Review of the Cardillo Travel Systems case
The following is a clear evaluation of the case of Cardillo Travel System where Securities and Exchange Commission (SEC) charged certain executives with Fraud. The reason as to why the commission charged them has been explained under the various sub-headings;
False Representations to Outside Auditors
According to AU section 316: Consideration of Fraud in a Financial Statement Audit (2002), there are two misstatements that can be created. In the case study, both have been realized at one instance. One, they have caused a misstatement by giving the falsified financial reports in hopes of cheating the statement’s audience. By doing this, the audience is misled into making wrong decisions and overlooking certain issues that wants to remain hidden. Evidently, the inappropriate sales of company shares with use internal information had not been noticed until the misstatement was.
Secondly, misappropriation of funds was done by not acknowledging the development funds as so but as company profits. Despite the management decision being sound, the action was not acknowledged in the final financial report. In this case, the funds can be considered to as the assets because in actual sense, they were intended for improvement of the reservation system. Therefore in all accounts, the executives are in the wrong side of the laws of state and profession.
Maintenance of Accurate Financial Records
Intentionally maintaining inaccurate records is a crime by law and this perhaps blankets the entirety of the allegations. However, further exploration of the act reveals the vital importance of having accurate records, for instance for audit purposes or taxing. In this regard, the executives at Cardillo hoped to mislead the Auditor and any other person who would use the financial statement. Also, as professional executive staff, they did not adhere to Financial Executives International (FEI) principles of professionalism. Specifically they did not act in good faith nor worked without misinterpretation.
Filing prompt financial reports with the SEC
As Gibson Dunn (2014) notes, failure to provide a timely report to the SEC is in violation of Exchange Act of 1934. He speculates on the thorough nature of investigations by the SEC against the culprits to such an act. He further points out that SEC is the authorized body for enforcing the Act. Therefore, Cardillo executives acted in a manner that would attract allegations from the commission by not providing the report within the expected time frame.
Insider trading provisions of the federal securities laws
According to News Digest (1987), one A. Walter Rognlien used inside information to sell 100,000 shares of the firm at a price around 237,500 US dollars. This is in violation of the national securities law. Using inside information is illegal and should be so because the information is confidential to the concerned firm. Exposure to the public might result in certain repercussions such as great losses or loss of competitive edge. In this case, Rognlien did not bother to use discretion; he ‘directly’ sold the shares to earn the money (Burger & Crean, 2014).
In conclusion of this part, it is important to state that there are certain circumstances that warrant one to have committed an offence in the business world regarding matters similar to those of Cardillo. It is an offence when one knowingly misrepresents records, hands in the information or allows handing over of the said records to an auditor while aware of their nature. In this regard, all the aware executives were held accountable regardless of the real culprit who did the crimes.
In accordance to various union regulations, all certified financial workers have a role to play in the maintenance of chaotic-free business environment. To do so, they are guided by principles governed by bylaws in the American Institute of CPAs (AICPA) professional conduct policies (Standards, 2013). Integrity and professionalism are key elements that are focused upon in these bylaws, approaching them from all possible angles to ensure high quality service provision. Russell Smith and William Kaye had a similar dilemma to write up false reports as dedicated by their superiors or to stick to the code of professionalism. Russell Smith did not budge and his move went a long way in ensuring that there was no ‘faked’ evidence of the authenticity of the reports. William Kaye submitted to the superior’s requests and he paid the ultimate price by accepting a permanent injunction after the commission’s complaint.
As dictated by their code of professionalism, auditors’ main purpose is to flash out any suspicious fraud and to make sure that the financial reports are in line with the all relevant transactions (AU Section 110: Responsibilities and Functions of the Independent Auditor, 2002). By doing so, the financial statements are left error-free and professional integrity is maintained. In Cardillo, the outside auditors noticed the irregularity in the transaction concerning the firm and United Airlines. The practitioner enquired on the same and relevant rectifications were made on the report. This implies poor audit risk management in the case study. This is because the financial report was easily picked out by the auditors as misleading and in the exact point of error. The firm acquired the auditors services by demand implying a certain level of confidence in the statement created. However, the auditors easily sniff out the sore spot on the financial report.
The running of Cardillo implies that most of the five key components of internal control were not followed. Two examples are stated to show this conclusion. One, the control environment is not based upon key values that indicate its liability in a firm. For instance, Rognlien used internal information to possibly make a personal profit by selling company shares. This shows unprofessionalism and lack of integrity or professional ethics.
Secondly, the control activities have not been fully implemented in the firm. As the auditors discovered, there is no proper documentation of the real nature of the transaction of United Airlines and the firm. Therefore, the missing information in the reports implies an inadequacy of proper documents and records of the transaction.
Auditors’ main role in literal is to confirm that a company has what it says it has and done what it says it has done. It is for the public good that accurate information is produced by companies since the public relies of this information to make decisions such as of investment. Intentionally misleading the public is an offence on its own accord. Therefore, the auditors as part of their responsibility have the right to assess the decisions made by Cardillo’s management.
Another important role given to the auditors is identifying fraud in companies in whichever form it comes with. In Cardillo, the discovery of irregularities in the financial report acted as a whistle blower to possible deeper issues that were improperly or wrongfully done.
AU Section 316: Consideration of Fraud in a Financial Statement Audit. (2002). Retrieved May 17, 2015, from Public Company Accounting Oversigt Board: http://pcaobus.org/Standards/Auditing/pages/au316.aspx
AU Section 110: Responsibilities and Functions of the Independent Auditor. (2002). Retrieved May 17, 2015, from public Company Accounting Oversight Board: http://pcaobus.org/Standards/Auditing/Pages/AU110.aspx
Burger, M., & Crean, A. (2014, February 12). Australia: The ins and outs of insider trading (Part 1). Retrieved May 16, 2015, from Mondaq: http://www.mondaq.com/australia/x/291416/Corporate+Crime/The+ins+and+outs+of+insider+trading+Part+1
Dunn, G. (2014, September 11). SEC Enforcement Actions Over Stock Transaction Reporting Obligations Offer Reminders for Public Companies and Their Insiders. Gibson, Dunn & Crutcher LLP.
Standards, A. P. (2013). Code of Professional Conduct and Bylaws. New York: American Institute of Certified Public Accountants, Inc.
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