Topic: You know that there are material misstatements in your employer’s financial statements, you are a publicly traded company and the external auditors have not been informed of the material misstatements.
Memorandum
Subject: Material Misstatement in Financial Statements
To: Executive Director
From: ABC
Date: 18 October 2018
The management of the public traded company is responsible for the objectivity and integrity of all the information included in the financial statements of the company.
It is to inform the management that certain levels of material misstatements have been found in the financial statement of the company. It includes the expenditure on substantial repairs, extension, and renovations for the factory and administrative premises. As per the nature of this work, which shows that the amount expended is material in the financial statements? The wrong classification of the expenditure between the capital and revenue has to lead to material misstatements in the financial statements. Other than this, the company has also invested in the replacement plant and equipment which includes lease hire and lease purchase contracts. It is required by management to completely disclose the assets held as per such contracts as this can lead to material misstatement as well. Furthermore, the replaced assets are subject to the unauthorized transaction of disposals consequently leading to incorrect accounting entries causing a material misstatement in the financial statement (International Federation of Accountants).
In case of finding any level of the material misstatement in the financial statements of the publicly traded company, there are certain statutory obligations on employees to report such material misstatement to senior management of the company or if needed than report the material misstatement to the external auditors. Feeling this obligation, I am conveying my concerns to you so that the management can consider it responsibly. It is under the responsibility of the company’s directors to ensure that all the risks of material misstatement due to fraud have been addressed in the company by recognizing that a material misstatement in the financial statement can directly affect the way of conducting an audit in public traded company. There are different forms of creating material misstatements in the financial statements of the company, for example, unproductive behavior and minor employee theft that results in fraudulent financial reporting and misappropriation of assets. According to the codes of ethics, it is not only the responsibility of the management, but employees also need to ensure that for the sake of the users of the financial statements. As the external auditor is not aware of these misstatements, it would be the ethical responsibility of management to report these to the external auditor along with giving timely treatment to the misstatements as well. Material misstatement in financial statements has different levels of consequences, for example, it directly impacts the decision-making process of the users of financial statements (Snyder).
It is very important to note that when there is a material misstatement in the financial statement, then it directly affects the procedures of the audit. The judgment that is made by the auditors regarding the financial statements would not be considered as credible when any level of the material misstatement is not informed to the external auditors. It is the main reason that when any employee especially accountant finds any level of the material misstatement in the financial statements of the company, then it must be communicated to the responsible authority in the company by recognizing the public interest and commitment to professionalism. The key factor is the financial integrity regarding the reputation of the company among the professional advisors, employees, regulators, suppliers, business partners and other stakeholders of the publicly traded company. The meaning of demonstrating integrity is to remain honest and straightforward in all levels of the professional and business relationship. As an accountant in a publicly traded company, it is my responsibility to demonstrate integrity. Therefore, it is my responsibility that if I know any level of the material misstatement in the financial statement, then I must have to share it with the senior management or even with the audit committee. By the ethical and legal codes of conduct of a publicly traded company, it is my responsibility to bring my senior management to the attention of the material misstatement in the financial statement of the company. The most important area of my responsibility under codes of ethics is that I must have come forward information about such material misstatement in the financial statement without regard to the position and identity of the suspected offender. Under the ethical scenario, it is my responsibility to accept the obligation to deal with the material misstatement in a way that will show my commitment to professionalism, serve the public interest and honor the public trust (Ahluwalia, Ferrell and Rittenburg). My response to knowing material misstatement in the financial statement is based on the following integrity standards and accounting ethics:
- I must maintain objectivity and independence that means I must share material misstatement in the financial statement
- I must prove my professionalism by thinking regarding the public interest
- The third ethical requirement is to have professional behavior when dealing with such a situation.
By considering the ethical requirement of employees working in a publicly traded company, I have come to realize that I must inform the senior management of the company regarding the misstatement in financial statements. The provision of information regarding this material misstatement in the financial statement to the external auditors would increase the effectiveness of the independent decision of external auditor regarding the true and fair view of a company’s financial statement (Badshah). It is an ethical requirement that all employees of the publicly traded company are responsible for co-operating with the external auditors fully. In this perspective, the external auditors must be provided with all the information regarding any level of fraud and error. There is an ethical responsibility to point out the material misstatement in the financial statements to enable the senior management that there is deliberate or intentional wrongful act has been committed to preparing financial statements through the use of misleading or false information. It is in the best interests of the public because a misstatement in the financial statements could be harmful to the employees, investors and creditors and other stakeholders of the publicly traded company. By pointing out the material misstatements in the financial statement, the senior management or external auditor would be able to find out the method of creating misstatement in the financial statements and in response to that proper action would be taken to mitigate the material misstatement (PCAOB).
By summarizing above discussion, it is noted that ethical standards create an ethical responsibility of all people working in a publicly traded company to point out any level of misstatement in the financial statement and inform the higher management as soon as possible. It is true that when external auditors are not informed about material misstatements then it could impact the credibility of the opinion made by the auditor regarding the true and fair view of the financial statement of the company. As in a publicly traded company, there is direct public interest. Therefore, both the senior management and employees must keep this public interest in front of personal conflicts. It shows that the management should consider this memorandum with seriousness and report the misstatements mentioned immediately to the external auditor. Under the ethical codes of conduct, every member of the publicly traded company is responsible for identifying any level of material misstatement due to fraud and error so that proper action can be taken. Therefore, it is my reasonability to inform you that there is a material misstatement in the financial statement and the important thing is that the external auditor has not been informed about this material misstatement.
By my ethical responsibility, I want to inform you that there is a material misstatement in the financial statements of our company. By realizing moral duties and obligations, I would suggest investigating possible fraud in records and information of financial information. The external auditor must be informed about the material misstatement because this material misstatement has a direct impact on the audit procedures. The management of a publicly traded company must think of honoring the public trust.
Regards
Name and Signature
Work Cited
Ahluwalia, Saurabh, et al. “Sarbanes–Oxley Section 406 Code of Ethics for Senior Financial Officers and Firm Behavior.” Journal of Business Ethics 151.3 (2016): 693-705.
Badshah, Kamran. “Corporate Reporting – Ethics Failure and Corrective Measures.” LinedIn. LinkedIn, 12 May 2015. Web 17 October 2018. https://www.linkedin.com/pulse/corporate-reporting-ethics-failure-corrective-measures-kamran
International Federation of Accountants. Handbook of International Auditing, Assurance, and Ethics Pronouncements. International Federation of Accountants, 2007.
PCAOB. “AS 2401: Consideration of Fraud in a Financial Statement Audit.” PCAOB. PCAOB, 2018. web. 17 October 2018. https://pcaobus.org/Standards/
Auditing/Pages/AS2401.aspx.
Snyder, Herbert W. “Client Confidentiality and Fraud.” FRAUD MAGAZINE. FRAUD MAGAZINE, 2011 January 2011. Web. 17 October 2018. http://www.fraud-magazine.com/article.aspx?id=4294968847.
+447462439809