The Logitech International Audit Scandal
The Logitech International Scandal is a technology manufacturing firm, which has been order by the Securities and Exchange Commission (SEC) to pay a fine of about 7.5 million dollars for misrepresenting its financial 2011 financial results and other accounting violations. According to (Securities and Exchange Commission, 2016) the company’s former director of accounting Sherralyn Bolles and former controller Michael Doktorczyk were fined 25,000 and 50, 000 dollars respectively.
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The Audit Report that the CPA Firm Issued
The Logitech International Scandal audit report inflated the company’s operating income in order to satisfy the demands of the earnings guidance. However, this was against the purpose of audit report, which is meant to reveal the actual financial position of a firm. This major purpose of an audit firm is critical for the development of investor confidence. The professional CPA firm is supposed to exercise “Professional Skepticism”, which involves a critical assessment of the evidence that an audit produces.
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The misrepresentation of the financial position of a company by an audit firm produces three major kinds of liabilities. Mann & Roberts (2012) asserts that accountants can civilly and criminally liable for the actions under the 1933 and 34 acts. According to (Clarkson, Miller & Cross, 2016) initially, a professional owed only liability to those they had contractual relationships. However, this has changed especially among the accounting firms, have the duty of care, duty of honesty and duty of correctness. The CPA firm that performed the Logitech International 2011 audit is liable for tort claims that result from deceit under the federal and security laws. The deliberate misrepresentation of the financial position amounts to a deceit of third parties.
The Statement of Generally Acceptable Auditing Standards (GAAS) that were Violated
Generally, auditors are required to reveal the actual financial position of a company at the time of the release of the financial statements. As such they should release audit report with an opinion or reasons if such an opinion cannot be provided. While releasing the audit report, they should ensure the report is free from any material misstatement. In the case provided, the auditors released audit report that did not reflect the true financial position of Logitech at the time the financial statements were being released, which is against the GAAS. The auditors violated the GAAS section 150 (.2) which governs disclosures. The auditor is required to maintain mental independence in all matters and when it is determined that information disclosure is inadequate, it must be stated in the auditor’s report.
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Comparison of the Responsibility of Management and the Auditor for Financial Reporting
The preparation of the financial statements is the responsibility of the management. The management has the responsibility of maintaining sound financial policies and company internal controls (Friedlob & Plewa, 2006). In contrast, the auditors have the responsibility to plan and perform the audit and obtain reasonable assurance on whether the company accounts are free of material misstatement, whether caused through error or fraud. And if such opinion cannot be provided, they must state the reasons why they cannot offer such an opinion.
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In view of the responsibilities of the auditor and the management, it is of the opinion that the management should have the greatest burden. This is because the management’s work is to prepare their financial accounts in accordance with the accepted accounting standards. The management is responsible for putting in place effective internal control procedures and sound accounting policies. Although the management may provide all disclosures, they may be prepared in a way that may be hard to detect. Given that the responsibility of the auditors is to provide an opinion based on disclosures and financial information provided, the management has the greatest responsibility for financial reporting.
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The Sanctions Available Under SOX
The Sarbanes-Oxley Act or SOX was enacted by Congress in 2002 in response to increased fraud. The SOX was enacted with the sole purpose of instilling corporate governance (Pratt, 2011). It provided sweeping changes in responsibilities of management, audit committees and auditors. The act demands that financial officers and principal executives to certify that financial statements received are untrue, do not omit important information and that they offer fair representation of financial position of the company. In addition, the act demands the auditors and management to ensure there are adequate internal controls to provide reasonable assurance regarding the completeness of financial records.
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The Public Company Accounting Oversight Board or PCAOB is charged with the responsibility of investigating accounting firms and persons associated with such firms for violation of the Sarbanes-Oxley Act for noncompliance and enforcement of appropriate sanctions. Since the audit firm in Logitech scandal had knowledge regarding the problems with the company’s accrual accounting, it is recommended that the audit firm be banned from conducting any audit for one year and the same be applied for the audit officers within the firm. In addition, Logitech should be fined for its role in the accounting misrepresentation of the company sales of Revue.
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