ACCT2216 Assurance and Forensic Accounting | Financial Losses

1.

The key issues that were there in Quintis ltd financial collapse are :

Lack of sufficient funds- The company did not have any funds to exercise the put option. It required the company to purchase a put option from the company Asia Pacific Investments. The put option required the company to buy 400 hectares of plantations for around $ 37 million. (Li and Saiz, 2018).

Financial losses- The company reported a net loss after tax of $416.8 million. In the previous year the company made a $90.1 million after tax profit . A number of factors were responsible for this heavy loss. Loss amounts included a diminishing value of assets to the extent of $307.4 million . There was also a yearly fall in revenue to the amount of $95 million.

Phantom Chinese buyer- The company announced that there was a five year agreement in place from a mysterious Chinese buyer. The agreement was to send a shipment to this anonymous buyer .The shipment consisted of 150 tonnes per annum of processed sandalwood to China. The company did not reveal the identity of that buyer. The contract was worth USD 25 million. On further investigation it was found that the company had falsified this claim of a large scale Chinese buyer. The buyer was a tiny importer with no web presence and tiniest operations. It also has very little revenue and no profits. The company had no financial means to buy the shipment. The company therefore totally mislead its investors upon claiming that they had this huge contract from china. In reality however, no such shipment was done(Hassan and Holmes 2016.).

Ponzi scheme- In a Ponzi scheme, the investors are promised quick and easy returns from the money raised from new investors. In this scheme the company had partnered themselves with an asset partner called Jaederberg & Cie . According to this , the investors in this scheme were promised cash dividends beginning from two years from initial investment. However there is no scope of such dividend in reality because the income from harvesting of sandalwood can come after 15 years from planning only and not before that.

2.

A forensic accountant examines, deduces and summarize complex financial and business matters. He compiles financial evidence and investigates any criminal or illegal affairs that are present in the financial statements of a company(Adeniyi and Agbaje 2017) The three potential fraud symptoms that a forensic accountant must investigate further include :

Accounting anomalies- Accounting anomalies are items that are problematic and cannot be properly ascertained in the financial statements. These anomalies may have logical or reasonable explanations. However these anomalies may or may not prove that there is no evidence of fraud.In the case of Quintis, the company reported profits from non-cash gains. It also made an incorrect valuation of sandalwood trees (Howieson, 2018).

Analytical anomalies- Analytical anomalies are those anomalies in the financial transactions that do not make sense. They are considered anomalies because they go beyond any justification For example in the case of Quintos, the company announced that it will declare dividend after two years. However there was no chance of that happening because the earnings will not accrue until 15 years has lapsed from the harvest of sandalwood.

Internal control weakness- A lack of proper internal control measures often leads to fraud. All organisations are mandated to have an efficient system of internal control. A proper method of internal control helps weed out inefficiencies . It also makes the company operate in a smooth manner. A lack of good internal control measures do not present a fair and true view of the company. A good internal control measure would have been able to minimise the extent of financial damage that the company took in the wake of this crisis.

The evidence that the accountant must seek in order to determine whether fraud has occurred or not includes the following:

The accountant must first ascertain the nature of the fraud. The nature of the fraud can be either intentional or unintentional.

The accountant must analyse and deduce all the financial statements . This will help the auditor to make an assertion . The assertion states that all the relevant accounting standards and the accounting policies have been followed or not.

The accountant must review the extensiveness and precision of material items in the financial items. These items need to be properly confirmed and measured.

The accountant must check all the related documentation. This documentation can be related to purchase document and other verify documents like bill of sale. Those documentations may contain falsified information and inflated figures .

3.

The key audit matters by Ernst & Young in the audit report for 2017 include:

Valuation of biological assets-Biological assets are measured at fair value minus the costs of disposal at the reporting date. Since there is a no market for Indian sandalwood trees, the fair value is measured by the discounted cash flow model.

Carrying value of intangible assets and goodwill- At the end of each accounting period, it was evident that the asset may be impaired. Goodwill is assessed for impairment in an annual basis. As per the impairment indicators, the company performed impairment assessment across both current and non current assets

Recognition of revenues for establishment fees-Establishment fees provide a significant part of the revenues of the group They are charged upon the sale of new plantations. It is recognised as revenue based on the amount of the establishment work that is done by the organisation. (Sirois, Bédard and Bera, 2018.)

These disclosures have not significantly benefited shareholders. Although the adequate disclosures have been recognised by the auditor and done in a systematic way, yet the company mislead investors by disclosing a fictitious shipment made to a Chinese buyer. The company made improper disclosures that caused significant losses to shareholders(Kachelmeier, Schmidt and Valentine 2017).

The other matters that should have disclosed include proper valuation of property, proper valuation of cash in hand and disclose the investment portfolio of the company. Other issues include the effect of the audit on other significant events on the period(Backof, Bowlin and Goodson 2017). There was no sufficient appropriate auditor judgements in the matters that the auditor needed to. The accounting estimates have been estimated uncertainly.

4.

The auditor, Ernst and young were negligent in carrying out their duties. They did not undertake appropriate audit evidence to conduct the audit. Hence no material misstatements were found. This happened in spite of so many intentional fraud cases that were uncovered when the forensic audit was done(Plambeck and Taylor 2015). An auditor is expected to carry out his duties with reasonable skill and care. The auditor , in case of negligence is liable to his clients with whom he has a contract (Weirich and Reinstein 2014.). He is liable to pay damages for the loss resulting directly out of negligence. He is also liable for special damages at the time of entering into a contract and if he has intentionally had knowledge of the usual circumstances.

Conclusion

The audit embarked by the company designates that the auditing procedures have not been shown in a fair manner. Although there is no material misstatement in the audit, the scam indicates that the audit has not been done in an suitable manner. Hence it is very vital to conduct the audit in a fair and responsible manner . This will help in early detection of material misstatements. Steps need to be taken so that the auditors can exercise proper diligence in their audit function and also be liable for not fulfilling their responsibilities in respect of key audit matters and other significant disclosures.

References:

Adeniyi, S.I. and Agbaje, W.H., 2017. Stemming The Tide Of Undecided Fraud Court Cases In Nigeria: Forensic Accountant Roles. Journal of Academic Research in Economics, 9(2 (July)), pp.137-145.

Backof, A., Bowlin, K. and Goodson, B., 2017. The impact of proposed changes to the content of the audit report on jurors’ assessments of auditor negligence.

Chen, L. and Lee, H.L., 2016. Sourcing under supplier responsibility risk: The effects of certification, audit, and contingency payment. Management Science, 63(9), pp.2795-2812.

Hassan, G.M. and Holmes, M.J., 2016. Do Remittances Facilitate a Sustainable Current Account?. The World Economy, 39(11), pp.1834-1853.

Howieson, B., 2018. What is the ‘good’forensic accountant? A virtue ethics perspective. Pacific Accounting Review, 30(2), pp.155-167.

Kachelmeier, S.J., Schmidt, J.J. and Valentine, K., 2017. The disclaimer effect of disclosing critical audit matters in the auditor’s report.

Li, F. and Perez-Saiz, H., 2018. Measuring systemic risk across financial market infrastructures. Journal of Financial Stability, 34, pp.1-11.

Plambeck, E.L. and Taylor, T.A., 2015. Supplier evasion of a buyer’s audit: Implications for motivating supplier social and environmental responsibility. Manufacturing & Service Operations Management, 18(2), pp.184-197.

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.

Weirich, T.W. and Reinstein, A., 2014. The PCAOB's Proposed New Audit Report. CPA Journal, 84(4), pp.24-29.