1. What factors do you think influenced Molex management’s decision not to raise the issue with the auditors?
The factors that I think influenced Molex management’s decision not to raise the issue with the auditors could have been many but I think the most significant was probably that they thought it was immaterial. The accounting error accounted for $8 million of inventory that had affected results for several years. Management did not find this error until mid-July 2004. The review states that Molex had struggled financially in 2002 and 2003. In first quarter of 2004 (ending September 30, 2004) revenue had increased by 29 percent for the first quarter of 2003. Gross profit margin was 35.7 percent for the first quarter of 2004 compared to 33.8 percent for the first quarter in 2003. Management sensed that these the financial numbers were improving and they probably did not want to disclose the error knowing that it would affect the shareholders. Even though the share prices had not greatly increased, with these numbers they probably expected them to increase. They opted to claim that the error was immaterial and to account for gradually overtime so that the share price would possibly increase and not suffer from the uncertainty that a fraud case may cause. I think that they were trying to sprak trading activity rather than report the error which would hinder trading activity.
2. Why were the auditors so concerned about the reporting problems at Molex?
Deloitte & Touche were concerned about the reporting problems at Molex mainly because the company’s CEO and CFO, Joe King and Diane Bullock, had signed the management representation letter for the annual financial statements and 10-K on August 20, 2004 with no mention of the inventory error. King and Bullock both new of the inventory problem on July 21, 2004 and they specifically did not disclose the information to Deloitte & Touche. As a result Deloitte & Touche said that they...