Audit Case Study Deepika Subedi ACC5218 Course Examine Dr Bonnie Hampson 20/04/2021 Table of Contents Introduction 3 The Auditor’s Responsibility in Relation to Fraud 3 Process in selling the product 4 Internal Control Weaknesses 4 Factors identified by Auditors having an effect on the risk of fraud 5 Impact of Corporate Governance 6 Conclusion 8 References 9 Introduction This is a case study on the collapse of One Tel. One Tel was a major corporate collapse in Australia in 2001.The failure of One Tel is a classic case of failed expectations, strategic errors, and incorrect pricing strategy. The company’s rapid growth and collapse is linked to significant flaws in its corporate governance, including internal control, financial reporting, audit quality issues within management and board. The main objective of this report is to evaluate the Weaknesses of Internal Control of One Tel, Auditor’s Responsibility in identifying the fraud and the importance of corporate governance in avoiding corporate failure. The Auditor’s Responsibility in Relation to Fraud Financial reporting frauds are usually more serious than asset misappropriation frauds because they involve senior management and do not involve the misuse of company properties. It is the duty of the auditor to identify the possibility of material misstatement because of fraud. (Song,2013). The auditor must gather sufficient audit evidence for the risk identified and react appropriately to fraud that has been detected or suspected. The auditor would review the specifics of the financial controller’s misconduct with the finance director, as well as the processes used to detect any financial statement changes that are needed. It was Auditor’s responsibility to identify the issues in maintaining proper records in OneTel. Perform Substantive procedures to obtain information regarding actual position of bad debts. Auditors of One Tel should discuss with the senior management regarding misrepresentation of balances, less provisioning of bad debts, insufficient credit checks, capitalising revenue expenditure. If Auditor is of the opinion that Management is involved in fraudulent activities, it should obtain a Qualified Opinion of the Financial Statements. Process in selling the product To market the commodity, One-Tel has taken several measures. They began with the guide telling them to speak with Optus, which has to be the gentlest contact in Australia. In 1995, the corporation decided to pay Optus large discounts in exchange for pumping out handsets to consumers. Optus promised to pay a fixed rate for sell calls, giving One Tel a flat margin. After each customer signs up, Tel receives $120 directly into their bank account. To receive the Optus bonus, the company did not need to sell handsets or enter into a long-term deal. Giving the customer a new sim card, which was counted as a new phone, was sufficient to receive payment. As a result, the firm began issuing SIM cards to those who had the necessary information. They began focusing on single mothers, retirees, and schoolchildren. (Carnegie,2014) There were no entry fees, no minimum call spends, and no contracts with a set name. Optus had the option of refunding the money if the number was not used for at least 12 months, but more than half of the sim cards had never been used before. This had potential to materialise in bad debts, which was the worst-case scenario. The corporation never run credit checks on consumers and made poor pricing, distribution, and credit management collection decisions. John Greaves (chairman of One Tel) and Rodney Adler were the only members of the company’s council. Internal Control Weaknesses Internal Control weaknesses include a lack of careful control, which raises the likelihood of financial reporting misstatements. It leads to misstatement if the auditor is unable to make sufficient controls to meet audit objectives. In favour of reduced calculated control risk, the organisation has not established audit protocols to measure the operational efficacy of controls. One, Tel lacks a protocol for testing controls and contacting relevant client staff. Unauthorized employees should not be given access to electronic information, and the inspector should examine the company’s detail for oversight. Examining documents and records is an operation. In this scenario, we can see that the organisation lacks information when selling a SIM card. The auditor does not follow client protocols. The company’s financial controller was providing false information OneTel overstated its debtor balances. It aggressively sold its services from small streets to big malls, from cities to towns across the centres. Customers were signed up for the telephone services with few and inadequate credit checks which indicated a major internal control weakness. Due to its aggressive marketing, different people like adults, schoolkids, teenagers, housewives, unemployed, pensioners etc. signed up for the telephone services offered. This resulted in huge bad debts for the company. But the books of the company showed a different picture altogether. There was very low provision made for doubtful debts. (Duong,2015). One Tel recorded “spectrum licenses” at an excess price of $500 million than its actual cost. These licenses were acquired for developing their own telephone network. It paid 10 times higher than its competitors to acquire these licensees. Prepaid Advertisement amounting to $90Million was recorded as an asset and was written off during liquidation (Duong,2015). It should have been written off as revenue expenditure over period of years. Due to this wrong treatment in accounts, it was subject to an enforcement action by ASIC in 2000. Factors identified by Auditors influencing the risk of fraud The auditor should be aware of the various considerations that have been assigned in the situation. It is the auditor’s duty to find the material misstatement. It’s a vital part of every audit’s preparation to assess the possibility of mistakes and fraud. It is their duty to adequately prepare and conduct the report, as well as to uncover any illegal evidence. The auditing classes of transaction, closing balances in account, and presentation and disclosure must all meet those auditing objectives. Transactions must be reported as they arise and pertain, all transactions must be completed, sums of data from related transactions must be registered correctly and reliably, transactions must be recorded in proper records, and finally, transactions must be recorded in the relevant accounting period. In the case of One Tel, they haven’t completely registered the transaction, so they hardly keep track of client records, resulting in miscalculation of bad debts. Credit checks were overridden mostly, and they produced false numbers. The monthly report is late, and the annual report is inaccurate, improperly classified and not documented in the correct accounting era. All these factors contributed for high risk of fraud in OneTel that the auditor should have identified (Bryce,2015). The internal control systems are designed and developed by the management. Hence control risk isn’t in the hands of the auditor. Control risk is said to be high if the systems or their functioning isn’t up to the mark. It is advisable that the auditor presumes the control risk to be high at the planning stage of the audit and accordingly prepare Audit Plan. Impact of Corporate Governance The corporate governance is the principle that govern the company. There are few principles and recommendations on corporate governance. The failure of One Tel highlights the importance of corporate governance in avoiding business failure. In ASIC v. Rich (2009, NSWSC 1229: 257, 258), Jodee Rich and Mark Silbermann, the finance director gave evidence that he rarely saw One Tel’s trial balances, monthly board reports, unpresented cheque listing, Ledgers, journals, other records. Several records and balances including accounts receivable were tampered (ASIC v. Rich , NSWSC 1229: 301). There were many Internal Control weaknesses in the system. The senior management did not care about integrity and accuracy of financial statements. One Tel’s earning was of low quality as due to more accrued income. It had negative operating cash flow. The company’s position on deferred spending was modified. Previously revenue expenses associated with the company were now capitalised and amortised over a three-year period. Even though One Tel previously preferred to capitalise certain costs under Australian GAAP, the writing off method was still compatible with Australian GAAP. The same audit firm, BDO Nelson Parkhill, audited OneTel from 1997 to 2000. (BDNP). For all these years, the auditor gave unqualified audit opinions. The ICAA also found that the audit report violated the Corporations Act, and it never gave opinion on Going Concern. There are also reports that One Tel paid its external auditor a lot of money for non-audit services (NAS). The ICAA reprimanded both the audit partner in charge of One Tel and BDNP. A fine of $48 000 was imposed on BDNP. (Duong,2015). Poor financial reporting and auditing techniques were used to mask poor financial performance and fair results by its board of directors and shareholders. As a result, there was no way to take corrective measures to prevent the company from collapsing. The inconsistencies in following accounting and auditing standards were the evidence to prove the ineffectiveness of Audit committee and Board of Directors. CEO Jodee Rich frequently chaired all the board meetings implying that he had more influence and power in the board. The non-executive directors never scrutinised matters of concerns. Also, many directors were not qualified as “independent directors” implying they had vested interests in the company. The board members did not receive correct and full information on important business matters. The board’s and management’s responsibilities were not clearly established. Due to poor corporate governance, One-Tel management was able to paint a rosy image of the business. All these together led to the collapse of the company. Outcomes and Leanings from the Corporate collapse of One Tel: – Aggressively capturing market with objective to acquire high customer base without having adequate credit checks can affect the profitability of the firms.It is insufficient to produce sales profits unless they are received in cash in a timely manner.Non-executive board members must scrutinise company’s affairs on their own. They should communicate directly with low and middle level management for proper accountability.Auditor must form a qualified opinion whenever necessaryFirm’s major investors must participate in the activities of management.Taking non-audit services from external Auditor can jeopardise audit quality.The agenda of board meeting must be true representation of facts and proper management of company affairs. (Appuhami,2015) . Thus, Corporate governance acts as a “safety net” to prevent a company from collapsing. Management and the board of directors are responsible for setting the “tone at the top” for ethical behaviour in the company. The term “tone at the top” refers to the leadership and dedication of management and the board of directors to be truthful and ethical. It is important for management to behave with honesty and integrity because this reinforces the importance of these values to employees through the organization. If the Top management at One Tel followed all the corporate Governances principles, it could have avoided the collapse of such big market giant. Conclusion The Aggressive marketing policy adopted by the One Tel Management to involve all types of customers to its telephone network whether they are capable financially lead to excessive bad debts. Inappropriate Accounting treatment of capitalising revenue expenses, undervaluing bad debts, acquisition of licenses at higher prices, recording at high values than actual price etc. resulted in insolvency of group and its demise soon after 6 years of its incorporation to summarise, businesses with poor internal controls, poor audit quality, and poor financial reporting are more likely to fail. References R, Appuhami,& M, Bhuyan, (2015), Examining the influence of corporate governance on intellectual capital efficiency: “Evidence from top service firms in Australia” Managerial Auditing Journal. Australian Securities and Investment Commission V, Rich 2009, New South Wales Supreme Court (NSWSC) 1229. Bryce, M., Ali, M, J., & Mather, P, R, (2015), Accounting quality in the pre-/post-IFRS adoption periods and the impact on audit committee effectiveness—Evidence from Australia, Pacific-Basin Finance Journal, 35, 163-181 Carnegie, G, D., & O’Connell, B, T,(2014), A longitudinal study of the interplay of corporate collapse, accounting failure and governance change in Australia: Early 1890s to early 2000s, “Critical Perspectives on Accounting”, 25(6), 446-468. Duong, L., & Evans, J, (2015), CFO compensation: Evidence from Australia, Pacific-Basin Finance Journal, 35, 425-443. Kirkham, R,(2012), Liquidity analysis using cash flow ratios and traditional ratios: The telecommunications sector in Australia, Journal of New Business Ideas and Trends, 10(1), 1-13. Miglani, S, Ahmed, K, & Henry, D, (2015), Voluntary corporate governance structure and financial distress: Evidence from Australia, Journal of Contemporary Accounting & Economics, 11(1), 18-30. Song, D, B., Lee, H. Y., & Cho, E, J, (2013), The association between earnings management and asset misappropriation, Managerial Auditing Journal. Teen Mak.Yuen, 2013, Corporate Governance Case Studies; Volume Two, Call 0 for OneTel, 91-92.
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