10 Sep After reading Chapter 15 of your Forensic Accounting and Fraud Examination textbook,

After reading Chapter 15 of your Forensic Accounting and Fraud Examination textbook, complete the following problems, which will help you apply your knowledge of the Sarbanes-Oxley Act:

· Case 45 on page 464.

· Case 47 on page 464.

· Case 48 on page 464.

45.Consider the following facts:

a. XYZ is a publicly traded company that has been cited three times in the past five years for ethics violations. Its board of directors vetoed an ethics code.

b. The auditors of XYZ are Big 4 Accounting, L.L.P.

c. The chairwoman of Big 4 personally knows the chairperson of the PCAOB and verbally informs him that Big 4 will be auditing XYZ and other publicly traded companies.

d. Big 4 has a policy to retain working papers of its clients for five years.

e. Recent cost-cutting measures at Big 4 have left Partner Leon Smith as the sole partner on the XYZ audit. Smith has been its auditor for the past 10 years.

f. XYZ informs Big 4 that the internal controls that Big 4 has designed and maintained are working well.

g. Reva Jones, a former partner of Big 4 who worked on the XYZ audit last year, is now its CEO.

h. In addition to auditing XYZ, Big 4 does the bookkeeping and taxes for XYZ.

i. Frank Washington, also a partner at Big 4, specializes in valuation and has been retained by XYZ to value prospective companies that it is considering to take over.

j. Lydia Johnson, another partner at Big 4, performs background checks on new employees of XYZ. Fees for this service amount to 3 percent of all fees that XYZ pays to Big 4.

k. Last year, XYZ changed its accounting procedures from LIFO to FIFO and restructured its methods for determining the useful lives of its assets.

l. Jack Adams, the corporate attorney for XYZ, is involved in another case that will take much time and has asked his next-door neighbor, Smith, to overlook certain issues that are material to the financial statements of XYZ.

m. Jones, who just got married, has borrowed money from XYZ to purchase a vacation home in Florida.

n. Two weeks ago, XYZ sold 3 percent of its shares to an Australian conglomerate that is interested in getting into the U.S. market.

o. Smith’s wife plays bridge with the wife of the chairman of XYZ’s audit committee. Smith, being overwhelmed by the new laws affecting corporations, asked his wife to let the chairman’s wife know of the material changes in certain of XYZ’s accounting policies.

Discuss the Sarbanes-Oxley implications on the preceding facts. Cite specific provisions of SOX that are identified. Discuss areas where other violations could occur.

 

 

47. You are a recent graduate with a degree in accounting. Your new employer is unfamiliar with the concept of auditor independence. Explain to your new boss why auditor independence is important and identify specific steps that must be taken to ensure compliance with the independence requirements of Sarbanes-Oxley.

 

48. A small Web-based social network company is tremendously successful and rapidly reaches $50 million per year in sales. This company is unique in that its entire workforce consists of only three brothers. The secret to the tremendous growth is in the brothers’ smart outsourcing of almost all of their business activities. The brothers have decided to take their company public with the expectation of raising billions of dollars in equity money. To do that, however, they will have to become SOX 404 compliant. At present, the brothers are also the members of the board of directors and the officers of the company. One brother, a computer engineer, manages the Web site. The other brothers have degrees in management and engineering.

 

Is it possible for a three-person company to become SOX 404 compliant? What general steps should the brothers take to do so?

 

 

After reading Chapter 16 of your Forensic Accounting and Fraud Examination textbook, complete the following problems, which will help you apply your knowledge about tax fraud at the local, state, and federal levels:

· Case 56 on page 508.

· Case 57 on page 508.

56. Tom Anderson is a CPA who is engaged to prepare the annual tax return for Mary West, the CEO of a company to which Tom provides regular consulting services. Each year Mary brings Tom several brown bags full of documents relating to her income and expenses. This year, when Tom is sorting through the documents, he finds something he hadn’t seen in previous years: a deposit receipt from a foreign trust in the Cayman Islands. The receipt for $50,000 was written by a Cayman Islands attorney, with a notation that it was for deposit in a trust account for the benefit of Mary West. Tom asked Mary about the receipt. “What is this?” he asked.

“Forget about it,” she said. “I want you to act like you never saw this.”

Tom is concerned that Mary may be evading taxes by not reporting income from the trust, and he is also concerned about the need to disclose the existence of the foreign trust on her tax return.

Should Tom immediately withdraw from the engagement without discussing it further, try to convince Mary to report the foreign trust and any related income, or report the incident to the IRS or other authorities and continue to do consulting for the company?

 

 

57. Sonya Fuentez, an IRS-enrolled agent, has been contacted by Carlito Alverez, who is interested in having her prepare his annual income tax return. Sonya is a little apprehensive about the engagement because she’s heard rumors that he is a major drug trafficker with roots in Colombia.

At Carlito’s request, Sonya visits his home to discuss the details of his return. When she arrives, she’s shocked by the opulence she sees. The house is on 2 acres of land just west of the Intracoastal Waterway in Miami Beach. The land is completely surrounded by canals and connects to the rest of the city only via a narrow bridge that has a small guardhouse and security team protecting the entrance to the driveway. She sees other uniformed security guards walking around the perimeter of the property.

The three-story house appears to be as large as a small city block. Sonya is escorted by a housekeeper to a rear patio and garden where Carlito is sipping a martini and watching the large boats go by.

“Welcome to my humble abode,” he says. “I hear you’re really good. I hate paying taxes, so I need an accountant who can save me as much money as possible.”

Sonya smiled and accepted a martini from a tray brought to her by a man wearing crisp black and white tuxedo-type clothes.

“I’ll pay you $50,000 for your help,” he said. “All in cash, if you want.”

Sonya needed the money, so she said, “Okay, I’ll accept your very generous offer.”

“Great,” he said. “Let’s get started.”

“One thing first,” she said. “I must ask you before we start not to tell me about any illegal activities. I won’t be able to help you if you do that. I must also tell you that you must be completely truthful in your tax return, and you must report all income.”

“Okay,” he said, “I get most of my money from commissions on my international import and export business.” He grinned from ear to ear. “I don’t mind paying my taxes on that. The U.S. has been good to me, and I’m happy to do my part in the tax system here.”

“You’re a Colombian citizen?” she asked.

“I’m a naturalized U.S. citizen,” he replied.

He went on to show her detailed records of income and expenses. Most of the incoming funds had been deposited directly into foreign banks.

“I’ll take these documents back to my office,” she said.

She returned to her office and spoke to Julia Whitaker, her partner.

“Don’t even think about doing this guy’s tax return,” said Julia.

“What do you mean?” asked Sonya. “He wants to pay his taxes. All I want to do is help him.”

“Yes, but we both know what he imports and exports.”

“You don’t know anything for sure,” snapped Sonya. “Just because he’s rich and has a reputation doesn’t make him guilty of anything.”

“Forget that,” said Julia. “Let’s just assume he’s a drug trafficker. Given that, can you accept this engagement?”

Can and should Sonya accept the engagement with Alverez? Why or why not?