Just follow the sample memo to do this assignment
403W_Sample_Memo Memorandum To: Mr. Joe Dionisio From: John Doe Date: 11/18/’14 Re: Dell Audit Failure Case Study The Auditor of a firm has one duty: to conduct audits in accordance with Generally Accepted Auditing Standards which provide investors with reasonable assurance that an entity’s financial statements are in accordance with Generally Accepted Accounting Principles (Auditing). The public instills their trust in these audited financial documents so they can practice their right to invest in a free market economy. It follows from this principle that CPAs and auditors are responsible for giving the public a good idea of how companies are performing. Most of the time, audits are prepared correctly thanks to the PCAOB, Sarbanes-Oxley and other legislation that have created rules and consequences to keep accountants in line. However in the off chance that an auditor fails to perform their job with the upmost regard, the amount of audit risk increases and could significantly alter the investor’s opinion. Recently, Dell Inc. and PricewaterhouseCoopers unjustly deceived the public. This memo will discuss the actions surrounding Dell’s fraud and the role PricewaterhouseCoopers played as external auditors during the fiscal years 2003-2005. In July of 2010 the S.E.C. charged Dell Inc. with failing to disclose material information to investors and using fraudulent accounting methods to meet targets earnings as well as to reduce expenses. The beginning of Dell’s undermining started in 2002, a time when they were struggling to compete with main competitor, Hewlett-Packard. To meet the high demands of the market, Dell designed a malevolent strategy to meet target earnings. Dell claimed they were “cutting billions of dollars of operating expenses” without disclosing the truth as to how they were making this happen. Dell was able to make large margins off of Intel manufactured products, instead of making these products themselves. This was the first lie whereby Dell Inc. did not disclose to the public. Late in 2002, Dell suffered a great loss. They lost $20 Billion in stock, and over $1 Billion in stock options. This was as a result from Hewlett-Packard surpassing Dell in sales, thereby losing investor confidence. In 2003, Dell Inc. had a plan to address this predicament. Dell managed to drive up the stock prices by over 90% by using payments they were receiving from Intel, misstate financial statements, and make record earnings. By 2004, Dell Inc. had recovered from their loss in 2002 and appeared to be doing great in the public eye. Soon after their huge gain in the stock market, Dell Inc.’s CEO, CFO, CAO and two other executives sold nearly all their stock in the company—which sums up to about 99 million shares. This would certainly raise brows among stockholders and investors. Subsequently, to make matters worse, Dell spent over $12 Billion in repurchasing stock to drive the stock price up even more. By repurchasing these shares, Dell manipulated their stock price in order to cover up the fact that top executives had sold off their shares. In reality, these executives knew they were running a company based on fraud. Then, in 2005 the lies surfaced. Dell incurred their largest recall in history, involving over four million defective PCs and lithium batteries. This followed after having a period of extensive problems with their products, support and service operations. As what normally follows bad press, customer dissatisfaction and bad publicity spread like wildfire. In mid 2005, Dell Inc. came forward about their ties with Intel and misstating financial statements to falsely report positive earnings. This marked the end to Dell’s fraudulent scheme and the beginning of their rebuilding process. As I mentioned earlier, the role of the auditor is to provide reasonable assurance of the validity of financial statements. In Dell’s case, the lack of transparency among the financial documents signifies that there were significant deficiencies throughout the audit process. For the years 2003-2005, Price Waterhouse Coopers (PWC) audited Dell’s financial statements. PWC stated that they had conducted audits in accordance with GAAS and that Dell’s financial statements complied with GAAP. As I discussed above, these financial statements were clearly not in compliance with GAAP standards. Many allegations of false reporting were raised against PWC during this investigation. Despite the great amount of evidence supporting these allegations, i.e. the 20-something year-old relationship between PWC and Dell Inc. and the lucrative payments paid to PWC during this period, PWC was never charged with conspiracy to commit fraud. For whatever reason, PWC maintains that they failed to recognize any material misstatement in Dell’s financial statements. PWC even went so far as to say that “[Dell] did not maintain effective internal control over financial reporting,” thus putting the blame on Dell’s internal control (S.E.C. vs. Dell). This does not mean that PWC is free from all responsibility concerning the fraud that existed in Dell’s financial statements in the years 2003-2005. Although PWC may point fingers, they are still responsible for reporting unqualified reports. Had they maintained more skepticism while auditing Dell Inc., such as investigating Dell’s new Billion dollar cost-cutting approach or examining Dell’s abnormally high income despite incurring billion dollar losses just the year before, perhaps the auditors would have discovered material evidence. As a result, PWC failed to provide the public with a clear representation of Dell’s performance in the years 2003-2005. In theory, this should significantly deter PWC’s public image. Thankfully, evolution affects business as well. In the long, the survival of the fittest will make it in this economy. As for PWC, continuing such behavior will ultimately lead to the end of them, as we know it. Audits are necessary to keep our free market economy fair. They provide credibility, or proof, to the investor that a certain company’s reported performance, whether good or bad, is in fact true. Without the accounting profession, the investor would have blind faith investing in the market. In a sense, failed audits do the same thing. By falsely assessing Dell, PWC helped create a fictitious picture for all to see. Unfortunately, the public placed their trust and money gambling on these fictitious documents, at least for a while. Works Cited Amalgamated Bank vs. Dell Inc., Intel Corp., and PricewaterhouseCoopers LLP. United States District Court, Western District of Texas, Austin Division. 30 Jan. 2007. Print. Dionisio, Joe, CPA. Auditing. N.p.: n.p., n.d. Print. Securities and Exchange Commission vs. Dell Inc., Michael Dell, Kevin B. Rollins, James M. Schneider, Leslie L. Jackson, Nicholas A. R. Dunning. United States District Court, District of Columbia. 22 July 2010. Print. "SEC Charges Dell and Senior Executives with Disclosure and Accounting Fraud." (Press Release No. 2010-131; July 22, 2010. N.p., n.d. Web. 16 Nov. 2014.