Different ratios are used in identifying red flag for potential fraud where it was shown that MiniScribe has higher than industry average or the rest of the some of its competitor-companies in the industry. In terms of 1988 profit margin at 0.04, MiniScribe was as good as competitors while for 1987 and 1986, the company was better than its competitors, where the company had 0.09 and 0.12 as against competitors 0.02 and 0.04 respectively for the said years. See Appendix.
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In terms of 1988 return on equity (ROE), the same experience as that of profit margin may be deduced as the company as the company ROE appeared to perform equally as its competitors or similar firms in the industry. Meanwhile, in terms 1987 and 1986 ROE, MiniScribe has shown better
When correlated with case facts, it may be emphasized that the upon change of management in 1989, a review of the company’s financial statements for the years 1986 to 1988 was done by IEC where it was found that MiniScribe’ financial statements for the said period were not reliable. In fact, only a preparation of the balance sheet was possible because of fraudulent practices committed by previous management.
To cite what happened in financial statements, case facts say that actual results were being adjusted to be equal with announced results six weeks earlier by the management headed by Mr. Wiles, so that in cases of adjusting entries recommended by auditors that would have affected the company’s net earnings and other accounts, the company had resorted to making last-minute adjustments in order to make it sure that announcements were confirmed by the results after offsetting in the accounts were made.
Negotiations were done with the auditor and the company was allowed with what it wanted to happen. It was found out however that in many instances the company’s inventory accounts for the three-year period were overstated since the actual physical count did not tally with the recorded values. In the accounting parlance, overstating the inventory, will overstate the company income. This overstatement is therefore confirmedby the result of analysis of the company’s profitability ratios as stated earlier where the company appeared to have performed as good as that of its competitors or even be better for the years 1987 and 1986.
Page 2 . Perform a ratio analysis using case Appendix to identify red flags for potential fraud at MiniScribe Essay
In terms of 1988 current ratio, the company slightly lower than competitorsbut in terms of 1987 and 1986 current ratios, the company showed better as 2.6 and 2.2 for the said years as compared with competitors at 1.9 and 1.9 for the said years respectively. See Appendix 1. As to how the company manipulated its current ratio may be again attributed to its overstated inventory for the three year period. In 1988, the company’s inventory was noted to have overstated the same by as much as $4 to $6 million. In1987 it was about $12 million and in 1986 it could reach the amount of 3.5 million or higher. Please refer to case facts. Higher recorded inventories than the actual physical count will also have an effect on current assets since the same are part of current assets for purposes of computing current ratio in measuring the liquidity or capacity to pay current obligations of the company.
In terms of inventory turnover, MiniScribe appears to have performed better for the three-year period than competitors. This means that the company was able to sell faster than competitors. This appears to be contrary to case facts where there was already a decline in the demand of the company’s products in 1988 to be not good as in 2008. Since the company has overstated its sales by recording what it created as inventories in transit as sales for $3.66 in 1987. The company therefore deliberately overstated sales by the same amount. This act would have the effect of overstating the related cost of sales and this could explain why the company has a very high inventory turnover.
In term of receivable turnover, the company performed better than competitors only in 1987. In terms of payable turnover, the company appears to have performed better in 1987 than competitors. Although fraud could not be deduced from these ratios, the fact the company has overstated its inventories, somewhere along the way an overstatement of what the actual could have is still possible. See Appendix 1.
In terms of debt equity ratio, it appears that only in 1986 that company was as good as competitors but for the years 1987 and 1988, it has shown poorer results. In terms of times interest earned, the company has show better results than competitors for the years 1986 and 1987. See Appendix 1. Again overstating the inventory, overstated the income and therefore the equity is also overstated. Thus the company may have worse than normal debt to equity ratios. The better times interest earned than competitors appears not credible because of inflated revenue which inflated income and therefore the ratios are inflated as well. See Appendix 1.
Which of the Doggy Accountings greatest hits did MiniScribe do? Provide examples. (I am attaching the Dodgy accounting greatest hits sheet. Read the case and this sheet and answer the question.
This researcher believes that MiniScribe has done inventing fictitious revenue and shifting current expenses into a future period as Doggy Accounting greatest hits. This evidenced by the company recognizing higher value of inventory that what it should be. Case facts on the finding of IEC say that MiniScribe had in 1986 an inventory shortfall of apparently $4 to $6 million following completion of 1986 year-end physical inventory. Since this is the same as saying that there is less amount of inventories than book inventory, it could be deduced that the inventory account is overstated by the same amount. Overstating inventory will result to overstatement of revenue and net income. Thus is could be considered as fictitious recording of revenue. 
The fictitious revenue was also committed in 1987 where the amount of $12 million shortfall in inventory was concealed to the public. In addition the amount of $3.66 million of false inventory as generated so that it would be in transit during 1987 and was recorded as sales for 1987. The intention to overstate revenues and earnings was also very evident.
It was further found in 1988, that the entire customer inventory of $4.3 million, classified as other assets at the end of 1988, was actually scrap. The effect of this is to shift current expenses into a future period. Accounting theory requires the write down of inventory but it was deferred to make the company look better. Case facts confirms the same by stating that throughout 1988, the Company accumulated scrap that had been written off the company’s books and which should have been discarded. It was further stated that these defective parts and disk drives has little or no value but were included at full value in inventory.
Using the SOX handout on Key control questions, critique MiniScribe’s management control techniques. Discuss its flawed controls, and recommend new or improved management control techniques.
MiniScribe’s management control techniques appear flawed in many respects. The company’s management which included the board failed to evaluate the business risks and potential impact for the years 1986 through third quarter of 1988.
Theory provides that the board member must be in complete agreement as to specific risks that business will incur and how to manage and monitor them. Not being able clarify these issues will cause failure to develop a plan for addressing them and will create problems later on. Case facts say that during the time of Mr. Wiles as Chairman of the Board from 1986 through 1988, the board was under the control of Mr. Wiles; hence it would appear that there was dictatorship and the other members were powerless to influence the direction of the company. Thus what happened were doctored financial statements that resulted to the decline of the company’s stock price when the frauds were discovered by stakeholders of the company.
Because of the control of Mr. Wiles of the whole organization, it could be deduced that the there was failure to assign responsibility throughout the whole organization. It is incumbent upon management to make it sure that employees at all levels must be given detailed descriptions of their respective responsibilities to monitor and manage business risks. In the case of MiniScribe, a very clear failure was evident by the creation of two groups on employees under the Finance department where one group was called “History’ and the other was “Control”. Although the first group has the function of reviewing the result of the work of the second, there is no sense because whatever the first group will find will have to give in to what is desired by the second group under the direction of Mr. Wiles.
There are other flawed control techniques of the company and the responsibility could be traced to Mr. Wiles who appear to have orchestrated the fraud including the lack of proper audit, the lack of internal legal counsel and many other things.
What may be recommended is not just improvement but an overhaul. It is a good thing, Mr. Wiles has resigned but he must be held responsible with what he has done to the company, by the fraud he appears to have orchestrated and directed and the consequent damages to stockholders.
The act of the present board to have conducted a review of its 1986 to 1988 financial statement is a good step toward fixing the mess. What must be done is to strengthen internal control by having responsible board members who will decide for the interest of the stockholders and not for purely selfish reasons. The company must ensure integrity in all its dealing to restore the trust of its stakeholders. It must reward employees for performing corporate governance goals by establishing links between accountability and performance.
The company must aim for long-term wealth maximization of stockholder’s wealth and everything will follow since coupled with this purpose is satisfying all other stakeholders’ interest to attain the corporate mission and vision that must be carefully defined by management. The company will also have to include social responsibility as part of its objectives and a basis for its mission and vision in the future.See More on Company, Potential