What’s Wevenue? Case Study
Coopers & Lybrand was auditing Cal Micro at the time the latter company wrote off half of its accounts receivable. The move sparked an internal investigation and the Securities and Exchange Commission (SEC) sought to bar the two auditors working with Cal Micro from signing off on public company audits. On one hand, the SEC pointed to several weaknesses in the auditors’ performance of their jobs, while on the other the auditors claimed ignorance and even alleged a willful cover-up on the part of Cal Micro (MacDonald, 2000).
At issue in the dispute was Cal Micro’s failure to establish a guideline for when a transaction could be treated as a sale. The chief ...view middle of the document...
In addition, the auditors sent out confirmation letters to 91% of their customers with outstanding bills, but did not scrutinize what was returned in response. One-third of the 37 replies received were cause for alarm: companies indicated that Cal Micro booked revenue on unshipped products, while one company noted ‘some amount still in negotiation for return of parts’ and another said Cal Micro had set up a consignment arrangement, and therefore was not obligated to pay until the products were resold (MacDonald, 2000).
Coopers & Lybrand did tell Cal Micro to reverse many of the erroneous transactions, but failed to investigate further to see if more revenue irregularities existed. In addition to the alarming customer response, former employees had given hints to the revenue reversals (MacDonald, 2000). Thus it seems that Coopers & Lybrand should have easily uncovered the problem.
The IMA Statement of Ethical Professional Practice offers four categories of standards: competence, confidentiality, integrity and credibility. For competence, members of the IMA should continually develop knowledge and skills, perform duties in accordance with relevant laws, regulations and technical standards, as well as recognize and communicate professional limitations or constraints that would preclude responsible judgment or successful performance of an activity (IMA). Neither the employees of Cal Micro or Coopers & Lybrand sufficiently meet the competence standards. The chief financial officer of Cal Micro lied about his accounting background when in fact, he only took one class in accounting during college and received a D (MacDonald, 2000). Thus, he failed to further his knowledge or skills in the area he proclaimed to have expertise in. Coopers and Lybrand had a duty to ensure that auditors for Cal Micro had sufficient experience to handle something as involved as an annual audit. In addition, those auditors should have professed their lack of experience in certain area and deferred to those with more experience when necessary.
The confidentiality standard requires that members keep information confidential except when disclosure is authorized or legally required, inform all relevant parties regarding use of confidential information, monitor subordinates’ activities to ensure compliance and refrain from using confidential information for unethical or illegal advantage (IMA). Cal Micro mishandled confidential information by shredding important documents that likely had information that needed to be disclosed to pertinent parties (MacDonald,...