Introduction
The audit is an important part of the contemporary financial world, for, if conducted successfully, it permits for detecting fraudulent activities and preventing financial misconduct (Young, 2013). The current paper pertains to an accounting scandal that recently occurred in the U.S. Certain aspects of the case are analyzed, and conclusions related to the actions against the frauds are made.
Analysis
The scandal in question took place in 2015 when SEC charged the former executives of OCZ Technology Group Inc. with accounting fraud (U.S. Securities and Exchange Commission [SEC], 2015). According to SEC (2015), the former OCZ’s CEO Ryan Petersen mischaracterized discounts given during sales as marketing expenses and made employees compose false documents to hide the misconduct; concealed considerable returns of the product from the finance department of OCZ and its auditor so as to prevent those returns from being documented; maintained the image of the company that was very different from its true condition; and gained personal profits from such misconduct. Simultaneously, former CFO of OCZ Arthur Knapp caused OCZ’s transactions to be recorded differently from what is demanded by U.S. GAAP (for instance, costs of sold goods were identified as R&D expenses, labor and overhead costs were not capitalized as inventory costs, etc.) and failed to prevent misconduct carried out by Petersen (SEC, 2015).
It is clear that the audit report issued by the auditors of OCZ for the period during which the fraudulent activities were committed does not contain clear indicators of these activities. For instance, according to the Form 10-K report, which can be found on SEC’s website, marketing expenses were mainly comprised of advertising and promotional expenses; also, “customer marketing arrangements” are mentioned (U.S. Securities and Exchange Commission [SEC], n.d., pp. 38, 47). According to sec. 302 of Sarbanes-Oxley Act of 2002, a company’s chief officers signing financial reports are responsible for the contents of these reports, and for that, based on these officers’ knowledge, these reports do not include any false statements or omit material facts (U.S. Securities and Exchange Commission [SEC], 2002, p.777), which permits for concluding that these officers will be liable for accepting reports with false or omitted content. Also, according to common law, persons conducting fraudulent activities by creating false financial statements must be held responsible for their misconduct (Margret & Peck, 2015). On the whole, it is possible to conclude that OCZ’s former CEO and CFO have a liability to those third parties that relied on these financial statements, for instance, investors and stockholders, due to the fact that the investors were deceived and misinformed about the true financial position of the organization, and had to unknowingly make financial decisions based on the false information provided for them in the altered reports.
It might be possible to assert that in the given case, the statements 2 of Standards of Reporting of GAAS have been violated while performing the audit (“Generally Accepted Auditing Standards,” n.d.). This is due to the fact that in the annual report, it is stated that the controls and procedures implemented during the fiscal period in question were appropriate and effective (SEC, n.d.), whereas, according to the Statement 2 of GAAS, the auditor is obliged to identify the instances in which the generally accepted accounting principles have not been complied with during the period in question with respect to the preceding period (“Generally Accepted Auditing Standards,” n.d.).
In the given case, the top managers of OCZ (namely, its former CEO Ryan Petersen and former CFO Arthur Knapp) were held responsible for engaging in fraudulent schemes and violating numerous provisions of the federal securities laws; they were to pay significant penalties, and most of their stock sales profits and bonuses were forfeited (SEC, 2015). Simultaneously, OCZ’s auditor was prohibited from performing auditing activities for 3 years (Godoy, 2016). Thus, the managers had significantly greater responsibility in this case. It is possible to state that this is as it should be, for the managers intentionally engaged in fraud, and made an effort to misdirect the auditor, so their responsibility ought to be greater. At the same time, the auditor is also guilty, for it is the auditor’s professional obligation to detect such fraud; however, this obligation was not fulfilled, which means that professional repercussions should be made.
According to SOX, sec. 304-305, a company’s chief officers are responsible for misconduct in financial reporting; in case of such fraud, their bonuses, incentive-based or equity-based compensations, as well as profits obtained from selling the securities of the issuer over a 12-month period, may be forfeited, and they may have to pay an equitable relief for the investor (SEC, 2002, pp. 778-779). Simultaneously, auditors may bear responsibility with respect to their professional obligations pertaining to the detection of erroneous or fraudulent elements in financial statements (SEC, 2002). In the given case, the PCAOB should take actions against the CEO and CFO aimed at preventing them from conducting such fraud in the future, as well as obliging them to provide compensations for those who suffered losses due to their fraud (Young, 2013). At the same time, the auditors should bear professional responsibility, such as limiting the scope of their practice, due to their failure to detect and address the fraud which was conducted with respect to the financial statements.
Conclusion
On the whole, it should be stressed that the CEO and CFO of OCZ engaged in serious fraudulent activities and financial misconduct. Both chief officers were punished and had to compensate for these activities; the auditor was also penalized by liming their ability to perform the audit. The penalties are appropriate according to the current legislation.
References
Generally accepted auditing standards. (n.d.). Web.
Godoy, J. (2016). SEC bans auditor for 3 years over OCZ accounting failure. Web.
Margret, J. E., & Peck, G. (2015). Fraud in financial statements. New York, NY: Routledge.
U.S. Securities and Exchange Commission. (2002). Sarbanes-Oxley Act of 2002. Web.
U.S. Securities and Exchange Commission. (2015). SEC charges former executives with accounting fraud and other accounting failures. Web.
U.S. Securities and Exchange Commission. (n.d.). Annual report on form 10-K: OCZ Technology Group, Inc. Web.
Young, M. R. (2013). Financial fraud prevention and detection: Governance and effective practices. Hoboken, NJ: Wiley.