This is an individual research assignment that consists of three parts. In Part A students will review the video False Assurance and answer the questions in Part A below. In Part B, students will apply those learning’s to the financial collapse of Quintis Ltd (ASX:QIN). A conclusion that summarises what has been learned is to be completed in Part C. The False Assurance video is available on RMIT Canvas under Assessments.
Through the RMIT Library, ASX and other sources, including a research report by Glaucus Research Group available on Canvas, research the financial collapse of Quintis Ltd, including the potential for fraud and responsibilities of the external auditor, Ernst & Young. Then answer the following questions:
Write an overall conclusion that discusses what you have learned from the case studies and be mindful that written communication skills are also assessed for Parts A and B. See marking Rubric on course guide on RMIT Canvas.
Part A: False Assurance
Key Issues Associated with Fraud
Fraud is defined by ActionFraud website as the use of trickery to gain a dishonest advantage, often financially driven, over another person (ActionFraud 2018). Fraud is one of the issues in an organizational situation which comes about as a result of failure to effectively deal with or counter ethical issues in the right way especially among the senior management and leadership.
Therefore, ethical issues in leadership constitute the key issues associated with fraud. Majorly, it concerns the manner in which information about organizational financial aspects is shared in an organization and majorly, policies and regulations governing information sharing in the organizations. From the video False Assurance, one way of managing fraud in an organizational situation is to ensure quality checking and rightful handling of information. Other issues covered in the video that concern fraud includes the evaluation of technical issues such as the robustness and controls regarding the approval of agents and suppliers, valuation of organizational intangible assets, evaluation of the risks associated with cyber security, internal investigations and evaluation of their level of reliability, and risk management through enactment of efficient working methods as well as the importance of strong leadership.
Fraud symptoms that should have alerted TYSL and D-Merton’s Board to the fraud
The first alert to cyber security and fraud was the identification of 50 serious flaws within the company’s defences across all its systems including the design database. Worst of all, the company was highly vulnerable because had four different functioning systems that ran within the group. The danger lay in all of the four systems being affected by the flaws.
Secondly, Premintel was considered for the supply of the functions that needed to be outsourced. However, the company had a bad reputation such as corruption issues and poor leadership and overall management. Additionally, Printel’s management is linked to the family of Richard, one of the senior manager’s family. There is also loss of the reports within the company yet the circumstances surrounding the reports are unclear. The outsourcing company is basically unqualified as the supplier to D-Merton (Wiggetts 2014).
Failure to accept the conclusions and recommendations by the external auditors is another symptom of fraud that should have alerted TYSL and D-Merton’s Board to the fraud within the management. This was based on the arguments that the external recommendations were subjective and would be too expensive to implement. It was also argued that these recommendations were based on the original rather than latest/modern technology (Wiggetts 2014).
Responsibilities of both D-Merton and TYSL with regard to the finalisation of the financial statements, the audit report and identification of fraud
D-Merton was responsible of convening meetings and discussing the extent to which the company was meeting its major challenges especially those related to fraud incidences. In so doing, the company had to remain internally vigilant and committed to the identification of any apparent symptom of fraud such as the loopholes in the technology and management information systems. Another responsibility of the company was to be objective and remain unbiased on all the discussions which would help the company to successfully finalize the financial reports in a transparent manner. The company had to embrace the conclusions from the external auditors and make use of all the positive aspects of the recommendations while working on reducing the adversities of the recommendations made.
Key issues associated with fraud
TYSL on the other hand was responsible of being objective and not subjective on the matters related to the financial reports of D-Merton. Being a group of external accountants entrusted with the mandate of auditing and providing reports on the financial progress of the D-Merton, TYSL is further mandated with the role of ensuring that D-Merton receives updated reports that will facilitate corporate attempts to eradicate fraud issues. Lastly, TYSL should have worked out avenues of preventing fraud in future and recommending them among its recommendations to the management board of D-Merton.
The key Issues Associated with the Quintis Ltd Financial Collapse
Financial collapse of Quintis Ltd was largely a consequent of the mismanagement of the company’s business models and practices which adversely affected the corporate management information systems. According to a report by Glaucus Research Group, the business model resembled that of Ponzi scheme, a scenario that was predicted to lead to devastating losses for the company.
Additionally, the independent expert s who investigated the company and released reports on the financial progress of the company was also questioned by the report. According to this report, there were apparent inconsistencies in making assumptions that Quanti’s future scale output as related to a small global market for sandalwood products were not going to flood the market and result in the reduction of achievable prices.
The news regarding the decision by the manager of Quantis Frank Wilson were also received with both apprehension and suspicion amongst both internal and external players, coupled with news of the company’s leading customer (Shanghai Richer Link) to purchase the company. Basically, Wilson’s resignation was unclear and the explanation was thus one of the prominent issues that surrounded the demise of the company. By making its customer rich at an equivalent of USD 25 million per annum, Quantis had already threatened its own profitability.
Three potential fraud symptoms that a forensic accountant should investigate further
A forensic accountant investigating the collapse of Quintis should further investigate the resignation of the manager of the company Frank Wilson so as to establish the exact reasons that led to his resignation. This is because the details that Mr. Wilson give are in direct conflict with relevant information such as the interim relationship between the company and its main customer based in China Shanghai Richer Link which was alleged to have garnered immense benefits to the point of purchasing Quintis, its original supplier, which was to the disadvantage of Quintis.
The number of management information systems that were managed at Quintis was reported to undergo a drastic drop in the year that preceded the collapse of the company. From the statistics given by Davis & Henry (2018), the company managed 43 management information systems in may 2010, which dropped to 14 in Sep 2010 in the Agroforestry sector. This meant the loss of corporate effectiveness and competitiveness, hence an indicator of its declining profitability. Therefore, a forensic accountant looking to obtain information about the company’s losses, this quantitative trend should serve as an indicator.
Lastly, reliance of the company on incipient Capital as the only remaining source of the company’s critical demand forecast in its 2016 presentation that was made to investors is a symptom of the company’s Quinti’s continued dissipation in the earlier years. Although Quintis sought to dismiss the report by Incipient Capital, there was enough proof that the company was coming to a point of collapse. This was worsened by Quintis’ refusal to release its studies coupled with increased uncertainties and unpredictable state of the company (Fredrich von Schiller 2018.)
Evidence that the accountant should seek to obtain to determine whether a fraud has occurred or not?
The accountant should seek evidence on the efficiency and appropriateness of the information contained in the company’s management information systems. This information should be compared with the available information from other sources such as suppliers and other significant market researchers. Lack of consistency in this information, particularly in regard to the financial aspects of the company is a strong indicator of the occurrence of fraud in the company.
Additionally, there is need to investigate about the reasons for the resignation of the manager. Lack of clarity about the exact reason that led to the resignation of Mr. Frank Wilson may serve as an indicator of fraud in the company. The manager had to be interviewed and information obtained from the interview alongside secondary sources of information regarding his resignation may altogether constitute a fraudulent activity.
Lastly, comparison of the company’s performance overtime may also act as a source of relevant information on whether there was fraud or not. Fraud and other related activities result in a number of consequences, most notably decline in corporate profitability.
Key Audit Matters (KAMs)
Symptoms of fraud in the False Assurance video
Key Audit Matters as explained by Ernest and Young are matters which are communicated to the management and the auditor has to highlight the matters requiring extra attention. KAMs pay extra attention on areas having high risk of significant risk and substantial misstatement as identified as per the ISA 315. Another key concern of KAMs is the assessment conducted by the auditor regarding financial statement areas which constitute substantial judgment of the management such as significant accounting estimations, and the impact of the revision of the transactions or significant events having taken place in a period (Sirois, Bédard & Bera 2018). These disclosures have benefited the stakeholders by facilitating the process of accounting. However, there are other matters that have to be taken into consideration namely the nature of communication within the organization and the recent activities that have taken place within the management of the company.
The auditors, having conducted investigations in salient matters affecting the company, have fulfilled their statutory duties in regard to their 2016 and 1017 audits. This is because the audits convey all details of the information which was established through auditing. Since this information is able to serve the function for which it was intended, it can be concluded that indeed, auditors played their role appropriately.
Fulfillment of Statutory Duties
According to Sirois, Bédard & Bera (2018), primary statutory duties of auditors include requirement for proper accounting records and requirement for proper accounted audits pursued through a number of auditing procedures such as inquiry of the management and other stakeholders understand an organization, its operations, and financial reporting so as to establish known fraud or error. This is followed by evaluation and understanding of organization’s internal control system. Analytical procedures are then performed on either expected or unexpected variances in classes of transactions or account balances followed by testing. This is followed by observation of the physical inventory count and lastly, conformation of accounts receivable as well as additional counts with third party. The procedures were followed by accounting auditors, implying fulfillment of their statutory duties.
In the first case study involving the analysis of a video titled “False Assurance”, major lessons derived revolves around the role of management in the identification and solution of ethical dilemmas in organizational contexts. D-Merton which is a company that faces an ethical dilemma has to make decisions on whether to source the relevant functions or simply to upgrade their systems. In the solution of this dilemma, the management ends up making a decision that consequently results in the worsening of the situation. The main lesson derived here is that the role of the management in decision-making is crucial. Equally important is the role of external auditors who come in to join the company in the attempts to solve its challenges. The company finds it crucial at the end that it might have been helpful to work hand-in-hand with external auditors to overcome the challenge, which was not earlier taken into consideration. Further in False Assurance, it becomes manifestly evident that collective responsibility, transparency, and integrity are essential organizational virtues that should be embraced at all times.
In the case study of Quintis, the main lessons that can be derived is that organizational success depends on the commitment of the top leadership to its profitability and competitiveness. This to a considerable extent is deeply rooted in the efficiency with which a company deals with a number of challenges such as the bargaining powers of suppliers and consumers. A company is likely to lose profitability and competitiveness once the bargaining powers of its suppliers and consumers rise beyond the company’s own bargaining powers. Lastly, the role of multidimensional approach ion problem identification and solution remains an imperative strategy in organization’s quest to grow and achieve its goals.
ActionFraud 2018. What is Fraud and Cybercrime? National fraud and cyber crime reporting center. Retrieved September 10, 2018 from https://www.actionfraud.police.uk/what-is-fraud
Davis, K, & Henry, H., 2018. Agribusiness MIS Failures: Policy lessons from the Quintis failure Retrieved from https://kevindavis.com.au/secondpages/acadpubs/2018/Text%20-%202018-07-01.pdf
Schiller, V., 2018. TFS Corporation Limited/Quintis|ASX:TFC/QIN. Glaucus Research Group.
Sirois, L.P., Bédard, J. and Bera, P., 2018. The informational value of key audit matters in the auditor's report: evidence from an Eye-tracking study. Accounting Horizons.
Wiggetts, D., 2014. False Assurance. Kanopy. Retrieved September 9, 2018 at https://rmit.kanopy.com/video/false-assurances