization of the structure of the company to fully safeguard the interest of the shareholders.
Firstly, a reinstatement and change in the internal audit system should perhaps be the first and the most important tool, which the company should implement. To cater for this, it should revise the structure of the internal audit to include other persons who are not affiliated in close relationship to the management.
Either, the corporation management should work to ensure that operation functions and duty performance of the internal audit is independent and not guided by the management in all respects. This is geared towards safeguarding the duty performed by the auditors and any financial results formulated from the work of the internal auditors would be far away from any manipulation in terms of materials misstatements and other various accounting errors of commission, omission and other a transactional errors.
Business money need adequacy while dealing with its accuracy. In all cases business money should be safeguarded from any possible environment that may act to a possible fraud. This can only be measured through proper transactional system and banking of the money often.
As a rule, the internal control system of the account department should be organized in a manner such that the workers are occasionally rotated in performing their duties. Either, the work done by one worker should consequently be over looked by the other in the accounts system. In any case workers in the accounting department should never be solely left independent for one work over a long period of time. There should be a good corporation between these workers.(Sunden, Stratton, 2006)
If fraud is to done away, the corporation should maintain a fountain documentary system in its transactions. Financial documents work as evidence for the transactions which a business undergoes in. Either, documents work to reduce any material misstatements in the accounting system of the corporation.
Management incentives to deal with the problem
Due to the poor performance of the company stock market, the management was at a state of disincentives in their duty play within the organization. This was perhaps the biggest draw back to the company in its attempt to retire back to its original state. Importance was therefore attached to developing incentives that would motivate them to work harder towards performing their duties.
In the annual dividend to the shareholders in 2005 the company allocated some share dividends to them as a motivation to their performances. To the CEO, his remuneration was to be revised and improved and further emoluments expenditure allowances featured in his payments. Above this, he was offered with other personal allowances in recognition of him as the CEO and the importance of the role-played by him within the corporation. (Rutledge, Karim, 2004)
Since the finance department initiated the fraud, close study revealed that this was compromised by the inadequate roles played by the chief finance officer in administration of his department. Importance was therefore attached to an increase in the pay and remuneration of the CEO. Either, further incentives were accorded to him through share dividend in the company’s annual dividend shares.
With these incentives to the management and especially for the CEO and the CFO, they were more motivated in working towards minimizing such a fraud. To the CEO he was motivated to the overall coordination and running of the corporation. He could thus ensure that all other structures work cordially with one other in pursuit of achieving the corporation’s goals. Elsewhere, this was a performance of the duties of the finance department. He would now ensure that all the structure within the finance department was efficiently done. (Hollingsworth, White, 1999)
Authenticity of the board of member
In the audit committee that had invited a government financial analyst some weaknesses where pointed out on regarding the company’s financial director and the information system director. After a scrutiny of the nature of the fraud, the finance director was recognized as having initiated the same through his administration he had initiated for the manipulation of accounts.
Either, his close linkage to the internal auditors was a threat to the company and that he had compromised such fraud. Either, the IT director had fictiously initiated the fraud when he used the corporation technology system to create a loophole for concealing this fraud. In regard to the mandates empowered to him by the law the financial analyst declared that these two directors were not adequately fit for the offices in the company.
‘Tone at the top’
This concept is highly evident in the company where the top people in the corporate management system are the source of authority to the administration. Decisions by the shareholder are no longer an issue of consideration. Through this concept the company is therefore involved in a fraud, which leads to its bankruptcy (Rezaee, et al, 2002)
Compatibility of the fraud case with the accounting laws
Inn the Sarbanes-Oxley laws, stipulations are given concerning accounting manipulations that would lead to fraud cases in a firms accounts. In its laws, it adequately elaborates for the provision of such manipulation and elaborates on the importance of an active internal control system. In the Act of 2002, it states the important roles and regulations that cover the internal control system against financial inconsistency and prevention of any financial fraud.
The act has stated the statutory requirement that regulates the internal control towards the corporation’s financial credibility. Either, it has focused on the importance of the independency of the internal auditor in producing a fair view of the financial transactions of the corporation. For all cases, the Act has focused on the importance of the internal control towards limitations of fraud cases in a firm
The authenticity of the correctness of a firms accounting system lies in the structure of the internal control of the firm. To avoid fraud cases in business so should the internal control be a viable structure working under the regulations of the international accounting standards. Independence in the auditing system should always be focused in ensuring the worth of the firms accounting system.
Barrese, J & Scoris N (2003) Corporate Risk Management. Review of Business, Vol.24
Hollingsworht, K & White, F (1999) Audit, Accountability, and Government. London: Clerendon Press.
Rezaee, Z et al (2002) Continuous Auditing: Building Automated Auditing Capability. Journal of Practice and Theory Vol.21
Rutlledge, R & Karim, K (2004) Environmental Disclosure Practices and Financial Performance. Westport, CT: Praeger
Sundem, J & Stralton (2006) Introduction to Management Accounting .London Prectice Hall.