Netflix is an American international company operating in the media and telecommunications industry. Its flagship service is its on-demand and internet steaming-based video content service. With more and more people being able to connect to the internet, Netflix’s business model makes a lot of sense. In this paper, the author evaluates the risk of material misstatement for Netflix. This technically refers to audit risk or the risk that there are some fallacies, discrepancies, or inconsistencies in the data and information being shown in the company’s financial statements such as income statements, balance sheets, and statement of cash flows. In this case, the focus would be on the following: content library (i.e. one of Netflix’s main assets), account balance, subscription revenue transaction assertion. And account balance assertion. As a disclaimer, the values and ideas in this paper are based on the author’s own assertion. Because of the unique business model that Netflix has, there is no standardized way to quantitative assess the risk of material misstatement for each of the assertion.
Overall, the RMM for the company’s content library is only moderate. Its content library is arguably its most valuable asset mainly because it is what generates the company’s revenue so the company would have all the incentive to overstate the value of this asset. In the same manner, it would be important to note that Netflix is a publicly listed company. Publicly listed companies are required, by the national government through the Securities and Exchange Commission (SEC) to submit financial documents, including the ones that contain the information for the assertions stated earlier, that are audited by a third party auditing firm for the disposal of the investing public. Submission of documents that have fallacies, inconsistencies, and discrepancies, especially if caught by the SEC, can lead to dire consequences such as monetary penalties and fines, and if the act has been found to be systemic and chronic, as in the case of the Enron (which led to its downfall) a possible mandate to delist the company’s shares from public bourses (i.e. stock exchanges) may be issued . So, judging from the possible consequences that the company may face as a result of misstating their financial materials and documents, the intentional audit risk may be considered low. To balance these two factors, the overall RMM for this assertion would only be low.
Often, assertions are assessed based on their completeness, occurrence and cutoff, valuation and accuracy, existence, rights, obligations, and disclosure and presentation (i.e. COVEROD) .
In terms of subscription revenue, the overall RMM is high. This is mainly because of the fact that Netflix has the motivation to overstate their number of subscribers. One of the possible benefits of doing so would be the fact that more institutional and retail investors would be enticed to participate in its growth story—especially if the growth of subscription revenue is sharp and constant. Their capacity to release contents is also being considered here.
Property, Plant, and Equipment (PP&E) Account Balance Assertion
The RMM for Netflix’s PP&E, based on an inherent risk assessment, is also low. The main reason behind this is the fact that Netflix does not rely on the vastness of its infrastructure to reach out to its target markets and actually service them with its products and contents. Its unique business model allows it to do majority of its business transactions virtually or over the web and so it would not have any incentive to misstate its PP&E Account Balance Assertions.
Basically, the fact that Netflix is a publicly listed company and that is one of the most successful companies out there can serve as a buffer for investors . The motivation to misstate their materials is inherently low in such conditions because the risk of being caught is high and the consequences can be dire too.
Works Cited
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Ray, I. "Efficient Tests of Balances Series--No. 4: Understanding Financial Statement Assertions." Sift Media Accounting (2011).Print 01.
Russolillo, S. "Netflix’s ‘Euphoric’ Rally: Why It Looks Vulnerable." The Wall Street Journal (2016). Print 01.
Tayan, B. and D. Larcker. "Researchers: Where Do You Draw the Line Between Trust and Regulation?" Stanford Business (2013).Print 01.
