Question One: SEC’s Rationale to Charge Cardillo Executive
Making False Representation to External Auditor
The executives of Cardillo intended to give false financial information to lure investors and creditors. They intended to get at least $3 million thresholds that were established by the court. As a result, the executives made inappropriate adjusting entry, which gave the SEC the reason to charge them. They lied to the external auditors that the $203, 000 that was received from United Airlines was income to the company, which was not the case (Ritteberg, 2012). In the real sense, the money that was paid by the United Airlines was supposed to be refunded after five years if the Cardillo Travel System failed to meet the intended objectives. Therefore, the false representation was violating SEC rules regarding financial reporting. As a result, it had the rationale to charge Cardillo executives.
Failing to Maintain Accurate Financial Records
For a firm to be successful in its operations, its management has the responsibility of maintaining good governance, including its financial reporting. A company is likely to lose investors and public confidence if it lies about its financial status. Cardillo executives failed to exercise internal control effectively when they attempted to make an improper adjusting entry that grossly violated SEC code of conduct, specifically section 13(b) and 2(A) of the code. The two parts of the SEC code are aimed at ensuring that all corporate firms maintain accurate financial records. Violation of the sections attracts a criminal penalty, and the SEC was justified to charge Cardillo Travel System executives because they did not keep accurate financial records.
Failing to File Prompt Financial Report with SEC
The first violation that was done by Cardillo was when it carried out misleading publication. The publication that was done by Esther Lawrence did not contain complete financial information and was misleading (Ritteberg, 2012). For instance, the release failed to justify that the organization incurred a significant loss. Secondly, the executives also violated section 13(a) when they failed to report Form 8-K to the SEC in time. As a result, the actions of the company's officials violated SEC requirements, which called for their sanction or punishment. SEC even had the authority to revoke Cardillo registrations because it violated the rule and the standards set by the commission.
Violation of the Insider Trading Provisions of the Federal Securities Law
The executives carried out shareholders’ equity transactions with the intention of covering the fines that were charged by the court. The executives issued about 100,000 shares, which was a violation of SEC codes (Ritteberg, 2012). They specifically violated section 10b-5 of the federal security laws, which amounted to financial charges. Therefore, the SEC has enough reasons to charge the executives by violating the insider trading provision of federal security laws.
Question Two: Violation of AICPA’s Code of Professional Conduct
There are a number of people who violated or complied with the AICPA’s of professional conduct. Russell Smith is one of the Cardillo accountants who complied with the AICPA requirements. Smith adamantly refused to sign off the transaction that was involving United Airlines and Cardillo (Ritteberg, 2012). Unfortunately, she was fired for failing to abide by the company’s demand. Another employee who complied with the AICPA was Helen Shepherd who was the representative of Touches Ross. She went against Cardillo’s demand when she refused to recognize the $203,000 from United Airlines as revenue. Finally, Roger Schlonsky also declined to acknowledge $203,000 from United Airlines as revenue. He informed Cardillo executives the money could not be treated as income, but it could rather be recorded on a pro rata basis during the contract period (Ritteberg, 2012). Therefore, those who refused to recognize United Airlines’ $230,000 complied with the AICPA’s code of professional conduct.
However, even after being advised by another accountant, William Kanye, the vice president of Cardillo, went ahead to violate the AICPA code of professional conduct. He was the one who adjusted entry that recognized $203,000 as revenue, which was violating AICPA code of conduct. The external auditors also, to some extent, violated the AICPA code of professional ethics when they allowed Kanye to report misleading and inaccurate financial information. Also, their actions violated section 13(b) and (2) (A) of SEC code.
Question Three: Analysis of Actions of External Editors
Cardillo’s external auditors tried to act in a professional manner when they were dealing with their clients. It is the Cardillo top management that was directly responsible for the incorrect and misleading financial reports that were violating the AICPA code of professional conduct and SEC code. However, external auditors also had the primary role of ensuring that they advise Cardillo to financial reporting standards. The external auditors in the case were focused, and they acted professionally (Gaffikin & Lindawati, 2012). They tried their best to confirm that United Airlines’ $203,000 was not refundable.
For instance, Shepherd sought clarification more than once from Cardillo CEO to ascertain that the money was not refundable. She also reported her disagreement with Cardillo management on the 8-K statement to the SEC. External auditors were also aware of the audit risks that they were exposed to when they were dealing with Cardillo. They were conscious of the weakness of the organization’s management, especially when it came to financial reporting. Therefore, external auditors did relatively well in this case.
Question Four: Determination of whether the 5 Components of Internal Control were being followed
The five elements of internal control were not adequately being followed in this case. First, Cardillo’s management did not have a good control environment. Also, executives did not carry out a risk assessment of posting an incorrect adjusting entry (Ritteberg, 2012). Cardillo also had poor financial reporting. The executives also had a poor communication system with other stakeholders like the SEC and the public at large. Therefore, the organization had a weak internal control, but a corrupt control environment. The management of Cardillo lacked integrity in their financial reporting, which made it to disregard five components of internal control.
Question Five: Auditors’ Responsibility to Assess the Judgment of Cardillo’s Decisions
The auditors have the responsibility of judging the decisions that are made by Cardillo’s management. It is the responsibility of auditors to gather enough and accurate evidence on the information that is contained in financial reports (Gaffikin & Lindawati, 2012). They should ensure that the people who have key positions and reliable and their actions do not violate basic accounting standards and principles. Auditors always have the freedom to look at the files and to interact with the subordinates to countercheck the information given by the executives. The confirmation of the audit evidence is lawful and a common practice in auditing across the globe. Therefore, auditors have the right to confirm receipt and other financial transactions from all the parties involved. Therefore, auditors have the responsibility of assessing the judgment of executives involved in decision-making.
References
Gaffikin, M. J. R., & Lindawati, A. S. L. (2012). The moral reasoning of public accountants in the development of a code of ethics: the case of Indonesia. Australasian Accounting Business & Finance Journal, 6(1), 3.
Ritteberg, J. G. K. (2012). Auditing: A Business Risk Approach with Cases. Byron L. Cardillo Travel Systems, Inc.
