Nextcard Inc

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Assignment 1 – Nextcard Inc.
In the late 1990’s internet companies and their stocks were booming. Nextcard was among the group of companies, whose stocks were soaring, creating overnight multi millenaries. While some of these companies, such as eBay, Yahoo, and Monster, would survive the stock market burst Nextcard would not be so lucky. It turned out that Nextcard was not being completely honest in representing its financial position and would eventually be taken over by the Federal Deposit Insurance Corporation (FDIC). When that happened it lead to an audit partner from Ernst & Young (E&Y) to make some bad ethical decisions in order to cover up the fact that an unqualified opinion was issued for a company being investigated for issuing materially misstated financial statements. Since several instances of fraud have been uncovered, the American Institute of CPAs (AICPA) and Public Company Accounting Oversight Board (PCAOB) have issued standards and a code of conduct to prevent unethical behavior. 1. Given PCOAB oversight of accounting firms and the AICPA Code of Conduct, discuss whether or not you believe that public accounting firms can successfully manipulate audit work papers and records of clients engaged in fraudulent activity. I do not feel that, even with PCOAB and the AICPA code of conduct, that manipulation of audit work papers can be eliminated. The PCOAB Audit Standard No. 3 clearly states, who, how long, and what audit papers must be retained by the auditing firm. If additional documentation to the audit papers is needed, article 16 describes how the changes need to be documented. “Circumstances may require additions to audit documentation after the report release date. Audit documentation must not be deleted or discarded after the documentation completion date, however, information may be added. Any documentation added must indicate the date the information was added, the name of the person who prepared the additional documentation, and the reason for adding it.” (Public Accounting Oversight Board, 2004-06) However, even when the PCOAB reviews the firm’s audits, they may be able to check if changes are documented, but they are counting on the honesty of the audit firm to ensure ethical practices. The AICPA also relies on voluntary cooperation, peer, and disciplinary proceedings to insure there is no client work papers and record manipulation. The AICPA Section 54 – Article III – Integrity, states that in order to “broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity.” (American Institute of CPAs) The AICPA and virtually all of the state societies have also joined together to create the Joint Ethics Enforcement Program (JEEP). When a complaint is filed JEEP responds, investigates and then concludes the investigation. This program does subject conduct violators to punishment however the program does offer the offender to undertake corrective action. In the case of corrective action the investigation and results are kept confidential so by allowing this choice of action there is little deterrence of violation. I believe SOX Section VII will deter some fraud by making it criminal to alter or destroy audit documents and protecting whistleblowers, but by relying on voluntary cooperation of the standards and code, it may help prevent but will not eliminate, manipulation of client work papers and records. A major part of any audit is analyzing fraud risk factors. 2. Analyze the fraud risk factors presented during the 2000 Nextcard audit and how each should have impacted the audit procedure. The appendix to SAS No. 99 offers three fraud risk factors, Incentives/Pressures, Opportunities, and Attitudes Rationalization. The incentive and pressure that Nextcard managers felt was the desire to grow the company rapidly. One of the primary goals of Lent’s, one of the companies creators, was to obtain over 1 million credit card customers. In order to meet...
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