Case Summary of "The Anonymous Caller"

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Case Summary

Disclosure responsibility
Disclosure responsibility
Risk for controller
Risk for controller
Organizational
imperfection
Organizational
imperfection
Incentives for misstatement
Incentives for misstatement

Outline
Mr. Anonymous is the controller of a private-hold, small, start-up company. He was in dilemma whether to provide the fraudulently misstated financial statement to the bank, thus turning to his former professor Dr. Mitchell for advice.

Incentives for misstatement
Faced with a severe cash flow shortage, the company met the bank to fund its line of credit. A quarterly report was required by the bank representative. However, the enterprise was operating at a net loss for a while, which couldn’t reach the standard sales revenue of bank. That’s why the senior executive team knowingly submitted financial statements overstating sales and receivables accounts.

Organizational imperfection
The CEO and CFO of the company lack knowledge on accounting and criterions of GAAP. In some situations, the boundary between aggressive accounting and fraud is ambiguous. But in this case, almost half of the sales this quarter consist of fabricated entries, obviously in the fraud category. In Addition, a large number of receivables may indicate aggressive accounting method. On receiving the financial statement, the bank can evaluate riskiness to some extent.

No external auditing is performed since the company is not public traded except for annual reports. Creditors have no access to the authenticity of its quarterly report. To misrepresent the receivable, CEO authorized an unrelated clerk to record the number of accounts without telling the controller. Process flow of financial management was easily disrupted, reflecting an unstandardized and unbending management of the company.

Risk of the controller
Mr. Anonymous signed on a commitment with bank for a loan right several months ago. As a new comer, he was unable to tell whether...
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