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If auditing of financial statements is required for the protection of public investors, should not all PCAOB members be taken from the investment community that uses audited financial statements? Why or Why not?

How does the decision, in this case, impact the validity of the Board and other provisions of the Sarbanes-Oxley Act.

 

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Romarie Khazandra Marijuan
Romarie Khazandra MarijuanLv10
28 Sep 2019

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Related questions

QUESTION 31

The Board of Governors of the Federal Reserve System is

composed of seven members who are appointed by the President and approved by the Senate.

composed of 12 members of the Senate and the U.S. House of Representatives.

elected by the general public.

composed of representatives from the country's 12 largest commercial banks.

1.11 points

QUESTION 32

The Fed is said to be the "lender of last resort" in that

it charges a higher interest rate to borrowers than does any other bank.

it functions as the government's bank only when commercial banks fail to do so.

it makes loans to individuals whom commercial banks do not believe are credit-worthy.

it stands ready to lend to any depository institution that it has decided should not fail.

1.11 points

QUESTION 33

The Federal Reserve System acts as the government's fiscal agent by

providing checking account services for the government.

preparing the budget the President presents to Congress every year.

determining how to finance a deficit.

auditing taxpayers.

1.11 points

QUESTION 34

The Federal Reserve System was established in which year?

1913.

1929.

1865.

1941.

1.11 points

QUESTION 35

By serving as the lender of last resort,

the Fed provides check clearing services.

the Fed aids in the sale of government securities.

the Fed supervises depository institutions.

the Fed can prevent bank failures.

1.11 points

QUESTION 36

Depository institutions must

use and pay for the services of the Federal Reserve System.

set their interest rates according to schedules established by the Federal Reserve System.

keep a certain percentage of their deposits as reserves.

turn over a percentage of their profits to the Federal Reserve System as payment for services provided by the Fed.

1.11 points

QUESTION 37

The Federal Reserve System has

50 district banks.

24 district banks.

12 district banks.

7 district banks.

1.11 points

QUESTION 38

The part of the Federal Reserve System (the Fed) that holds the reserve balances of depository institutions is

the Board of Governors.

the Federal Advisory Committee.

the Federal Open Market Committee.

the Federal Reserve district banks.

1.11 points

QUESTION 39

The potential for a financial breakdown at one financial institution to spread throughout the financial system is known as a

systemic risk.

liquidity risk.

lending risk.

moral hazard.

1.11 points

QUESTION 40

A system in which depository institutions hold reserves that are less than the amount of total deposits is called

fiat money banking.

required reserve banking.

fractional reserve banking.

central banking system.

1.11 points

QUESTION 41

Total reserves of private banks are

all customer deposits.

the minimum amount banks need to hold against time deposits.

federal reserve notes.

deposits held at the Fed and vault cash.

1.11 points

QUESTION 42

A statement of assets and liabilities of any business entity is called

a cash flow statement.

an income statement.

a balance sheet.

a statement of net worth.

1.11 points

QUESTION 43

Which of the following actions has no effect on the total money supply?

The Federal Open Market Committee buys government securities.

There is a transfer of deposits from one bank to another bank.

There is change in the money multiplier.

The Federal Open Market Committee sells government securities.

1.11 points

QUESTION 44

Given a required reserve ratio of 20 percent, a commercial bank that has received a new deposit of $100 can make additional loans of

$80.

$0.

$400.

$20.

1.11 points

QUESTION 45

The Federal Open Market Committee has responsibility for

appointing members to the Board of Governors of the Federal Reserve system.

issuing orders to buy or sell government securities for the Fed.

advising the Treasury Department on monetary policy.

printing money.

Problem

WorldCom Corporation began as a small company in the 1980s. Under the direction of CEO and cofounder Bernie Ebbers, it quickly grew to become one of the largest telecom companies in the world. Ebbers’s success resulted in his theory that survival in the telecommunications industry would come only through company growth and expansion. Therefore, during the next two decades, WorldCom grew through acquisitions, purchasing more than 60 different firms in the latter half of the 1990s alone. In 1997, World- Com acquired MCI in a transaction that cost the company roughly $37 billion, and it would have purchased Sprint if it had not been prevented by federal antitrust regulations.

In less than two decades, WorldCom had grown from a small telephone company to a corporate giant, controlling about half of the U.S. Internet traffic and handling at least half of the e-mail traffic throughout the world. The value of WorldCom stock followed the company’s growth, eventually reaching more than $60 per share. However, corporate scandal and falsified financial statements soon led the company down the dreaded spiral until, in 2002, it filed for the largest Chapter 11 bankruptcy in U.S. history.

In 1998, WorldCom experienced a sudden and unexpected halt in its formerly increasing revenues. WorldCom’s stock immediately took a hit. As its stock continued to drop, WorldCom became unable to reach Wall Street expectations, and in a desperate effort to maintain investor confidence, the company resorted to dishonesty.

WorldCom had established a large reserve account, which was initially maintained to cover the liabilities of companies it purchased. However, when revenues from operations continued to decrease, the company decided to use these reserve funds to boost its numbers. In total, WorldCom illegally converted $ 3.8 billion of reserve funds into revenues from operations.

However, these fictitious revenues were not enough to help WorldCom meet its expected level of revenue. So, in December 2000, CFO Scott Sullivan ordered accountants at the company’s Texas division to reclassify many of the company’s expenses. Members of the accounting staff were to reclassify operating expenses (an income statement account) as capital expenses (a long-term asset account). For example, lease expenses and computer expenses would become lease assets and computer assets.

This reclassification of expenses did two things. First, by greatly decreasing operating expenses on its income statement, WorldCom increased its net income. Second, by converting operating expenses into capital assets, the company increased its long term asset account. The idea was that a huge increase in both retained earnings (from an increase in net income) and assets would inevitably lead to an increase in the value of WorldCom and its stock. Overall, nearly $3.85 billion of operating expenses were misclassified as capital assets.

Other fraudulent activity dug the company’s fraud deeper and deeper until the schemes were eventually detected and investigated by the company’s own internal audit department and the SEC. In the end, it was discovered that more than $11 billion had been defrauded from a company that was soon forced to file the largest Chapter 11 bankruptcy ever recorded. As a result of the fraud, thousands of employees lost not only their jobs, but also their entire retirement savings. The fraud cost investors billions of dollars as the company quickly went from a multibillion dollar franchise to bankruptcy. Several company executives were indicted on counts of conspiracy and security fraud. The main perpetrator, Scott Sullivan (CFO), received a sentence requiring him to pay as much as $25 million in fines and serve up to 65 years in prison. Other executives received similar sentences. In essence, the WorldCom fraud left those involved in the company with nearly nothing. It proved a prominent example of the age-old adage “cheaters never prosper.”

Questions

1. Suppose you are an accountant for pre-fraud WorldCom. You have just been instructed by the CFO to alter specific company accounts in order to boost the company’s numbers before fourthquarter disclosures. You know the actions are unethical, but you fear that refusing to comply with executive orders may result in punishment and possible termination of your job. What would you do?

2. Although it usually doesn’t involve physically stealing money, financial statement fraud is commonly considered the most expensive type of fraud. Why is this true?

3. The Sarbanes-Oxley Act of 2002 has, in many ways, changed the role of financial statement auditors. In addition to ensuring financial statement accuracy, independent auditors are now required to review a company’s internal controls and report their assessments in the company’s annual report. How might these new policies help prevent financial statement fraud from occurring?

Mark Miller, CEO of Jefferson General Hospital, has some tough decisions to make in the future. Jefferson General is a stand-alone, not-for-profit hospital that has a long and proud tradition of serving the community in which it operates. It was founded in the midst of the great depression as Jefferson County Hospital and remained under public control for over 50 years. Then, in 1986, after years of losses, the county decided that it could no long afford to operate the hospital, and it subsequently converted the hospital from a public to a private entity.At that time, Mark was brought in as the CEO. After a shaky start, he was able to turn the hospital into a moneymaker. Still, he was very aware of the hospital’s roots, and he made sure that the hospital continued its original mission of providing healthcare services to the needy regardless of their ability to pay.Jefferson General is the smallest of the three hospitals that serve Jefferson and surrounding counties; the other two are St. Vincent’s Hospital and Northwest Regional Medical Center. St. Vincent’s has religious roots, but it is now operated as a not-for-profit, non sectarian hospital. Northwest Regional is owned and operated by a large for-profit chain. The combined capacity of the three hospitals is over 950 beds,but none of the three operates above 60 percent occupancy. Further-more, managed care is starting to take hold locally, and hospital utilization trends indicate that the service area will need only 600 beds as utilization rates are squeezed down.The most logical solution to the county’s changing healthcare market conditions is a merger between two of the three hospitals, and Jefferson General is the hospital most likely to be acquired. Mark has been approached by the CEOs of both St. Vincent’s and Northwest Regional concerning his interest in a merger. Although it was too early to speculate on the exact terms that might result if a merger takes place,past mergers in the region provide some insights into what might hap-pen to Mark should a merger occur.If the hospital were acquired by St. Vincent’s, Mark would prob-ably continue as CEO of the hospital, at about the same compensation as he currently receives. However, he would lose much of his autonomy and authority because he would now have to report to the system CEO,who most likely would be the current CEO of St. Vincent’s. If the hospital were acquired by Northwest Regional, Mark would probably relocate to a CEO position at some other not-for-profit hospital because the for-profit chain usually brings in its own management team when it makes an acquisition. But Mark would not go away empty handed. He would probably receive a large “golden parachute” as a result of his job loss, which might include lucrative stock options, a lump sum payment,and a consulting contract. The aggregate amount of such payments could easily be worth many times his current annual salary.Although the ultimate decision regarding the fate of Jefferson General rests in the hands of its board of trustees, the members of the board were chosen more on the basis of their community ties than on their business acumen. Thus, all those involved are aware that Mark’s recommendations regarding the hospital’s future will carry a great deal of weight in the final decision.

What do you think about the dilemma facing mark miller? Does this case present an ethical issue? If so, to which party (or parties)? If you could act as the ultimate authority on this situation, what would you do?

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