Acknowledgment
I would like to acknowledge my colleagues for their support as I was doing this report and their valuable criticism of my work. In addition, I would like to acknowledge my supervisor for the intellectual contribution to guiding me through the process of putting my report into perspective.
Abstract
This paper seeks to highlight the relations between Candie’s Inc which is a footwear manufacturing company and Ernst and Young an auditing company. In this write-up, I am going to highlight the importance of auditors to a company. Further, the paper is going to dwell on the two types of auditors; the internal and external auditors to a company. The paper will also explore the different roles of the auditors in their quest to ensure that companies employ financial accountability. Some of the roles will include monitoring the financial records and accounting systems. The paper is also going to mention some of the parties that depend on the auditor’s report. The conflict between Candie’s Inc and Ernst and Young is also going to be examined. The paper will also highlight the major concerns raised by the conflict between the two parties.
Introduction
Candie’s Inc. is a footwear company that specializes in women’s accessories and apparel. The company was established in 1978 by Charles Cole in Westchester, New York. Since its establishment, the company was able to make commendable profits that resulted in the launch of their global brands into areas such as Canada, Brazil, New Zealand, and some parts of Asia (Funding Universe 2011). On the other hand, Ernst and Young is an auditing company that was established in the early 90s by Arthur Young and Alwin Ernst (Ernst and Young 2011). They had a conflict with regards to the financial records of Candie’s and the role that each party played in the misrepresentation of revenue back in the late 90s.
Literature review
The question under study in this report revolves around the role of auditors in ensuring that companies accounting practices are in line with the stipulated law. To ensure that any company is run in accordance with the law and the expectation of society, most companies utilize the expertise of auditors who are tasked with ensuring that the financial records of the company are in order. This ensures that the financial information of the company is of high quality and as such, reliable. This also builds on the integrity of the company towards its stakeholders, the governing bodies, and the public at large (Albrecht, Stice, E and Stice, G and Swain 2008).
Auditors may either be internal or external depending on the needs and the size of the company and the stipulation of the governing bodies. Internal auditors are normally tasked with monitoring the operations in the accounts department in their quest to ensure that financial records are in order. They also monitor the effectiveness of the financial recording systems that are put in place. Further, they evaluate all records in order to ensure that the personnel involved in the accounting department are not involved in fraudulent transactions. Such auditors are normally independent and employed by the company and therefore, they are accountable to the company’s top management team that may include the CEO or the board of directors (Albrecht, Stice, E and Stice, G and Swain 2008).
External auditors are normally independent individuals or companies that are contacted in order to oversee and safe guide the financial analysis of the company. Most government’s e.g. the US government advocate for the use of external auditors by all the major companies in order to ensure that the financial records of such companies are done accordingly and that their published annual reports on their financial status are articulate. Companies that are normally listed in the stock exchange markets are required to outsource an external auditor who examines the financial records of the company in order to meet the stock exchange minimum entry requirements, rules, and regulations (Albrecht, Stice, E and Stice, G and Swain 2008).
Auditing is a process that takes some time before the accounting systems and their control measures are assessed. The auditors conduct a number of activities before writing a final report that indicates the nature of the systems in place and their efficacy in attaining accounting goals. Such activities include conducting interviews with the workforce as they seek to understand how their accounting systems operate. They also rely on such interviews as their basis for researching some of the questions they might have regarding the efficiency of the systems.
Auditors also do a number of observations in order to examine if the systems in place are followed to the letter. They also determine the potential weaknesses of the systems in order to make an informed conclusion. In some instances, the auditors will go an extra mile to verify if the cash indicated in the system as either cash at hand or petty case tallies with what is there in the vault (Albrecht, Stice, E and Stice, G 2008).
In their quest to ensure that all transactions conducted by the company are recorded and accounted for accordingly, auditors also examine a few transactions by verifying the documents presented such as invoices and receipts against what is recorded in the system. They also go to the extent of counting the products that are present to verify the validity of the inventory system. Auditors also conduct confirmations by way of contacting the alleged parties to a transaction. Before writing the report, the auditors conduct the final task which involves analytical procedures that guide them on areas that require further investigations.
There are a number of people who rely on the auditor’s report. Such individuals include the company’s board of directors, the shareholders, and the taxing authorities. Company partners and associates also bank on the auditor’s report in order to assess the credibility and conduct of the company. Other groups such as the stock exchange markets representatives and banks who act as a guarantee to the company also rely on the auditor’s report. Therefore, tampering with such a report is subject to compromising the integrity of a company and thus the faith of all the parties that have any vested interest with the company (Albrecht, Stice, E and Stice, G 2008).
Conflict
Between 1997 and 1999 Candie’s Inc management was involved in a fraudulent case that involved misrepresenting the actual financial status of the company by recording premature revenue in anticipation of delivering the goods to their clients. In this case, Ernst and Young played the role of ignoring such fraudulent practices that were under their auditing watch. The conflict, in this case, revolves around the fact that Candie’s Inc’s management team claims that Ernst and Young’s auditors mislead them for failing to highlight the faults in their system. Further, Ernst and Young claim that the company transacted all their fraudulent deals behind their back and as such, they were not aware of such dealings.
In this case, both parties have to blame because neither of the two played their roles according to the shareholder’s expectations. Candie’s Inc went to the extent of falsifying documents in their quest to conceal their fraudulent deals while Ernst and Young did nothing to the effect of reporting such inappropriate conduct. Further, they did their reports without investigating neither the validity of the documents or confirming the financial reports.
Concerns raised by the conflict
Suppose I own stocks with Candie’s the conflict between them and Ernst Young would raise a number of questions with regards to their conduct. Firstly I will be concerned about the validity of their annual financial reports and their implications to my shares with the company. This is attributed to the fact that due to the fraudulent case involved in this conflict I will not be in a position to ascertain if the value of my stock is valid. Further, the fact that I have invested my money with them means that I may also have succumbed to some of their frauds through reduced returns on my stock shares.
Secondly, this case would also make me question the integrity of the management team and the financial supervisors. This is attributed to the fact that the former and the latter are the main pillars of any given institution or organization. If such individuals are part of a mischievous activity in an organization, the chances that such an organization can defraud their clients and their shareholders are high. This in return affects the integrity of the company which consequently affects the value of its shares in the stock exchange market. As a result, this will affect the value of my stock with the company.
Another major concern that this conflict trigger is the reliability of the internal and external auditors. This also questions the efficacy of the accounting systems and the control measures put in place. With such questions lingering behind my head, I would foresee a collapse of the company and thus the loss of my investment. Such a concern might influence me to rethink my perception of the company and my contribution to the same. I would be more concerned about safe guiding my stock by either disposing it completely or offloading a few for the sake of ensuring that I don’t make major losses.
Conclusion
In conclusion, this case provided a perfect scenario of some of the relations that exist between companies and their internal and external auditors. The case also enlightens the reader on the role and the importance of auditors and to whom they are accountable. It also highlights the fact that auditing bodies may not be accurate thus the need for confirmation by the bodies dependent on their reports. It is also important to note that, such cases expose corrupt deals that help the public to judge the validity of companies that they were anticipating to invest in or individuals who already have shared with such companies. Therefore, I recommend that any individual or a group of people or a company that is interested in investing in a certain company should ensure that the financial transactions and records of the company that they want to invest in are not questionable.
References
Albrecht, W, Stice, E Stice, G 2008, Financial Accounting, Cengage Leaning, Ohio.
Albrecht, W, Stice, E Stice, G, Swain, M 2008, Accounting: Concepts and Applications, Cengage Leaning, Ohio.
Ernst and Young 2011, Two people one vision, Web.
Funding Universe 2011, Candie’s, Inc., Web.