What's Your Fraud IQ?

Recent scandals at Olympus, Barclays, and Wal-Mart, among others, illustrate the ongoing need for organizations to continually review and strengthen their corporate governance practices. CPAs play a key role in this process. Do you know the best practices for setting up a corporate governance system? Can you spot governance weaknesses that might allow for fraud in an organization? Are you up to date with the latest events, issues, and trends on the corporate governance front? Take this Fraud IQ quiz and find out. 1. Which of the following scenarios best exemplifies an agency dilemma? a. A sales manager for a publicly traded corporation knows that his employer is facing a temporary financial crunch due to the loss of a large sales contract. He also knows that the organization is scheduled to roll out a new product in four months, which should more than make up for the lost revenue. To help his company report better earnings during the current period, he records fictitious sales to one of his division's biggest customers and plans to reverse those transactions once revenue picks up. His efforts give the company's profits a short-term boost, allowing the organization to meet its earnings targets for the quarter. b. A dentist hires a CPA to prepare the federal income tax return for his sole proprietorship. However, the dentist intentionally provides the CPA with a report that understates the money the practice brought in, resulting in an underreporting of revenue and underpayment of income tax to the IRS. c. Two brothers are partners in an advertising firm. One has retired but retains a 50% ownership interest as a silent partner; the other is the CEO and has full responsibility for managing the organization. Unbeknown to the retired brother, the CEO is running tens of thousands of dollars of personal expenses through the firm, reducing both profits and partnership distributions. d. None of the above. 2. Which of the following statements is true regarding corporate governance requirements for publicly traded U.S. corporations? a. Specific governance practices for U.S. public companies are mandated by the Uniform Corporate governance Act. b. Unless explicitly excluded, all corporations listed on the New York Stock Exchange (NYSE) or Nasdaq Stock Market must adopt and disclose a code of conduct for all employees and report any waivers of the code for directors or officers. c. Unless explicitly excluded, all corporations listed on the NYSE or Nasdaq must have an internal audit function. d. Specific governance practices for a U.S. public company are determined by the company's corporate governance committee. [ILLUSTRATION OMITTED] 3. Allen Corp. is a publicly traded company listed on the NYSE. Allen's board of directors is evaluating the company's corporate governance structure to ensure it follows best practices to prevent and detect fraud. The board contains three committees: audit, compensation, and nominating. The audit committee consists of three directors, including Jackson, Allen's former director of finance. Jackson left the company four years ago and joined the board of directors this year. He was appointed to be the audit committee's financial expert because he is a CPA with extensive experience in preparing, auditing, and analyzing financial statements, and he is already familiar with the company. The other two members of the audit committee are not financial experts and have never worked as auditors. The committee is responsible for the hiring, firing, and compensation of the independent auditors, as well as overseeing their work. Which of the following changes should Allen make to its board of directors? a. To comply with the NYSE's listing standards for public companies, Allen Corp. needs to add a risk management committee to its board of directors. b. Jackson should be removed from the audit committee because he worked for Allen Corp. …