ACC562 Advanced Audit – Assignment 4 “Eastman Kodak Company” Evaluate the current financial condition of Eastman Kodak based on its most recent quarterly report, which can be located at http://www.Kodak.com. Based on your evaluation, discuss the most significant “red flags” for its public accounting firm to consider. After evaluating Securities and Exchange Commission Form 10-Q report fled with Washington, D.C. 20549 it is evident that Eastman Kodak Company is experiencing large financial difficulties. On January 19, 2012 Eastman Kodak and its subsidiaries filed a voluntary petition for relief under chapter 11 of the United States Bankruptcy Code. Under this code the company will continue to operate in the ordinary course of business. (Veronda, 2012) The reason for filing chapter 11 was a fact, that the Kodak incurred loss for three years in a row-2009, 2010, 2011 and three months in the first quarter of 2012 ended on March 31, 2012 and is considered to be operated their business as “debtor-in-possession”. In order to understand the reason behind the hardships it is important to point out that Kodak operates in the highly competitive industry, such as the one where less and less people buying digital cameras and replacing them with digital cameras in cell phones, iPods, and IPad and various other electronic devices equipped with cameras. Additional areas of decline were experienced in traditional business and a $61 million reduction in revenue associated with tax refund sharing. Such negative conditions can impact financial position, results of operations and cash flows and may continue to do so in the future. (Veronda, 2012) To improve its financial performance and add competitive challenges the company is developing a strategic plan, whose successful implementation can be subject to numerous risks and uncertainties. Eastman Kodak reported that its strategy of focusing on its most profitable business and strengthened cost controls resulted in profitability improvements in both of its business segments as well as increased cash balance. The Selling, General & Administrative expenses decreased by $84 million and Kodak reduced its investments in unprofitable business lines and consolidated into two business segments- Commercial and Consumer. The improvement in the cash flow were due to a tax refund from Korean withholding taxes recorded in the quarter as a $122 million income tax benefit. (Veronda, 2012) The consolidated financial statements were prepared with assumption that the company will continue to operate as a going concern. The public accounting firm should consider this company as a high risk, due to decline in a business from its various segments and price erosion on plates due to industry overload. (Veronda, 2012) 2. Assume that you are the PricewaterhouseCoopers audit engagement partner and have assessed Kodak as a high-risk client. Explain the modification you would make to the audit engagement procedures to minimize any potential liability of the firm. There auditors should properly plan engagements especially with a high risk client in order to keep the audit costs reasonable and to avoid misunderstandings with client. During initial audit planning I would decide whether to keep Kodak as a client or not based on my earlier experience. This decision should be made early before any cost has been incurred. Few important points in minimizing legal exposure:
•I would emphasize compliance with ISAs, Code of Professional ethics and GAAP •Thoroughly investigate prospective clients
•exercise extreme care due financial difficulties
•Establish and follow internal controls procedures
•Use clear engagement letters- scope & responsibilities •Conduct audit with professional skepticism
•Consultation with more experienced auditors about difficult issues •Maintain professional liability insurance coverage
• Seek legal counsel whenever serious problems occur ("10 ways to," 2011) There are two risk...