Posted: May 25th, 2022
Enormo Case Study: Ultro’s Fraud
a.) Discuss the implications of this illegal act by Ultro’s management.
Accounting fraud is not limited to simply ‘cooking the books,’ or actively creating a financial statement that gives a deliberately inaccurate portrait of a company’s finances. It also involves failing to report known fraud. In this case, Enormo is attempting to persuade a respected accounting firm to look the other way regarding its subsidiary Ultro’s illegal activities, with the defense that such activities will not materially affect its own financial status, other than Ultro perhaps incurring a small fine.
However, if the fraud is discovered, the fate of both Enormo and its subsidiary Ultro could suffer a severe blow, in terms of public relations, as well as legal repercussions. First of all, Enormo’s legal analysis is far from expert, and is highly biased: what will actually transpire when the fraud is revealed remains an unknown quantity. If a scandal erupts in today’s anti-business environment, this could severely jeopardize the Enormo’s financial health. An accounting firm has a legal and ethical responsibility to fully disclose all of a firm’s financial activities that could have an impact upon its financial future.
A firm’s reputation, as known as its ‘goodwill’ is an intangible accounting asset that is still reckoned on a financial balance sheet. No accounting firm can accurately calculate Enormo’s assets in terms of ‘goodwill,’ knowing that the firm may soon become part of a scandal. The damage to Enormo’s goodwill if it is embroiled in scandal is likely to be far greater in today’s current media environment, than it would have been in the past. And so will the damage to the accounting firm’s own reputation, if it is complicit in what will be portrayed as blatant fraud.
b.) Describe the courses of action that are available to your CPA firm regarding this matter.
The firm has acted wisely in first approaching Enormo and attempting to persuade the company to reveal the fraud that has taken place. However, since Enormo refuses to consider the seriousness of Ultro’s illegal actions, the accounting firm should immediately distance itself from the company, and refuse to perform the audit.
The accounting firm has two options: firstly, in the name of confidentiality, it could remain silent, and hope that no other firm would take Enormo’s case, which would pressure Enormo to rectify the situation and reveal the actions of Ultro to the world. Unfortunately this seems unlikely, given Enormo’s intransigence and the unscrupulousness of many accounting firms. If the firm does not reveal Ultro’s actions, untold numbers of employees and investors might suffer after the scandal was revealed and Enormo’s reputation resulted in financial devastation to the company and its subsidiaries.
Granted, there is a great temptation not to bring the case of Enormo to regulators, for fear of the accounting firm seeming like a ‘tattle-tale’ of its various clients’ misdeeds. However, the risk of not revealing the fraud to the world is much greater. Once the scandal is brought to light, the name of the accounting firm could be tainted with guilt by association. People will surely ask why the accounting firm did not immediately notify the Securities and Exchange Commission (SEC) of the fraud. The venerable firm Arthur Anderson, the respected accounting firm, was destroyed because it lost its credibility during the Enron and World Com scandals. This accounting firm should not suffer the same fate, simply because Enormo has no respect for the law.
c.) State your opinion as to the course of action that is appropriate. Explain.
Enormo should be given one last chance to reveal what its subsidiary, Ultro, has done. If it does not, then the accounting firm should report the illegal actions of Ultro to the SEC.
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