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NextCard Fraud
Muna Rodriguez
Advanced Auditing
Mrs. Ashley Braun Harper, MS, CPA
April 28, 2013

Abstract
In the late 1990's the internet boom was taking off, and many new company's were being formed in Silicon Valley adding to the buzz. One such company was NextCard, Inc. Founded by Jeremy Lent and his wife, the company offered credit cards with 30 second approvals with very lenient credit stipulations. They marketed on the internet and used a business model that would reduce the cost to gain a customer and targeted internet savvy consumers with large credit balances. In 1999 the company went public, and by 2000 they had nearly 1 million customers extending close to a billion in credit to those customers. Even with this success, the company did not make a quarterly profit and had over 80 million in losses. As this information began to make it to public knowledge, serious investigations began to occur, prompting their auditors, Ernst and Young of Silicon Valley, to take a serious look at their 2000 audit. Thomas Trauger, the lead on the audit in 2000, called a meeting with a staff member and another audit manager. They began to tamper with the audit by pulling it out of the archive and altering it to look as if they had called attention to the issues going on with the financials. The main issues with their financials was that NextCard had not accounted for enough in Bad Debt losses. Since the customers that used their services were high credit risk, they were required to write off several millions in bad debt losses. Once the investigation focused on the audit, the three auditors were brought to justice, as well as the executives with NextCard. In this paper, I will discuss the PCAOB and the AICPA code of conduct and how it applies to this case, as well as explore the intentions of the auditors. We will explore the auditors point of view and look at the implications of their actions.

Introduction
As auditors, there is a responsibility with ethics and public trust. An auditors job is to ensure the financial reports that are provided by private and public companies alike. To define fraud in accounting, finance-dictionary.com states that it is any act or attempt to falsify an accounting statement for financial gain. A clear example of accounting fraud is the act of deliberately overpricing a company's assets in order to drive up its share price. Another example is under accruing an amount for bad debt losses in a misrepresentation of the amount of bad debt losses that are likely to occur as NextBank Inc. did on their financials in 2000. NextBank was subject to federal banking regulations and in 2001 the Office of the Comptroller of the Currency (OCC) forced them to significantly increase its allowance for bad debts. At this point they continued to mislead the public based on the knowledge that their customers were all high credit risks. This led to a class action suit by the investors of NextCard. This in turn caused their auditors Ernst and Young to go back and alter the 2000 audit records to show the misstatement of the financials. The PCAOB and the AICPA have standards and policies set to prevent this type of fraud occurring. What could the auditors have been thinking to alter the work papers and their financial opinions? The outcome led to punishment for all involved, and forces the public to take a hard look at investigating these actions. PCAOB Professional Standards

The PCAOB is a nonprofit corporation established by Congress to oversee the audits of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports. The PCAOB also oversees the audits of broker-dealers, including compliance reports filed pursuant to federal securities laws, to promote investor protection (PCAOB, 2013, para. 1). In 2001, after hearing the information regarding his client, Thomas...
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