Question

A former chairman, CFO, and controller of Donnkenny, Inc., an apparel company that makes sportswear for Pierre Cardin and Victoria Jones, pleaded guilty to financial statement fraud. These managers used false journal entries to record fictitious sales, hid inventory in public warehouses so that it could be recorded as "sold," and required sales orders to be backdated so that the sale could be moved back to an earlier period. The combined effect of these actions caused $25 million out of $40 million in quarterly sales to be phony.

Required:
a. Why might control procedures be insufficient in stopping this type of fraud?
b. Would an audit committee made up of representatives from senior management be effective in stopping this type of fraud?

Answer 1

a)

These controlling processes are inappropriate or not enough as the administration accompanying the fraud might supersede the complete control method to bypass the particular pair.

b)

In traditional state of affairs, management might obligate fraud to setting higher revenue and thus attaining high value.

An administration fraud can't be known simply by an ordinary man because it includes distinctive appreciative of financials. Thus one will use the assistance of consultants for investigative having an uncertainty thereon. So the audit group might be effective in preventing this kind of deception as they're predictable to operate as a regulator against administration fraud by observation money news declarations and control processes of a company. A perfect audit group would include the external or internal auditors which might assure for the credibility of the knowledge bestowed to the group.